Why doesn't this put (or call I guess) selling strategy work every time?

[Saltynuts]

Stock is at $10. A $10 put is $2. You sell one.

Stock drops to $8. You sell an $8 put, which is now (roughly, to keep it simple) $2.

Stock closes at end of option period at $8. You collected $4 of put premium, you lose $2 when then the $10 put is exercised. So you are up $2 still.

If stock drops to $6, same thing, you sell a $6 put for $2. Stock closes at $6.

You collect $6 of put premium, lost $4 when the $10 put dropped to $6, lost $2 when the $8 put dropped to $6. So I think you are still even even though the stock had shed a MASSIVE 40%.

So it just goes to show that if you don't sell all in one big chunk, but just sell slowly as volatility kicks in, its really pretty hard to get crushed selling options. I know the above example is missing tons of stuff, but is not the theory GENERALLY sound?

Thanks!

 

[dozu888]

no you are wasting time.

 

[El OchoCinco]

A stock is at $8 and has an ATM put selling for $2.00??

At $6 the ATM put is selling for $2.00 again??

Don't smoke crack and trade options.

 

[newwurldmn]

Stock is at $10. A $10 put is $2. You sell one.

Stock drops to $8. You sell an $8 put, which is now (roughly, to keep it simple) $2.

Stock closes at end of option period at $8. You collected $4 of put premium, you lose $2 when then the $10 put is exercised. So you are up $2 still.

If stock drops to $6, same thing, you sell a $6 put for $2. Stock closes at $6.

You collect $6 of put premium, lost $4 when the $10 put dropped to $6, lost $2 when the $8 put dropped to $6. So I think you are still even even though the stock had shed a MASSIVE 40%.

So it just goes to show that if you don't sell all in one big chunk, but just sell slowly as volatility kicks in, its really pretty hard to get crushed selling options. I know the above example is missing tons of stuff, but is not the theory GENERALLY sound?

Thanks!

What happens when the stock goes to 4

 

[Saltynuts]

A stock is at $8 and has an ATM put selling for $2.00??

At $6 the ATM put is selling for $2.00 again??

Don't smoke crack and trade options.

Lol! In fairness I did say I was just making up numbers for the example. Just trying to convey the general logic. Or illogic lol.

 

[Saltynuts]

What happens when the stock goes to 4

Using my made up examples/numbers -

You take in 8 option premium.

Lose 6, 4, and 2 on the puts.

So you are down 4 overall. Doesnt seem too bad to be down that much when the stock took a truly MASSIVE 60% hit, with buy and holders down that much.

 

[tommcginnis]

Stock is at $10. A $10 put is $2. You sell one.

Stock drops to $8. You sell an $8 put, which is now (roughly, to keep it simple) $2.

Stock closes at end of option period at $8. You collected $4 of put premium, you lose $2 when then the $10 put is exercised. So you are up $2 still.

If stock drops to $6, same thing, you sell a $6 put for $2. Stock closes at $6.

You collect $6 of put premium, lost $4 when the $10 put dropped to $6, lost $2 when the $8 put dropped to $6. So I think you are still even even though the stock had shed a MASSIVE 40%.

So it just goes to show that if you don't sell all in one big chunk, but just sell slowly as volatility kicks in, its really pretty hard to get crushed selling options. I know the above example is missing tons of stuff, but is not the theory GENERALLY sound?

Thanks!

Why doesn't this put (or call I guess) selling strategy work every time?

It *doesn't* work: extrinsic value versus intrinsic value...
Your example conflats math-at-expiry with initial conditions, and that just can't happen.
• If you sold an ATM put for $2 on a $10 stock, there is (by construction) only time value there == 20% of the stock's price, at that given volatility.
• when the stock drops 20% to $8, volatility will explode -- you will not be $2 down in the initial put, but $2 of intrinsic Plus the remaining extrinsic (time+vol) which will be double{?!?} the initial $2. So let's say, $2 + $4 = $6 -- which is now 75% of the current market price of $8.

You see what's going on here? Your account needs the margin to cover this. Going to sell another ATM put ≈ 20% of the underlying? That will only be $1.60. Maybe volatility pop will bring that premium back up? Maybe +25%?? So you're back to $2.00. Except, what about time? Let's say that the effective theta = 0, for simplicity... So your initial position is down $4 net, and your make-up is +$2 -- your current yield here is -100%, and have now mortgaged twice as much.

Your method (by any stretch) evaporates with a bit of study......

 

[El OchoCinco]

Using my made up examples/numbers -

You take in 8 option premium.

Lose 6, 4, and 2 on the puts.

So you are down 4 overall. Doesnt seem too bad to be down that much when the stock took a truly MASSIVE 60% hit, with buy and holders down that much.

Not to be rude but you cannot make up a fantasy hypothetical and than ask why can't it work.

It is no different than saying Why can't I just buy ATM calls on GOOGLE for $1.00 with 30days to expiration and when stock jumps $50 I make a fortune? Because it is not real...

 

[taowave]

Nice work,you have discovered that dollar cost averaging is less dangerous than going all in when taking a 40 percent hickey on the chin...

and good luck finding ATM put options trading at 20 percent of spot,then 25% then 33%...

 

[TooEffingOld]

Using my made up examples/numbers -

You take in 8 option premium.

Lose 6, 4, and 2 on the puts.

So you are down 4 overall. Doesnt seem too bad to be down that much when the stock took a truly MASSIVE 60% hit, with buy and holders down that much.

Your p/l keeps going down, down, down.

Just for fun, here's spy last December, selling one lonely atm march-2019 put on 12/3, then another on 12/7 when spy down 5%, then another on 12/17 at -10%, a fourth on 12/21 at -15%, then p/l at close next trading day (12/24).

So spy went down 15%, and although you took in $4k (on what margin?), you lost $11,500 for a net loss of $7500. Obviously, whether you lost more than 15% (the buy and holders) depends on your margin type and your portfolio, but off the top of my head this $7500 is ~25% loss.