# Sell Puts: is my strategy ok?



## Smallprofits (9 January 2009)

I was interested the your views on my option trading strategy;

Basically I have a share portfolio as collateral of about $50,000 and have LOC of about the same if need be. 

I have a very conservative strategy of Selling puts on companies which I believe are solid for the long term – CBA and BHP main ones I have use. 

Say BHP is trading at $30 – I would sell a put for 3 months out with exercise price of $27 ish and perhaps take a premium of $750 ish

Naked – don’t buy a put

If BHP > 27 in three months then I let expire

If below then Ill buy back at a loss and then go a further 3 months down the track and bring exercise price down 1 or 2 dollars. Generally this trade will break even which is fine – down side is my capital is tired up for another few months

Generally I would aim to do 1-2 of these per month depending on opportunity – feel it is pretty conservative yet a good additional income. 

Is my thinking ok?

Surely with bigger companies this is ok? I did have exposure to BNB which was silly but as I see it IF (big if) the company doesn’t go under and is expected to recover then it’s a pretty safe strategy??

Do you agree? Any thoughts?


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## drsmith (9 January 2009)

Index options would eliminate single stock expsure risk.

I started looking at this late last year but an yet to act. Some useful information in the following thread,

https://www.aussiestockforums.com/forums/showthread.php?t=2023&page=2


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## jackson8 (9 January 2009)

Smallprofits said:


> I was interested the your views on my option trading strategy;
> 
> Basically I have a share portfolio as collateral of about $50,000 and have LOC of about the same if need be.
> 
> Do you agree? Any thoughts?




hi smallprofits
just a couple of thoughts from someone who is just starting out in options trading

are you selling calls over the stock you already own
do you have enough cash to cover cost of an early assignment on puts
are you aware of 30% haircut on stock as collateral
have you considered credit spreads with your put strategy  for a bit of insurance

regards
gary


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## mazzatelli1000 (9 January 2009)

drsmith said:


> Index options would eliminate single stock expsure risk.




Yes, but downside risk is still very prominent, index or stock.




jackson8 said:


> are you selling calls over the stock you already own
> do you have enough cash to cover cost of an early assignment on puts




@smallprofits
This will result in synthetic short put anyway 
Different psychological approach 
Has been detailed by WayneL and sails extensively so I suggest digging up their posts

Options is used to transfer risk --- nothing is safe
Your strategy is fine as long as you are aware of the downside risk and know how to manage it if it goes wrong.

You've noted BNB - which has fallen for a while, so naked puts on BNB at anytime for the past year would not have been a good move. Safe? Afraid not

Think RIO?? 
This thinking that the blue chips will be "okay and won't fall" is the concern.

If you look the link drsmith posted - selling puts is exactly like the analogy Wayne puts up

You'll win often, but one loser could wipe out all your efforts

Theres lots of good posts here on the subject of selling puts and covered calls. I recommend you read through all of them!!

Good Luck


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## wayneL (9 January 2009)

mazzatelli1000 said:


> Your strategy is fine as long as you are aware of the downside risk *and know how to manage it if it goes wrong.*




This point of Mazza's is key.

Of all the US ETFs out there, the one that has performed best in 2008 is ETJ, a put selling fund. But we're getting large premiums at the moment to offset the risk.

Once premiums calm down it's back to slim pickins with large event risk, unless you habitually write risky stocks.

Long term, I would look at delta neutral strategies on indexed.


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## Grinder (9 January 2009)

with wayne on this one, delta neuts with defined risk and management.


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## jackson8 (10 January 2009)

wayneL said:


> This point of Mazza's is key.
> 
> Of all the US ETFs out there, the one that has performed best in 2008 is ETJ, a put selling fund. But we're getting large premiums at the moment to offset the risk.
> 
> ...




hi waynel
have just been reading your other thread aka  better than covered calls

i have a couple of queries concerning defending ones position when a naked  position goes against you

could you give an example of how to defend a naked position on a index whether it be a call or put

also could you post an example of a delta neutral strategy as i am having a bit of trouble understanding the concept

even though i have read quite a bit of material from different option strategy sites i still cant quite get my head around this concept.

with thanks 
Gary


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## long88 (10 January 2009)

i think you need to read the book. 

When Genius Failed: The Rise and Fall of Long-Term Capital Management


http://en.wikipedia.org/wiki/When_Genius_Failed

this is exactly what they are doing, that causing them to close down.

if it works for you so far, well done.

do go blame anyone else but yourself when position goes against you.

especially on fast moving stock such as bhp.

return on covered call is quite good anyway, about 4%-5%/month, why not write a covered call ? 

or if you want to buy bhp stock, at a discounted price, then there is better strategy for you.

put on a position for bear put spread, and either use ratio or sell a naked put after the short strike price to finance your bear put spread (you can usually do this for credit).

therefore when stocks goes down, you profit from it (and therefore brings down your breakeven further), and when it reached your naked put, you have to buy the stock (in case you got assign).

when the stock stay above, your breakeven, you got to keep the credit from the spread. 

Much more better situation to be in, rather than complete naked.

Safe trading.


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## cutz (10 January 2009)

long88 said:


> return on covered call is quite good anyway, about 4%-5%/month, why not write a covered call ?
> Safe trading.




So what follow up strategy would you have implemented if you did a buy/write on BHP at around mid July last year?


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## wayneL (10 January 2009)

jackson8 said:


> hi waynel
> have just been reading your other thread aka  better than covered calls
> 
> i have a couple of queries concerning defending ones position when a naked  position goes against you
> ...




Gary, I'll start a new thread in a day or two on this.


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## wayneL (10 January 2009)

long88 said:


> i think you need to read the book.
> 
> When Genius Failed: The Rise and Fall of Long-Term Capital Management
> 
> ...



Hold on just a doggone minute!

What LCTM wre doing and what is being proposed here are entirely different things! LCTM was employing massive leverage, i.e. massive face value of contract. What is proposed here is not that, or I don't get that impression anyway. But you raise a good point for discussion.



> do go blame anyone else but yourself when position goes against you.
> 
> especially on fast moving stock such as bhp.
> 
> return on covered call is quite good anyway, about 4%-5%/month, why not write a covered call ?




Oops. Option synthetics 101. Covered call = synthetic short put. May as well write puts as sell covered calls (unless you already own the stock).

But the important point you raised earlier is that of face value. People sell covered calls basically unleveraged, or if leveraged, at margin lending LVRs or less. 

The naked put seller should do the same.

However, what some naked put sellers do is sell many contracts well out of the money. They will win more often, but the black swan driving the steam roller eventually crushes them. LTCM territory... not what OP is doing.

Have a look at the ETJ(NYSE) http://finance.yahoo.com/q?s=etj It is a put selling ETF and guess what? It one of the best performing ETFs for 2008 and pays a 9% divvie. No LCTM leverage there.



> or if you want to buy bhp stock, at a discounted price, then there is better strategy for you.
> 
> put on a position for bear put spread, and either use ratio or sell a naked put after the short strike price to finance your bear put spread (you can usually do this for credit).
> 
> ...




In general, I think there are better strategies than CCs & naked puts, depending on the conditions and what it is the trader is trying to achieve.

I'm doing a lot of naked puts at the moment on individual stocks (as well as spreads), but it is not my normal gig, but my aims are a bit different to normal as well.

The strategy you talk about here is not clear to me. Can you please shown an example using striking prices.


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## long88 (10 January 2009)

cutz said:


> So what follow up strategy would you have implemented if you did a buy/write on BHP at around mid July last year?




Wow. that is a very quick reply.

if you have written a naked put @last july last year, you are probably still down about $10 from today price, and say atm put usually around $1 to $1.5 for bhp. means that your BE is around $1 or $1.5 less your strike, if you have done the Bear put spread, your breakeven will be lower, but who knows what is going to happen in the future ? who knows bhp is going to go to $20 at nov-dec ?

that is why never write a naked put, as the stock could be down for long time. and you are stuck with the stock, unable to sell it (unless you want take a loss).

I did learn my lesson from anz, down from $20 to $18.5 , naked put, lucky i managed to get out from position @profit, then another one @15.5 again i am holding the stock now, keep writing call to bring my cost down (which is already having profit), but lesson is, that money should be put somewhere else safer. 

No more naked put, unless you really like the stock, and wants to hold it long term (and have the buffer for it).


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## long88 (10 January 2009)

> In general, I think there are better strategies than CCs & naked puts, depending on the conditions and what it is the trader is trying to achieve.
> 
> I'm doing a lot of naked puts at the moment on individual stocks (as well as spreads), but it is not my normal gig, but my aims are a bit different to normal as well.
> 
> The strategy you talk about here is not clear to me. Can you please shown an example using striking prices.





one example here, i just done recently.

WBC @15.79 deal is done @18/12/2008

entered the trade with

Buy $15 put exp Jan 09 $0.575
sell $14.5 put              $0.445
sell $14 put (naked)     $0.345

total net credit of $0.215 (for 5 contract)

so here is the plan:

- if wbc stay above $15, i get to keep the credit
- if it goes down past $14.52 ( i will try to get out of the position (that is my max profit zone)).
- if it reach $14, will have to be prepared to be buy the stock (worst case scenario).

I don;t really want to own wbc, but what i want is to profit from it either way.

Cheers


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## wayneL (10 January 2009)

long88 said:


> one example here, i just done recently.
> 
> WBC @15.79 deal is done @18/12/2008
> 
> ...




So what you have is a Christmas Tree spread. 

Long gamma and vega on the downside similar to the naked put. Good for an orderly move down with small profit on the upside as well, but uncomfortable if you get a volatile move down. It's fine if you know the risks, just like any strategy.


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## long88 (10 January 2009)

Have a look at the ETJ(NYSE) http://finance.yahoo.com/q?s=etj It is a put selling ETF and guess what? It one of the best performing ETFs for 2008 and pays a 9% divvie. No LCTM leverage there.



Wayne.

one of the article mention about covered call

"What primarily sets ETJ apart from the typical long fund is that it has been writing index call options on roughly 67% of its holdings"

so i think the model is basically write naked put, if get assigned, write a naked put and covered call.

http://www.asx.com.au/products/options/systematic_approach_to_selling_premium.htm

i start with this idea, but i realised that i have limited funds available, therefore i cant do this scheme (this could be another ponzi scheme in the future ?)

cheers


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## Smallprofits (10 January 2009)

jackson8 said:


> hi smallprofits
> just a couple of thoughts from someone who is just starting out in options trading
> 
> are you selling calls over the stock you already own
> ...






yeah have sold calls on stock - have 1000 NAB share so have done for them - dont want to lose to much of the upside though.

yes margin requirements very tough.

is 
credit spread buying a put at lower price?


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## Smallprofits (10 January 2009)

drsmith said:


> Index options would eliminate single stock expsure risk.
> 
> I started looking at this late last year but an yet to act. Some useful information in the following thread,
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=2023&page=2





thanks, didnt know about that - like it - will check out


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## Smallprofits (10 January 2009)

mazzatelli1000 said:


> Yes, but downside risk is still very prominent, index or stock.
> 
> 
> 
> ...






yeah true - thanks

One loss and your f#$ked


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## Smallprofits (10 January 2009)

wayneL said:


> This point of Mazza's is key.
> 
> Of all the US ETFs out there, the one that has performed best in 2008 is ETJ, a put selling fund. But we're getting large premiums at the moment to offset the risk.
> 
> ...






thanks Wayne,

what do you mean by "delta neutral strategies on indexed" do you mean option trading on index or just simply go long on index?


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## wayneL (10 January 2009)

Smallprofits said:


> thanks Wayne,
> 
> what do you mean by "delta neutral strategies on indexed" do you mean option trading on index or just simply go long on index?




errr slight typo there, should be  "delta neutral strategies on indexes".

I'll be posting on this topic later, I've got stuff to do over the weekend, but next week.

Cheers


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## Smallprofits (10 January 2009)

long88 said:


> one example here, i just done recently.
> 
> WBC @15.79 deal is done @18/12/2008
> 
> ...






See I would just have sold the naked put at $14 and worse case senario is still to buy at $14 but have higher premium.


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## mazzatelli1000 (10 January 2009)

Wayne

Do you think it would be a good idea to make some of these covered calls/naked put threads a sticky - as this topic comes up often and there always seems to be confusion about synthetic versions of these positions???

It seems that many are introduced to options via these strategies


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## mazzatelli1000 (10 January 2009)

Smallprofits said:


> yeah have sold calls on stock - have 1000 NAB share so have done for them - dont want to lose to much of the upside though.
> 
> yes margin requirements very tough.
> 
> ...




Yes



Smallprofits said:


> thanks Wayne,
> 
> what do you mean by "delta neutral strategies on indexed" do you mean option trading on index or just simply go long on index?




Wayne will explain in his new thread 
But basically the deltas in your position will be offset by opposing deltas
Example using stocks
You buy 100 stocks - you are long 100 deltas
to make it delta neutral you will short 100 stock - which is -100

The same thing is done with options, except the delta of certain options depending on whether they are in or out of the the money differ and range from 0 t 1 or 0 to -1




Smallprofits said:


> See I would just have sold the naked put at $14 and worse case senario is still to buy at $14 but have higher premium.




Yes you have higher premium, but after you got the stock at $14 and it drops to $12 - does you premium cover that loss?
Will depend on your analysis


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## long88 (10 January 2009)

Smallprofits said:


> See I would just have sold the naked put at $14 and worse case senario is still to buy at $14 but have higher premium.




What is your plan here ?

you can still ratio the bear put spread, and have some naked put if you still really like the stock.

That example that i given you, my plan is to profit from the fall of the stock, but if i am wrong, i still got to keep the credit. my problem here is short vega, as what wayne mention, and i got out from the trade when wbc goes up to about $16 (making some profit), 2 weeks on the trade.

Cheers


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## jackson8 (10 January 2009)

"Wayne will explain in his new thread 
But basically the deltas in your position will be offset by opposing deltas
Example using stocks
You buy 100 stocks - you are long 100 deltas
to make it delta neutral you will short 100 stock - which is -100

The same thing is done with options, except the delta of certain options depending on whether they are in or out of the the money differ and range from 0 t 1 or 0 to -1
"

with delta neutral strategies would i be right in assuming that to profit from these there needs to be a rise in volatility or large movements in Sp 
the above example when the Sp moves one direction or the other is offset against each other the intrinsic value cancels each other out, so would we be relying on the time value to increase on either position with an increased volatility or is it more to do with the relationships between the deltas of each position as the price moves     

gary


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## mazzatelli1000 (10 January 2009)

jackson8 said:


> with delta neutral strategies would i be right in assuming that to profit from these there needs to be a rise in volatility or large movements in Sp
> the above example when the Sp moves one direction or the other is offset against each other the intrinsic value cancels each other out, so would we be relying on the time value to increase on either position with an increased volatility or is it more to do with the relationships between the deltas of each position as the price moves
> gary




Options have the greeks, Delta, Theta, Gamma and Vega - yes there is also Rho but not as important.

I think you got it. With my cr@ppy example - movements in the share price will be offset by the other position. This leaves theta, vega and gamma to provide you profit as the delta variable is minimized.

By keeping delta neutral you are focusing predominately on the other Greeks to profit.
Note that delta is dynamic, so you may find yourself adjusting to keep it neutral. There are other positions that start off delta neutral but don't need to be maintained delta neutral.

Yes there are positions where you may believe IV will increase so you neutralise the deltas so that your position is only going to profit from an IV increase. This may be where you believe you have found certain options undervalued and will increase in IV to revert to the mean.

But there will be positions that Wayne will discuss involving condors, butterlfies etc that will be delta neutral - but they will profit from time decay and a decrease in vega.

Best to wait for Wayne's thread


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## Grinder (10 January 2009)

jackson8 said:


> with delta neutral strategies would i be right in assuming that to profit from these there needs to be a rise in volatility or large movements in Sp
> the above example when the Sp moves one direction or the other is offset against each other the intrinsic value cancels each other out, so would we be relying on the time value to increase on either position with an increased volatility or is it more to do with the relationships between the deltas of each position as the price moves
> 
> gary




Wait for his new thread gary, all will be revealed. In the meantime do a search on ASF to locate past posts on stuff he has written before about the topic. Tried to search but can't remmember what it's called.


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