Wanted some insight from some of you more experienced option traders, as I'm relatively new to options, on a strategy I plan to begin implementing. The strategy is basic, only using covered calls and cash secured puts on weekly options contracts. Basically my goal is to sell cash secured puts slightly out of the money to hopefully keep the premiums each week... In the event of assignment, I intend to hold the stock and then proceed to sell slightly out of the money covered calls... Once assigned go back to selling the puts again then calls, etc... The stocks I will use for this strategy will have a high beta (more time value), and have a decent dividend. Any body have any insight on this? When I first got into options I lost a lot of money on speculative long calls and puts...
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Weekly option strategy...?
- Thread starter msd87
- Start date
Quote from msd87:
Wanted some insight from some of you more experienced option traders, as I'm relatively new to options, on a strategy I plan to begin implementing. The strategy is basic, only using covered calls and cash secured puts on weekly options contracts. Basically my goal is to sell cash secured puts slightly out of the money to hopefully keep the premiums each week... In the event of assignment, I intend to hold the stock and then proceed to sell slightly out of the money covered calls... Once assigned go back to selling the puts again then calls, etc... The stocks I will use for this strategy will have a high beta (more time value), and have a decent dividend. Any body have any insight on this? When I first got into options I lost a lot of money on speculative long calls and puts...
You basically have a continuous put selling strategy. If you get assigned on the short-put and then sell a covered call you essentially have another short-put position. Is that the strategy you want in this market?
The dividends of the underlying are factored into the option prices.
Selling puts that you're willing to get assigned on should be more of a special situation play (with a longer-term outlook on the underlying) than a long-term strategy IMO.
Higher beta stocks tend to move around more than the market so their options tend to have higher implied volatility and therefore. higher premiums. The flip side of that higher premium is that they're more likely to move ITM or OTM.
The success of your strategy will depend on your ability to pick stocks that don't go down. Think 2007-2009 and ask yoursellf if you'd want to own stocks when the DJIA halved (or similarly, the NAZ in 2000). That's the worst case scenario.
Bear in mind that as an UL drops, you'll get pennies for those original strikes sold. So either you'll have to sell lower strikes and lock in a potential loss should the UL rally or you'll become a buy and hope investor, waiting for a recovery.
The success of your strategy will depend on your ability to pick stocks that don't go down. Think 2007-2009 and ask yoursellf if you'd want to own stocks when the DJIA halved (or similarly, the NAZ in 2000). That's the worst case scenario.
Bear in mind that as an UL drops, you'll get pennies for those original strikes sold. So either you'll have to sell lower strikes and lock in a potential loss should the UL rally or you'll become a buy and hope investor, waiting for a recovery.
Quote from msd87:
Wanted some insight from some of you more experienced option traders, as I'm relatively new to options, on a strategy I plan to begin implementing. The strategy is basic, only using covered calls and cash secured puts on weekly options contracts. Basically my goal is to sell cash secured puts slightly out of the money to hopefully keep the premiums each week... In the event of assignment, I intend to hold the stock and then proceed to sell slightly out of the money covered calls... Once assigned go back to selling the puts again then calls, etc... The stocks I will use for this strategy will have a high beta (more time value), and have a decent dividend. Any body have any insight on this? When I first got into options I lost a lot of money on speculative long calls and puts...
hope you make money with this strategy of put selling/covered calls but it is more likely that you will eventually lose unfortunately and potentially never get back in the game.
if you are planning to use high beta stocks, which, if i'm not mistaken, move more than the general market, you will eventually get torched. only sell puts on stock you think you want to own but keeping in mind that at some point all stocks can be trashed and you will be left with assignment.
this is not a new strategy and if you were to ask any covered call sellers or put sellers how they are doing today after a month of selling and going into a month that has not been good to the market you will find that they are feeling a lot of pain and maybe not able to sleep with so much on the line. even if they tell you that they have not actually realized a loss on their stock and intend to sell calls against their stock for the foreseeable future, its a loss and a miserable way to trade.
option trading is a difficult business and there is a lot of garbage out there which can eventually or suddenly bring you to financial ruin. i'd just try to come up with something that you could live with if the worst case scenario were to occur and i'd be doing this in a paper account. good luck.
Quote from spindr0:
Bear in mind that as an UL drops, you'll get pennies for those original strikes sold. So either you'll have to sell lower strikes and lock in a potential loss should the UL rally or you'll become a buy and hope investor, waiting for a recovery.
First of all- he "get"s nothing for a sold put-- he is looking for it ideally to expire worthless or at a minimum "buy" it back for a lower cost. Aside from an ideal IV drop- the primary catalyst for this is a rise in price. If the UL drops- the puts rise and he either closes it by buying back for the opposite of "pennies"...he will be taking a loss to avoid assignment.
If assigned- as price rises after selling calls - he profits in underlying up to the strike of sold call. If price continues to drop-- a decision needs to be made on whether to buy call back at lower price and either roll out a new sold call or cut losses by selling UL and free up buying power.
For clarification, this was in reference to selling covered calls. Yes, if the UL drops, the call will expire. If the UL drops enough, the only strikes with some premium may be lower strikes that lock in a loss should the UL rally and you're assigned. The original strike may offer only pennies.Quote from spindr0:
Bear in mind that as an UL drops, you'll get pennies for those original strikes sold. So either you'll have to sell lower strikes and lock in a potential loss should the UL rally or you'll become a buy and hope investor, waiting for a recovery.
So the choices are:
1) sell lower strikes for a potential loss
2) sell really far out months (LEAPS) thereby lowering the premium per day and tying up the money
3) take the loss by selling the UL
4) become a buy & hope long term investor without the option income stream.
5) do a covered call spread which makes back $2 for every $1 the UL b/t the strikes up to the strike written (needs a rally to work)
... none of which I care for so that eliminates the original sell NP/CC premise for me
Kind of scary the sentiment towards the strategy... May rethink it. It is a good point that in both positions (covered call & short the put) that if the underlying goes down drastically I will be in a losing position. My safety net against this was to only sell weeklies.... Meaning that I can dump the stock after only one week and not be holding it for an extended period of time (so hopefully I don't get too hurt in one weeks time, even that I know the DOW has recently dropped 400-500 in one session)....like I said, I'm new to this and still in my lower 20's so I'm sure there will be a lot of trial by error lessons to be learned. Still not comfortable with my understanding of the different spreads and more complex options strategies, so I'm trying to stick to simple strategies.... Thanks for all the comments tho.
ha ha. I know someone who had exactly the same strategy.. net result was.. he was holding a LOT of stock soon. within a short period ...as the puts got assigned.. and the stock plummetted.. ha ha
ex DRYS.. CSCO. SHLD WHR many others.. now I consider him a bag holder... no way he can recover this Cost basis..
ex DRYS.. CSCO. SHLD WHR many others.. now I consider him a bag holder... no way he can recover this Cost basis..
This alternating way of selling puts and cc's will not work, you wont get more than fractions when a stock plummets if you want to keep writing at a stocks previous level. (Tried it..)
Its better to write options so they just wount be assigned, like 7% drop distance in 2-3 trading days or so. Havent checked recently but when market was volatile such could give you above 1% / week.
Or 2 stdev out of the money on an index monday->friday.
(Thats like 9% drop). I do that often yielding 1.5% / week.
Dont write puts on stocks you couldnt stand owning.
Happy trading!
Its better to write options so they just wount be assigned, like 7% drop distance in 2-3 trading days or so. Havent checked recently but when market was volatile such could give you above 1% / week.
Or 2 stdev out of the money on an index monday->friday.
(Thats like 9% drop). I do that often yielding 1.5% / week.
Dont write puts on stocks you couldnt stand owning.
Happy trading!
Update on my strategy previously posted above.... Didn't work due to the market in general gettin smacked down (thanks Europe). I'm down approx 23% right now, didn't help that my underlying also lowered guidance. But!!! Since my original strategy failed, I thought about how I could hedge the downside (since in essence I am in a long position at all times). So to hedge I buy a long term put on my underlying, 1 per every 100 shares of course. From what I've researched I can pay off the long term put (or my insurance policy as I call it) in approx 10 weeks. From then on I would be capturing my weekly premiums as pure profit with little to no risk.. Please give any insight on this strategy, seems to good to be true to me, but I have been in the whiskey since about 7, come on its the weekend...See the recap below of the strategy..
Example. Buy 100 shares of X, buy the longest term put that is offered slightly OTM (ie- January 2013 on my X), then proceed to sell the weekly calls close to the money, if assigned begin selling puts (or you could roll the call you sold or buy 100 more shares and sell call again). Anyway all you elite options traders let me know what you think....
Example. Buy 100 shares of X, buy the longest term put that is offered slightly OTM (ie- January 2013 on my X), then proceed to sell the weekly calls close to the money, if assigned begin selling puts (or you could roll the call you sold or buy 100 more shares and sell call again). Anyway all you elite options traders let me know what you think....