Strategy: Selling Put Options: The Best Income Method?

[botpro]

You don't "hedge" or micro-manage in anyway .......... All options positions including Short Puts should be left alone while the trade is open. If the trade is too risky for your comfort level then make changes before you open it.

Agree, that one has of course to do his through analysis before entering the trade.
But I think letting the position unmanaged till expiration is a big gambling as it can ruin the options seller.
Don't you think so?
Do you never apply hedging at all?

 

[daniel5198]

Agree, that one has of course to do his through analysis before entering the trade.
But I think letting the position unmanaged till expiration is a big gambling as it can ruin the options seller.
Don't you think so?
Do you never apply hedging at all?

When writing options, you must be hedged. Otherwise you will eventually blow up.

 

[drcha]

When writing options, you must be hedged. Otherwise you will eventually blow up.

I love it when people have a 1-line answer for a 21-page thread. This is absolutely correct. This thread really should end right after Daniel's post.

I am not sure how many times I have brought up 1987 on this site, but many. Please don't tell me that it won't happen again. I hope it won't, but believe it's best to live as though it could.

Here is an example of how selling naked puts might work in a scenario like 1987. Today, I can sell the SPY 15 Apr 200-strike put for about $455. I think my margin will be about $1500 (depends on rules of broker). If SPY is down 22% on the day of expiration, I think I would need to pay about $4500 to $5000 to repurchase the put, but I can only guess at this because I don't know what the volatility would be like. However, another likely scenario is that before I can make the repurchase, 100 shares of SPY could be put to me for $20,000.

So, there are 2 ways I can deal with this problem (I like #2):

1. I can keep $20,000 in cash. Eventually I'll need it, but most of the time it will lie around doing nothing. No, I can't just blow out that account and start another. The broker can come after me for what I owe. As you can see, it would be easier to just write covered calls, which amount to the same thing as keeping all that cash around. Covered calls at least have the virtue of allowing me to know my maximum loss.

2. Buy the insurance. For example, today I can buy the SPY 15 Apr 175 put for about $41. On the spread, my margin is about $2000 and my maximum loss is about $2000. Or if I want to, I can buy a longer-term long put that I can sell many shorter-term puts against. Yes, I am overpaying for the insurance. But this is still a great return on my money: about 20% if the puts expire worthless.

Just make sure you are bullish on the underlying and have a method for figuring out when you should no longer be bullish on it. For example, I personally would not be doing this on SPY right now.

 

[botpro]

When writing options, you must be hedged. Otherwise you will eventually blow up.

But in your previous posting you wrote this... ;-):

You don't "hedge" or micro-manage in anyway .......... All options positions including Short Puts should be left alone while the trade is open. If the trade is too risky for your comfort level then make changes before you open it.

Ah, I see it was not you, it was OptionGuru... ;-)

 

[botpro]

When writing options, you must be hedged. Otherwise you will eventually blow up.

That is obvious, the question is: when best to initiate the hedge? Immediately, or only later when the trade begins to run against the trader?
The second method would be better and cheaper, but the question with it is whether it can always be done before it gets quickly too late?...
I think by constant monitoring, it should be doable to a certain degree...

Black Swan events are IMO a bad example, as they have a very small probability of happening...

 

[destriero]

That is obvious, the question is: when best to initiate the hedge? Immediately, or later if the trade begins to run against the trader?
The second method would be better and and cheaper, the question just is if it can be done before it is too late?...

Wow. Waiting for it to move against you is better and cheaper?

 

[botpro]

Wow. Waiting for it to move against you is better and cheaper?

No, reacting as late as possible, but immediatly before any loss in account happens (excluding the credit rcvd) is better and cheaper...
Just play the situation with an options calculator or in a simulator...

 

[OptionGuru]

When writing options, you must be hedged. Otherwise you will eventually blow up.

I love it when people have a 1-line answer for a 21-page thread. This is absolutely correct. This thread really should end right after Daniel's post.

But daniel5198's post is just a blanket statement that doesn't apply to botpro's post he replied to, and botpro's post was in reply to my post which was in reply to an earlier botpro post.

The problem with those 1-line answers is that they don't take into account the flow of quoted posts and end up out of context - in this case HEDGING is out of context.

• botpro is referring to hedging after the trade is opened.
• daniel5198's post has changed that to hedging when you open the trade.
• Both are completely different.

 

[drcha]

Guru, my point is simply that you may have no chance to hedge after the trade is opened. A black swan may appear suddenly or overnight.

 

[samuel11]

Guru, my point is simply that you may have no chance to hedge after the trade is opened. A black swan may appear suddenly or overnight.

Please don’t tell him, we need liquidity!