Strategy: Selling Put Options: The Best Income Method?

[yobo]

Interesting week for me trading naked puts as I have been doing week after week since the election.

I had one position go in the money Wednesday. I decided to hold the position until expiration to see where things ended up.

I sold to open the WB 50.50 put strikes for .35 cents and the stock closed at 49.75. On Monday I will have 2000 shares put into my account.

Given the market had every reason to be a disaster given the jobs report, Syria, etc. I decided to assume the shares and buy a 50.50 strike put that expired in two weeks. I could have closed out the position and realized a loss, take the shares and wait till Monday not knowing what the shares will do and react accordingly, or buy insurance and cap my loss but still maintain unlimited upside with plenty of adjustment options to do to recouperate and potentially realize the profit.

On Monday I will have a married put trade on without a worry to be had since my losses are now defined and I have time working for me.

The next step Will depend upon what the stock does. If it resumes an uptrend, sell an otm put and turn my long put into a debit spread. I also have the option of selling cc if the math and return makes sense to me.

If the stock goes lower, selling a cc will be the first thing I do for an easy credit and return of capital. If I have an opportunity to sell my long put for a credit I will do that and buy another at a lower price and lower strike.

The point I'm making here is that I don't have to realize losses. I can continue to pull credits out of the market. I have plenty of time to recouperate the cost of my long put and have bought time by implementing a married put which affords me limited downside and unlimited upside.

Trading options is not a one and done deal. The real money can be made through proper adjustments.

Time and time again, I have learned it's not the first trade or position you open but the second and third and so on that determines if you make or lose money.

Once you learn the art of adjusting, profits consistently come your way.

Hope this helpful for anyone trading naked puts.

 

[beefcaketrade]

Yeah, you can keep selling premium to lower cost basis for the position. This works in relatively orderly and gradual price changes, up or down. But it doesn't work anymore if the price change is significant. Try selling premium some 30%+ away from current price. Now you're at best doing long date options. So you're sitting on a loss or dead money for a long time, locked into the position.

Anyway, WB is up. What did you do?

 

[yobo]

Here's my trade so far:

April 3, 2017: STO 20 WB 50.50 puts at .35 cents stock was at 52.70

April 7, 2017 At expiration: WB closed at $49.75 and I decided to take assignment to have my shares put into my account on Monday.

April 7, 2017 at expiration: BTO 20 WB 50.50 puts at $2.10

Monday, April 10th 2017: I have a married put position. Long 2000 WB at 50.15 and long 20 WB 50.50 puts that expire April 21st or next week. Total cost 52.25.

Monday April 10th: 20 STO 50.50 calls at .60 cents. total cost basis 51.65. The position is now a collar; long stock, long puts, and short calls.

Right now in real time the trade is even money if I were to cash out. Given the fact that when assigned the stock was at 49.75 and I was down 75 cents. I'm ahead of the game. However, I have to wait till tomorrow at the close to see where things are. I would love to see WB crash so I can roll down and out my puts, again collecting credits and write another CC, again more credits and possibly even sell some puts and turn my married put into a debit spread. I really have no idea what WB will do, so I wait and let the price action tell me.

In regards to your point if the stock crashes 30%, selling calls becomes very difficult because you have to go way out in expiration to get any premium if any....

I would say this: First it sucks when that happens, LOL. But second, because I trade usually 10 positions at a time, only 10% of my capital is tied into one trade so the damage isn't as great. Also one can sell covered calls against a stock that has sunk. Usually you can roll up and out if the stock begins to rebound collecting credits. As long as the return of capital is acceptable to you, keep writing and rolling calls until you return to cash.

 

[beefcaketrade]

If you are flat, why not close out and re-sell puts again lower?

The strategy of selling premium to lower cost works if price changes were gradual because you can sell incrementally closer strikes with beefy premiums, but sudden price changes and they don't work anymore because you can't collect any premium anymore at the strikes you want.

If WB had plunged to 30, what can you do with buying puts after the fact or selling calls? All of a sudden it's either completely dead money or you're doubling down and risking more capital.

I don't have a beef against the put selling strategy per se, but I'd personally prefer put spreads for risk management reasons. They protect against dramatic price change that makes the rolling premium selling strategy obsolete. The downside is you collect less per trade but you also hold up less margin. But also important not to try to 'scale up' the put spread strategy either. Basically you risk less and also make less. Just like anything else. Between naked put selling vs put credit spread, its like high beta stock vs low beta depending on risk appetite.

 

[Stymie]

If you want to keep it simple, just sell the Straddle with highest extrinsic upon delivery of stock. This doubles your potential returns with a cap to the upside. If it drops again, you will buy more at yet lower prices. Plan on 4x risk to zero and accept that risk. Find a stock that has some value - not pyramid scam like $VRX. Look at the premium collected and make sure rich enough.
Then let positive bias work for you.

 

[mushinseeker]

don't forget you are also less Vomma negative if you put on a put spread initially instead of naked put sale. nothing wrong w adjustments BUT you have to get real and be honest and step out of the position and re-evaluate... is the trading thesis still valid now vs when I opened the trade? (expected returns on new margin) Look at position mark to market and ask yourself if I were to put on this layer an an opening trade+ the loss I am currently nursing.. would I put it on? . if the answer is yes then go for it..BUT most often these 2nd layer trades are after an adverse event against the opening trade so the position is "under water" which means across lots of price points the new positions are below the line till expiration except for a little window somewhere in the pnl Graph. A poster earlier mentioned it as dead money. As you extend duration (which ThinkorS loves to say) , book the loss and put on new 2nd layer and graph it out ..you just might be compelled to move on and say "next!"

 

[yobo]

If you are flat, why not close out and re-sell puts again lower?

The strategy of selling premium to lower cost works if price changes were gradual because you can sell incrementally closer strikes with beefy premiums, but sudden price changes and they don't work anymore because you can't collect any premium anymore at the strikes you want.

If WB had plunged to 30, what can you do with buying puts after the fact or selling calls? All of a sudden it's either completely dead money or you're doubling down and risking more capital.

I don't have a beef against the put selling strategy per se, but I'd personally prefer put spreads for risk management reasons. They protect against dramatic price change that makes the rolling premium selling strategy obsolete. The downside is you collect less per trade but you also hold up less margin. But also important not to try to 'scale up' the put spread strategy either. Basically you risk less and also make less. Just like anything else. Between naked put selling vs put credit spread, its like high beta stock vs low beta depending on risk appetite.

If you are flat, why not close out and re-sell puts again lower?

The strategy of selling premium to lower cost works if price changes were gradual because you can sell incrementally closer strikes with beefy premiums, but sudden price changes and they don't work anymore because you can't collect any premium anymore at the strikes you want.

If WB had plunged to 30, what can you do with buying puts after the fact or selling calls? All of a sudden it's either completely dead money or you're doubling down and risking more capital.

I don't have a beef against the put selling strategy per se, but I'd personally prefer put spreads for risk management reasons. They protect against dramatic price change that makes the rolling premium selling strategy obsolete. The downside is you collect less per trade but you also hold up less margin. But also important not to try to 'scale up' the put spread strategy either. Basically you risk less and also make less. Just like anything else. Between naked put selling vs put credit spread, its like high beta stock vs low beta depending on risk appetite.

If you are flat, why not close out and re-sell puts again lower?

The strategy of selling premium to lower cost works if price changes were gradual because you can sell incrementally closer strikes with beefy premiums, but sudden price changes and they don't work anymore because you can't collect any premium anymore at the strikes you want.

If WB had plunged to 30, what can you do with buying puts after the fact or selling calls? All of a sudden it's either completely dead money or you're doubling down and risking more capital.

I don't have a beef against the put selling strategy per se, but I'd personally prefer put spreads for risk management reasons. They protect against dramatic price change that makes the rolling premium selling strategy obsolete. The downside is you collect less per trade but you also hold up less margin. But also important not to try to 'scale up' the put spread strategy either. Basically you risk less and also make less. Just like anything else. Between naked put selling vs put credit spread, its like high beta stock vs low beta depending on risk appetite.

If you are flat, why not close out and re-sell puts again lower?

The strategy of selling premium to lower cost works if price changes were gradual because you can sell incrementally closer strikes with beefy premiums, but sudden price changes and they don't work anymore because you can't collect any premium anymore at the strikes you want.

If WB had plunged to 30, what can you do with buying puts after the fact or selling calls? All of a sudden it's either completely dead money or you're doubling down and risking more capital.

I don't have a beef against the put selling strategy per se, but I'd personally prefer put spreads for risk management reasons. They protect against dramatic price change that makes the rolling premium selling strategy obsolete. The downside is you collect less per trade but you also hold up less margin. But also important not to try to 'scale up' the put spread strategy either. Basically you risk less and also make less. Just like anything else. Between naked put selling vs put credit spread, its like high beta stock vs low beta depending on risk appetite.

 

[yobo]

Ok. To bring up to date. My collar turned back into a married put. My short calls expired worthless. Kept full premium. I'm now long shares and long puts that expire next week. My trade is now risk free. Any credits I can collect or appreciation in the stock is all profit.

 

[mushinseeker]

so Yobo, looked at your position and correct me if I am off but your stock cost basis is $49.05? $50 (by assignment) -.35 (credit from put sale) -.60 (credit from expired call sale) = $49.05 which is now married to a 50.5 put you purchased for $2.10.

 

[yobo]

so Yobo, looked at your position and correct me if I am off but your stock cost basis is $49.05? $50 (by assignment) -.35 (credit from put sale) -.60 (credit from expired call sale) = $49.05 which is now married to a 50.5 put you purchased for $2.10.

Long stock: 50.50
Long put: 2.10
Investment: 52.60
Less: .35 short put
.60 short call

Cost basis: 51.65

Market value: 51.26

Stock=50.16
Long put=1.10

40 cent differential. I call it Risk free at this point because my next move or market move makes me $$.