Sell Puts: is my strategy ok?

[Smallprofits]

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

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.

 

[mazzatelli1000]

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

 

[mazzatelli1000]

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?

Yes

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

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

 

[long88]

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

 

[jackson8]

"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

 

[mazzatelli1000]

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

 

[Grinder]

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.