New Feature: Options Discussion Forum

[yostyid]

I have been tinkering with some calls on my r1 picks lately. I like to buy short term calls (maybe maturing in 6-8 weeks) and I will look at the strikes just above or below the current stock price. I like going short because time/future value is less of a factor and I like them close to the current market price because I am just testing the ideas and close strikes have less of a cash layout than a deep in the money call. I think either deep or barely in the money calls work fine, but again, I don't feel like laying out that much cash to learn.

The bad is they can move a lot, so it's not for the weak of heart. a little movement on the stock goes a long way. I had a stock move from 18.01 to 17.60 and the option lost about 50% of its value (.95 purchase to .45 low). When the stock reversed, It went to around 18.65 and the option was up well over 100% from my purchase price (bid price peaked at 2.40 per contract). This movement was in a matter of 8 or 9 days.

My strategy was based on stocks near, but not at a 50% mos and the technicals were lined up for a buy of the stock. I don't mind doing this with small amounts of cash, but I will need to feel much more confident before I start doing this with larger cash layouts.

[malwat]

Rule #1 is the perfect set-up for selling out-of-the-money (OTM) Puts.

The Reward:
When you Write (sell) a Put you receive the premium and time decay works in your favour. (This is why most option pro's make a very good living Writing naked options, not buying them).
If the stock does not go down to the strike price of the Put at or before expiration, you keep the premium.

Now for the "Risk":
If the stock does go down to the strike price of the Put, you will have to buy the stock at that price. (you still get to keep the premium).

However, if you wanted to buy that stock if it ever gets to that price anyway, you get to make money every month, until it does. Once you have bought it, you then have all the normal risk / rewards of owning any stock.

To Write options you will have to have enough capital in your account to buy the stock if it is "Put" to you, but you would anyway.

There is a lot more to options trading than stock trading and you should spend time getting to know at least the basics, before using this strategy.

All the best in the Markets

[malwat]

As a retired Professional Futures and Options Broker, I suggest you read my post of July 18th for the best way to use options for Rule#1.

Professional Options Traders have been making a very good income, selling "Naked" Puts on stocks that they would like to own for the long term (if it ever reached their target price), for decades.

We have a saying:"if you like a stock at $20, you will love it at $15".

If the stock you would like to own is selling at $20 and you sell a "naked put" at $15, you will receive a fee (premium) for selling an option that will lose value every day until it expires worthless.

Unlike buying options, you do not have to be right on the market direction, the timing and magnitude of any move. You just have to know where it won't go.

If you are wrong, you will get the stock "put" to you at $15, a price you would love to buy the stock at for the long term anyway. After that you have the normal risk of owning a stock.

You will need to learn about options yourself, and find a broker who really understands the nature of option Selling, "The Greeks", Volatility and Standard Deviations.

All the best in the Markets

[joshuat]

malwat, could you add some color on "very good income"?

I have been eyeing selling naked puts for quite a while. However, so far I've been pretty much fully invested in stocks, so I have not had the cash cushion that is required in case you get the stock assigned to you.

Correct me if I'm wrong, but you do need cash (or margin) available in the case of an assigned put. So, you cannot be fully invested. So I've been viewing this technique as suitable only if I had cash that I couldn't put to work in the market at a satisfactory return. To date the puts I have looked at haven't really seemed to offer a better return than I am currently making buying stocks and very carefully selected LEAPS. But then, I have mostly been considering the income from the sale of the put, not the benefit of having the stock assigned to you. So, I know my analysis is woefully inadequate at this point.

[malwat]

Hi joshuat,

You are quite right, this is an income generating strategy and requires it's own investment capital.
The Professional Option Traders I referred to as making a "very good income", trade size. 10 puts is 1,000 shares and at, say $30.00 per share you would need $30,000. (in T bills) in your account, per trade.
The amount they make depends on the Volatility of the stock they are trading. If they are selling puts on Apple they will make a lot of money, or own Apple.
Check the pemium for puts on a couple of stocks you would like to own (at that Strike price), on Yahoo Finance.
Options lose their value at an exponential rate during the last 30 days of their life (their Vega). This is why most at, or out-of-the money options expire worthless, even if the market is moving their way, as they have no intrinsic value, only time (hope) value, and that is running out fast.
The funds sell calls against their stocks (covered calls)and use the proceeds to buy puts, to hedge their stock positions and, just like the home owner who buys home insurance, are happy to see them expire worthless. You are taking the other side of this trade.
As I said, if you and the funds are both caught by suprise, you will have the stock "put" to you at a very attractive price, so long as you are prepared to hold the stock until it comes back.
This strategy is best used in an uptrending market, as it is a bullish strategy. For instance, as I am sure you know, if a stock is trading above it's 200 day moving average and drops 5% in a day, statistics show it will trade back above the 200 day MA within a month, usually sooner.
What better time to sell an out of the money put on this stock?

Good luck in the markets

[joshuat]

Okay, taking your example of apple, september $125 puts are selling for $0.10.I chose 125 because that's where I'd be willing to have it put to me.

To make $10 I need to have 12.5K sitting in a T-bill. Now, I realize that is $10/month until it happens to be put to me, plus the T-bill rate, but that isn't very attractive to me compared to what I can get with the 12.5K fully invested.

At $140 strike, the rate is .49, or $49 on 12.5K, 4.7% annually. Call it 10% after the interest on the money.

To me this isn't terribly attractive, though I do see that you get an upside no matter which way the trade goes - earn money from the option, or get the stock you want at a cheap price. I guess what I am saying is, not being Buffett with the problem of trying to put billions to work in the market, I am already getting stocks that I want at a cheap price. I can definitely see using this strategy in a market that I considered overbought.