Posted on 02/02/2019 2:57:08 PM PST by Vision
Have a few questions and my head is spinning.
What are your questions?
That’s no fun. If you are going to the casino, go for broke! Ha ha.
The P&L of covered calls and selling puts is identical; or at least they are considered identical.
I personally consider selling covered calls the single worst play in the stock market. I could give you a dozen or more reasons why. I am almost done writing an ebook about why I believe this. They are generally the first play a beginning options trader does. Notwithstanding any objective, provable, or experiential examples or considerations or iterations; Imagine that the very first play beginners are induced to undertake is a good one. One that Wall St. rewards. Naive much?
I *do* sell covered calls a fair amount (actually, I use what are known as bull call spreads where a long call option substitutes for the common stock against which a CC seller would ordinarily sell a CC) but I almost NEVER do them without being committed to adding protective puts to form what is known as a collar. Stock - call + put. The absolute maestros of collars is Radioactivetrading.com and they have several free recorded webinars which are excellent. Strongly recommend them.
The market at present happens to be particularly bad for selling CCs because by any objective measure (primarily ^VIX) the premia obtainable from call selling does not come close to compensating the CC seller for his/her risk; and, of course, the beginning CC seller HAS A FULL UNDERSTANDING OF the risks. Right? (no, wrong)
Covered calls SUCK. I’ve only had this discussion 5000 times with CC afficianados. They suck because down in the lower right corner of your brokerage stmt is a number. You sell CCs, that numbers will not get larger, indeed, will tend to go lower. To put it another way, go sell CCs 100 times and get back to me with whether you still think it is a good play.
Options were designed as hedges. And that is how they are best used.
If you’ve traded stocks, then the basic process is he same. Except, you can lose a lot of money very quickly. “Trading” options as if you are daytrading is either going to make you rich really fast...or make you poor really fast. And ask yourself if you know any rich options traders? They are out there, but they are rare.
As a reformed daytrader from the dot com days, options are not for the feignt of heart.
Unless you trade professionally, you’re generally the “mark” at the card table.
That works, but if it goes down your option is worthless.
It might behoove you to hedge against the loss. But at $100 and sell a put for $115. If it goes to $114 you keep everything. If it goes to $115 you pocket $15 a share and any dividends.
For this purpose, you might consider leveraging using margin rather than risk the amount of the option.
Short statement. If you only buy calls or puts, your downside is limited to the amount you spent and your upside is "unlimited." Writing naked calls and puts puts you at very very large risk because there is potentially no limit to your loss.
Under the efficient market theory you should only break even on options, less commissions and differences between buy and sell prices. The guru on this, however, is Nassim Nicholas Taleb who talks about the fact that he discovered, for instance, that deep out of the money puts are sold at a discount to risk because of "black swan" events.
There is investing and gambling,pick one.
Good luck.
PS; If your asking here, your gambling.
Your broker will reserve cash in your account equal to the purchase price of the stock at the strike price until the put option is exercised, expires, or you buy it back.
I would not recommend doing this on margin because you will quickly find yourself owing the broker a lot of money.
Buy low sell high.
After that you are on your own.
Good luck
Options always have a time frame and value they do not execute immediately. So you decide you would like to sell your XYZ in one month at $100 per share you sell a call at $100 strike for the date in question choice of every Friday in the case of most popular stocks. For this you get a small premium. If the stock is over $100 on that date your option will be called and you will be paid the $100 per share if the stock falls to $98 you keep the premium and your stock.
Cash secured puts are similar. You like a $15 stock but only if you can buy it for $12 so you sell a put $12 strike pick an “ex date” the date the option expires. Again you receive a premium. The premiums are paid to your account right away. Most options expire worthless so the sell side is the place to be. Most option selling is to drive a higher cash on cash yield on your portfolio. There are funds and ETF’s that use options extensively one that I own is QYLD which is basically NASDAQ with a yield. I also will sell some puts. I have mostly given up on covered calls as I can achieve comparable yields from CEF’s many of which are using option strategies.
Any image of “free money” is just wrong. This you can count on with the certainty of the sun rising.
I can’t fully answer your question without an understanding of what your desired trade frequency; your risk tolerance; what you are trying to do with the market; ..and I don’t want to know those things since I’m not offering to be a finan advisor.
I can point out the faults in your impressions.
If your [sold] call is in the money ITM over a dividend declaration by any amount in excess of the div amount, your common will be called away by the owner (the long) on or before the ex-date of the stock you sold the call against and you will miss the dividend and lose the stock. If under normal conditions you want to sell a $47 call against a $50 stock you’ll get less than $3 for it until the call has duration and thus time value and thus you would probably not be assigned right away. A close-in call might fetch 3.20 and OTOH it might only fetch 2.80 or maybe 3.10; hardly worth it.
If you sell a put ITM, yes, you could be assigned early but in terms of doing so to acquire the stock “instantly” the market maker will practically NEVER post a sale price that would allow “free money”. You *may* during an extreme event get an opportunity to do so but you would need the titanium cojones to actually do such a trade. For example; CATerpillar got whacked about 12-13 points on its last earnings report; from 136 to 122.5ish. Suppose you saw that and decided it would be a good time to go bargain hunting on CAT. (which is back @ 131) Upon that whack, the puts would be astronomically expensive to BUY and be of paltry value to sell. The bid x ask would be...what $3.50? (guess) That would take some guts to do that trade. Superior would be to buy the stock, because you would get stock execution maybe 20 cents in a radical event bid x ask but ordinarily CAT might be .02 or .03 bid x ask.
You are asking valid questions; but believe me, computers 1,000,000 times faster than you are looking for those situations and would buy (or sell) them in such size that whomever was offering such “free money” would almost immediately be forced to quench the arbitrage situation or, be carried off the exch floor on a stretcher. There are no free money strategies that you can outrun. IF YOU HAVE A RESTING ORDER, PLACED IN ADVANCE, then sure, you could take advantage of such a situation, but I can assure you, few thot CAT would get hit that badly.
The ideal notion of folks who sell puts are: 1: companies engaged in stock buybacks. 2: Warren Buffett who says “I like this co @ $45 but not at $49 and so I will sell 45 or 46 struck puts until hell freezes over and maybe I will get to sell them 3-6 times before getting assigned.”
Yes, in that scenario you would do quite well, but if it drops to $90, you’re still down. That $5 in premium is decent, but you are also giving up potential upside vs just being long the stock if the stock keeps running up.
Derivatives are gambles on gambles. Too much for me.
I trade em but only once in a great while.
I used to trade em all the time, but not anymore. It’s very high risk.
I read somewhere that 75% of option trades lose money.
On stocks that I have a gain on and want to finally sell, I’ll do it by selling a covered call on it to make a little extra on the sale. I’ve also sold Puts on stocks have seen an unusual drop in price, but are a solid stock. However, it’s very rare that I do that. Instead, I’ll sometimes just buy the call in that situation instead....again, very rare.
The markets are near all time highs at the time. Better keep out for a while if you don’t have idea how it works.
When the over- all stock market is about to fall because of rising interest rates, place a put(bet that the markets will fall hugely) on the OEX option. After the DJIA has fallen 1000 points you can cash in your put. Other wise stay away from options. Even the major brokerage houses are not able to make profit from options. Stay away from hedge funds.
The questions you are asking; and you are also being forthright about it (so I am not being dismissive) indicate that you are only starting to understand options. Which is perfectly fine. But what I’d like to point out is that since you do not yet understand them, the questions you ask which of course emanate from the stance of “how would I use them?” are equally larval. The uses for options are quite profound, not to paint an unrealistic picture; they can also rip your face off. They are not free money, this you can be sure of. They take a while to understand, years, and likewise, the smart questions and the conceptions as to “how can I use these” take some time to develop.
They are (to me) mathematically fascinating and intriguing, and infinitely flexible but those “higher order” applications take considerable time to comprehend. Most beginners tend to obliterate themselves NOT having a clear idea of what they are trying to do nor having a clear idea of how to execute strategy, the challenge is to get through the requisite 2-3 years of learning about them without mashing your account into pulp.
This.
For some reason I've virtually never had a stock go south after selling buys on it. Yes, they often get called away at the strike price and my theoretical maximum profit is not achieved, but I still do fine.
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