OPTIONS (PUTS)- great info (easy to understand) from THE VET and others

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Thanks terri, vet, et al...

....for this thread.  Just marking my digital territory some I can come back and learn some more cheeky

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VET's answers... MUST READ

I have put togther entire comment so everyone could see the answers THE VET gave to my questions via private message. This is EXCELLENT for those new to "put trades". In the discussion below you can follow one particular trade I made which was- I sold 2 puts (October 11 $7 at a $1.10 premium). His original comments are italicized and they were posted alone above, my comments bolded and his final answers have ** around them. Hope this helps all of you!!  And VET- you are the bestyes

Vet can I say "I LOVE YOU" and it not come off wrong?!

** No problem, Terri... I'm old enough to take that as a compliment.  My granddaughter (I only have one) says that to me all the time.... **

Flex was very thorough but my brain begins to blur with all the tech terms and math. I am sure there are many who completely got it as he went through it but with me it was more I re-read your explanations several times and I think MAYBE I get it.

** Most of your comments are spot on, but it's hard to ensure that I have always been clear and I do make typos so while it may be tedious I will respond in the same format. **

Below, within your words, are my questions. It was just easier to ask them this way. And THANK YOU THANK YOU for teaching me- you have no idea what it means to me!!

"The difference between the bid and ask is the spread, and is an important consideration in the costs of trading options. That difference is in effect the market makers profit.

who is the market maker (do you mean the one setting up the trade?)

** Options trading is done on specific exchanges set up for the purpose.  Each stock on which options are available has one or more market making firms who set bid and ask prices for every option to ensure that there is always liquidity available to buyers and sellers. **

The seller of the put is obligated to buy the stock at the strike price if the buyer assigns (puts) the stock to him. The seller gets a cash premium paid when he sells the put contract. The put seller must accept stock put to him and pay the strike price regardless of the market price. The seller is said to be short the put or has sold a “naked put”. Being short a put has the opposite effect to being short a stock. It is a bullish, not bearish strategy.

So I SOLD a naked put of 2 SVM Oct 11 $7 strike price...ok

  • ** Right! **

The seller’s loss can be as high as the strike price less the premium already received, in the event that the stock price goes to zero. So in other words worst case scenario if stock goes to zero is I essentially lost $1400 based on 200 shares of SVM at $7. minus the premium that I got at the beginning. ok got it.

** Right again! **

In practice, a put sellers risk is exactly the same as that of a regular buyer of any stock that loses value, minus the premium received. The sellers profit is limited to the premium regardless of how high the stock goes over the term of the contract. A seller can close a position at any time prior to expiry by buying back the put from the option market. So if I want to get out of my position in case I want to free up cash or don't trust the situation any more then I can prior to October expiry go onto market and BUY THE SAME PUT that I originally sold ,correct?

** Yes.  That is sometimes called "Closing the position".  You buy back what you previously sold and that's the end of the matter.  If your position is in profit (ie. the buy back ask price is less than the original premium received) that's fine and quite normal.  You don't have to wait until expiry and can take the profit (giving some, but not all of the premium back) at any time. **

The buyer of a put option is buying insurance against the fall in the value of a stock he holds or a speculator making a short bet that a stock he doesn’t hold will decline in price. The seller is the insurer and he gets paid a premium for accepting the risk. SO lets say in the situation of SVM, if I was unsure what the next several weeks were going to hold for this stock and I wanted to buy some insurance for my put that I sold (so that I don't lose too much on it if the stock keeps dropping), I would BUY a put. Would I BUY the same $7 Oct11 put or would I buy a lower price than the put I sold? and would I still keep it in the Oct11 timeframe?

** That's a bit confused.  You are the seller of the put.  The buyer is whoever took the other side of that trade.  There isn't really any insurance for you if the stock keeps dropping.  Your best actions if your put is ITM are either to close (buy back) the position and take the loss or to roll forward to a later month to get a higher premium and hope it turns around in a longer timeframe.  Some books do have complex combinations of puts and calls that are supposed to provide cover to other options but unless you are extremely skilled and lucky, they usually end up losing more! **

If the strike price of the put is higher than the current price of the underlying stock the put is “In The Money” (ITM).

If the strike price of the put is lower than the current price of the underlying stock the put is “Out of The Money” (OTM). So this is why you said I was OTM even though it was getting real close to my $7 strike price, got it.

** Right....**

If the strike price is the same or very close to the price of the underlying stock then the put is “At The Money” (ATM). But my strike price was $7 and the stock went down to $7.04 at one point today- isn't that what you would consider close and ATM??

** Yes that's close to the money but with a stock like SVM bouncing around like it was even if it went well below $7 and your position was ITM for a short period I wouldn't worry.  You would still have had a positive time value and no real risk of assignment. **

While you should never sell a put in a stock you are not prepared to own, being assigned a stock unexpectedly can lock up funds and at times trigger a margin call. This should never occur in a well managed account as your puts should be “cash covered” by sufficient cash or margin at all times to avoid this possibility.

One management strategy to minimise this risk is to monitor the time value of all ITM puts and take action if they become close to zero or negative. Is there a program that one can use that will keep track of the time values?

** Not that I know of.  I use an Excel spreadsheet linked into my own realtime quotes, but unfortunately it isn't really portable to other situations. **

As explained above puts with positive time values prior to expiry are rarely assigned, because it is better for the buyer of the put to sell the option and the stock on the market for a higher total return. OTM puts are never at risk of assignment and if the seller was assigned the stock against an OTM put the stock could be sold immediately for a profit. I guess maybe this would explain why I was safe even at stock dropping to $7.04 today because I was still slightly negative intrinsic value?

** No, the intrinsic value is zero if your put is OTM.  You did have positive time value.   The intrinsic value is not the value to you, it is the value to the buyer.  If he bought from you a $7 put and the stock is $7.01 then he loses a penny a share if he assigns to you rather than just selling the stock on the market.  Once it gets down to $6.99 he could gain a penny by assigning rather than selling. However he has already paid you for the put so he is still out of pocket by the premium (less the penny) and his commissions.  Also he sells at the bid and bought at the ask so there is probably another 5 cents per share he has to cover to make the trade profitable. **

The intrinsic value of a put is the strike price minus the stock price. It is the additional profit a buyer would get by exercising his option to put the stock to the seller, over what he would get by selling it on the open market at the going price. If a put is ATM or OTM the intrinsic value is zero and all of the premium of the put option is time value. Negative intrinsic values are ignored as they cannot occur in ITM contracts.

The time value for ITM stocks is the option price minus the intrinsic value. If the time value is close to zero or negative, your put contract is at risk of getting the stock assigned to it as the buyer of the put gains more by assigning the stock to you than selling it and the option in the market. This situation generally occurs with deep ITM puts often showing significant losses.

If the position is in profit and you are no longer bullish on the stock, the simplest solution is to buy back the put and book the profit. However it may be that you are still bullish and need more time for the stock to get to your target price. In such a case rolling the stock to a later expiry month is the best option and it should generates additional premium without much margin increase. In some stocks you can consider rolling out and down, ie. To a later expiry and a lower strike price. Don't normally these later expiry/lower strike prices cost more to sell? Reading it I guess you are saying that the additional premium will offset the increased margin increase. Ok I think I understand.

** You are confusing buy and selling a little bit.  When you roll you buy back your current short put contracts and sell new short put contracts in a later month. Puts always trade in contango.  That means that the longer dated put at the same strike has a higher premium than the nearby month put.  ie. If you sold your Oct $7 put for $1.10 then the November $7 put is usually priced at $1.60 or somewhere near that.  However that difference can change at different strikes, different months and depends on demand.  For example the December $7 may be $2.40 which is overpriced and a better candidate to roll to.  It's not uncommon to get unusual prices which can be better or worse than you expect. In the above example to roll Oct to Nov would give you a net credit of $0.50 but rolling to December would give you a net credit of $1.30.  You have to balance the extra premium against the longer term risk. Now if December $6 strike puts asking price was $1.90 then you could roll down as well as out to December in a diagonal.    You still get an extra premium (more cash in your pocket) but only $0.80 ($1.90 - $1.10) rather than the $1.30 in the straight roll.  This is a way to work out a bad trade over time for a profit rather than take a loss in a falling stock. **

This reduces your margin requirement and your risk and can still be done for a net credit in many cases. The net credit coming from the premium you just got paid, correct?

** Yes, the sale of the new put is at a higher price than it cost to buy back the old position.  This is always the case unless you are trading a really illiquid stock.  Always look at the option chain for future months before you open a new position to get an idea of the time premiums. **

In stocks with high premiums rolling out when the prices are favourable is a good way to get a continual income steam and avoiding the crap shoot of expiry Fridays for ATM positions. I LOVE THIS PART!!

** I'm glad you got this point.  Many don't!  Rolling provides more income and is done when it suits you.  In theory waiting right until expiry provides the best income BUT it exposes you to the risk of a sudden change in the stock price that traps you.  The market makers know they have the "tail enders" over a barrel and often drop their premiums so rolling out is harder and less profitable.   Look to buy back your short puts when the market is good.  Prices drop as buyer are not needing to buy insurance and they are not competing with you.  When markets are low and doom and gloom prevails, look at opening new positions and sell more naked puts when everyone wants what you are selling! **

Rolling out should be done as a two legged single limit order for a net credit. Buy back the near month (if talking about my SVM Oct11 $7 are you saying to buy back November11 or staying with the Oct11??)

** No.  The straight roll out is to buy back your SVM Oct $7 and sell the SVM Nov $7.  The Nov will sell at a higher price than the Oct will cost you to buy back.  I previously discussed the variations of rolling further than one month and rolling down to a lower strike above. **

and sell a further out month at a higher price. Ok here you lost me....I think we are still talking about IF I am still bullish on this stock but need more time but maybe it is dropping at the interim, correct? then why am I selling a further out month at a higher price when prices are dropping?- this question even as I type I know is going to be considered stupid.

** Not stupid.  Some of these issues are hard to explain and even harder to understand but suddenly you will get it.   What is hard in selling puts is that you sell and get your money up front, and when you buy to close the position you give some of that back unless it expires OTM.  However even if it is OTM then you may decide to roll and make more premium in some cases.  If the underlying stock is dropping only slowly then rolling out and down makes sense.  If you have misjudged the timing and you believe it will turn around later, rolling out makes sense.  Even a chronically losing ITM position with time value can provide a regular profit if rolled out each month.  Never give up on an option position as long as your are not over committed on your margin.  NEVER take out the cash received as a premium UNTIL the position is closed.  It is tempting when you see a lot of cash sitting in your account BUT it is not yours to keep until the position that generated it has been closed!  END OF LECTURE! **

Even if the option only trades in 5 or 10 cent intervals multi-legged orders can be placed in 1 cent intervals. Most options trading platforms allow this kind of order, and it avoids the situation that may occur with separate orders where one leg fills and the other doesn’t. I did see that Optionshouse allows for this.

Many platforms will give you a mid-price for the total trade which is calculated as midway between the buy and the ask of each leg. I find that dropping the price a cent or two below that mid price (are you talking about where I place the limit?)

** Yes  your limit price as a net credit. **

almost guarantees a fill and if the market is rising even the midpoint price itself usually fills. It isn’t usually worth fiddling around for odd cents on these rolling orders. Both legs are moving together so the difference even when the underlying is volatile isn’t usually very much. Always check the prices of different months and other close strikes to see if rolling further out, or up or down is advantageous. Is there a calculator or something I can use to do this?

** Just scan the option chain for the strikes and months you are interested in.  There is usually a pattern for any stock.  ie. Each month further out starts at 60 cents higher per month for close months and drops to 30 cents a month for further out ones.  Strikes ATM are usually about 60 cents different for each dollar difference in the strike with increasing as they get further ITM and decreasing as they get further OTM. **

Rolling out and up can be a good strategy in a strongly trending bull market as it increases your return and risk, of course. Time premiums are highest when the put is ATM so once a position is well OTM (are you talking about a position that I have rolled already where the stock price has moved significantly higher?)

** Yes..  Rolling up to a higher strike gives a higher premium, but is only sensible if the stock has moved up a lot and looks like continuing up.  Hopefully SVM will do this ! **

either close it or roll it up. There is little to gain in keeping a deep OTM option for months using margin, just to avoid paying 5 cents to close it out. Some brokerages provide cheaper commissions for multi-legged orders so there can be a slight advantage of rolling rather than closing one position and opening a new position with two single orders.

Hope that helps.  Best wishes The Vet..

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VET teaches some more...

MY QUESTIONS/COMMENTS ARE BOLDED BELOW, Everything else is from THE VET.  Hope all you newbies have gotten something from this conversation-I know I ABSOLUTELY HAVE- Thanks so much Vet!!  Terri

On working out the logic of a trade, try thinking of how the person who took the other side of your contract will act. He has bought a put at a strike price of $7 which will expire in October and he paid you $1.10 or so for the option to sell his stock to you at that price.

Did he BUY this put simply because he thought it was going down or did he buy it for insurance or do people BUY puts for either reason?

** People buy puts for both reasons. Generally for solid stocks with little volatility it's the owners of the stock buying insurance. In SVM's case it is most likely to be bears looking to increase their short sale profits.  Not only don't they own the stock; they are usually already short the stock. **

When people say they bought insurance for the "what if" against their calls are they BUYING or SELLING a put for insurance?

** If you are long a call, you gain if the stock goes up, and if you are long a put then you gain if the stock goes down.  One can counter the other, but either way you don't lose but you can't win either!  You are better off just not trading than playing those sorts of games.  Being short a call and a put is a little different because you are gaining time value on both and in some of those strategies you can win especially if the stock just sits there with no move in either direction.  Naked short calls are dangerous, but if you own the stock a covered call is a safe strategy.**

It is highly likely he paid more than that so even if the stock drops to $5.90 he is still making a loss. If he was a speculator buying the put as a bearish bet without owning the stock, he still has spent the $1.10 and the stock has to drop further than $5.90 just to break even because he needs to be able to sell back the option to cover the spread difference between the bid and the ask price.

Ok, I get this...seeing the numbers of real time help me to visualize and grasp it better.

Curiously, if there are a lot of buyers of puts who don't own the stock, then it will create a demand for stock at the expiry date and/or skew the put price.

So it skews it because essentially since they don't own it they now have to go onto the market and buy it which then looks like lots of interest in that stock and pushes prices higher, correct?

** Yes and they are likely to be short stock as well.  It will be interesting to see how the shorts handle this situation in the September month.  I expect it will be over by October expiry.**

While the seller of the put doesn't have the option to avoid assignment when holding an ATM or slightly ITM position through expiry the put buyer has to buy or borrow the stock to assign to you in order to meet the contract. If the SVMshort stock position is way oversold this could, in itself, create a squeeze and may result in slightly ITM puts not being assigned.

So you are saying that potentially even if the stock drops and causes it to go below strike price, the buyer may decide NOT TO ASSIGN the stock to me because it may cost him to much to do it (if he doesn't already own it). Am I right on that line of thinking?

** Yes, that is possible.  Usually the market makers take over these positions and force the assignment themselves and make a sure but small profit, but if the stock is simply not available at the price they will probably just leave the ATM and slightly ITM positions expire as if they were OTM.  If you are assigned when the stock is say $6.80, you have still made a profit.  You just sell the stock on Monday morning after Friday's assignment and while your premium is reduced you are still ahead. **

Watching the open interest as expiry approaches will be instructive.

The Vet

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Buy the dips - everyone's advice

We all know this story...  We see an article about a hot new stock we don't follow which is going up like crazy.  We do some DD and decide it's a good investment and we read our favorite guru who tells us to "buy the dips"...

Sure, great advice, but by the time you get your cash freed up and are ready to place the buy order, the "dip" has gone and the stock is trading up in rarified air!

So do you throw away all that caution and chase the stock (at great risk) or do you just put it in the "one that got away" drawer!

If you really think a dip is coming you might put in a low ball  good till canceled order to buy but that may or may not work and besides you have to let the cash sit in the account just in case.

The alternate strategy is to buy a call and hope the stock goes up a lot more. If you are lucky you get a big return, but usually it expires somewhat lower than you need to cash out well ITM and all you do is lose the premium paid for the call.

There is a another strategy in this situation.  Just look for an ATM or close to the money put that has sufficient premium to bring the stock into your buy zone.  eg. If the stock is trading at $14.10 and you would be happy to buy it at $12 (the dip) then see if you can find a put at say $14 strike with a premium of $2.10.  That's a bit rich for a nearby month, but is quite possible for something further out.   Sell the put and wait.  

If the stock drops to under $14 by the expiry date then you will be assigned and the net cost to you will be $14.00 - $2.10 or  $11.90 actually below your buy point.  Of course if the put is ITM you should ensure that there is cash or margin available to cover an early assignment.

If the stock continues up then you don't get the stock assigned but you do get to keep the $2.10 as a consolation prize and you can always try again with the same play next month.

If the stock turns out to be a dog, then wait until close to expiry and see if you can close the position and capture some of that time value.  Unless it drops below $12 and stays there you should be able to salvage something but even if it does you can roll the put forward a few times and it still could pay off.

The Vet

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Selling PUTS - they are going to expire so don't fall in love...

For traders with a general bullish outlook, one of the classic mistakes is to fall in love with a stock position and hold it through thick and thin....

I know, it's hard to dump it when it's down and take that loss and even harder to sell when it's going "to the moon" for fear of missing the big pay day!

Well, unfortunately, despite regular reports of ecstatic traders which appear from time to time on blogs like this, I'm sad to report that most traders don't make 1000% returns on very many trades and with most it's hard to even crack even, let alone show a profit. 

If you start selling puts for fun and profit, you still have your favorite stocks; still do your due diligence; and still have the ups and downs of the market to contend with, but, you don't fall in love with your position.  It is always transitory and always has an expiry date. 

You get your money up front, and that's the most you are going to get.  Your focus is now on a strategy to keep as much of that money as possible.  You develop a different mindset, and for me it's a more balanced one.  It doesn't suit all people, but if it suits you then it is worth learning about and developing into into a money generating occupation.

If it's too dull, then try a few synthetics.  They won't always make money but they do give you the odd shot at a big killing. 

I have free Jan 2012 calls, paid for in full by synthetic longs placed months ago in AUY at strikes of $12.50, $15 and $16 all just riding along showing nice profits which I could cash in at any time.  All of the short puts which financed these positions were closed long ago for profits and the calls are free.

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Been there, done that

As far as falling in love with a position and not wanting to give it up and hold my ground etc.

It's a terrible idea and a strong emotional pull on a investor. It's hard at times not to get a false sense of hope that the option or whatever will come back in price and you just watch a bit longer and before you know it the option price has decayed away.

I learned the hard way back in May when silver was hit hard to not view any position as a win/lose situation because you have some built in expectation/hope ahead of time. Fortunately I was way out in time and I still hold them and they are starting to grind back in value.

The bottom line is that there are definitely times you have to cut your loss and swallow your pride. It's tough to give up sometimes but it's the right thing to do.  I now fully realize that and will try very hard to not let it happen again.

__________________

An epic lack of foresight, accuracy and rationale...
https://www.tfmetalsreport.com/comment/170246#comment-170246

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DarkPurpleHaze - I'm sure that we have all done it at times..

but that's one of the advantages of selling puts;  your position gets better as time goes on, not worse, so holding isn't as painful and rolling out offers an escape route.

In that same May silver slaughter I was holding a 70 short put contracts on SLV at around an average strikes of around $40 and a similar number in SLW with strikes $39 to $45.   When silver was taken out behind the woodshed and shot, most of those positions were a long way underwater.   The few that I had placed a while ago that were still in profit,  even though they were deep in the money (the time value on them had decayed a lot) I closed out and took the profit.

I  held all the rest with longer dated expiry and rolled the short dated ITM contracts out all for net credit.  Every one of those positions is now back in the black! 

The moral is don't fall in love with a stock, but don't give up on short puts either when time is on your side....

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Constructing a portfolio to trade short puts.....

This is just an idea piece, and is by no means a blueprint...

At the start of this year I was forced by circumstance to change my major trading account brokerage at short notice when there were many open short positions.  This can be a problem because of the inability to trade and maintain those positions during the delays of the change over.  Fortunately it was achieved without any major mishaps, but I did lose a month of trading and took some minor losses.

I then decided to run two trading accounts with different brokers, one major and one minor, to ensure I could transfer quickly without going through the delays which seem to occur when opening new accounts.   This got me thinking on the best way to structure a new option trading account where I intended to concentrate on selling puts and PM stocks as a focus.

I opened an account with $50,000 and decided to hold just one good quality mid priced gold producer as a base stock.  That stock had to be liquid, marginable and have good potential upside.  I decided on Gammon Gold, which has since changed it's name to AuRico Gold (AUQ).   For the initial purchase I sold 50 contracts of the current month ITM put on Gammon gold and allowed it to be assigned which brought my inital purchase price to well under $8.00 a share.  That left me cash of $10,000 and  available margin on the stock of around $28,000.   I then sold 4 parcels of 10 contract short puts in various gold and silver stocks with expiry dates of 4 to 12 months.  

Subsequently, I have traded those puts taking profits as I saw fit and replacing those positions with new ones.  I work to maintain at least $25,000 available margin for option trades and always have a positive cash balance in the account so there are no margin interest charges.  As the account has increased in value, I have added more short put positions to maintain about the same margin exposure.   I now have 9 short put positions of 10 contracts each in 8 different stocks at various strikes for different expiry months.

This is not my major trading account which has around 130 different positions but I am running this as a real time exercise to see just how it works out. My main account was never set up for short put trading and has quite a few dribs and drabs that I have accumulated over the years. 

I have been fortunate that the Gammon Gold (now AuRico Gold) has done fairly well and is trading over $12 which has increased my available margin and allows for more open short put positions to be held.  The account is up over 50% in the 7 months it has been trading.

Margin required on short puts depends on your broker, but in general margin varies with the price of the underlying, the strike and the premium.  More expensive stocks have much higher margin requirements so if your funds are limited it's often better to stick with mid priced stocks, all other things being equal.  Spreads are often prohibitive on the illiquid under $10 stocks so keep an eye on that. 

Because you get cash when you sell a put, the cash premium tends to increase the surplus margin available when the actual short position decreases it.  Conversely closing a position before expiry requires free cash so it doesn't reduce the margin required as much as you may expect.  While you are required to have enough margin in your account to cover the short put, the cash from the premium should ensure that you are not actually paying margin borrowing fees.  If you are then you are probably over committed and should reduce your positions.

Just an example... Not intended as advice or endorsement of any particular account setup.

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The Vet:  Thank you so much!

The Vet:  Thank you so much for all the information on this options strategy.  I'd speculated with calls in the past (and even sold some covered calls for my long stocks), but I always disliked how I could potentially end up with very little (or nothing at all) if things went against me.  At least with selling puts, even if I'm wrong on the trend I'm still poised to end up with a stock that I already feel is undervalued at an even lower price.

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more advice from THE VET

Generally sell puts when the market for a stock is at the bottom (if possible) . Don't be afraid to put in a day limit order to sell higher than the bid.  You will often get filled, and if not it has cost you nothing.  Don't put in GTC orders as each day is different and you have to remember to cancel them.  A day at a time is fine.

Providing your commissions are not excessive it is better to have a few positions in different stocks rather than all your eggs in one basket.

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Endgame on synthetics from The Vet

We had a good exchange yesterday on Main Street that I think can benefit this thread.  The subject is these synthetic longs that you create when you buy a call and sell a put.  When and how to close them out?  Here's some Copy & Pastes.

Tom L - OPM

 
5

Well it's your money now!

I do prefer synthetics that give me net credits (OPM), but getting an in the money by 9 cents call with 7 months of time for 15 cents seemed like a bargain.  Of course I have to hold the put for a while but I find that I can often close it out for peanuts well before expiry and let the call run to the bitter end.

I have been trading exclusively since 1997 (no other income source) and have taken out my original stake many years ago... It has been a wild ride at times, but I still eat well and sleep at nights (that's something all traders should work at - it's just numbers on a screen until you cash out).

@ The Vet

 
2

I'm curious about your comment about closing out the short puts early, but letting the calls run to the end.  I'm just a newb at all this, and trying to soak it all in, but I was just assuming (ya, I know, ASS out of U and ME) that just the opposite would be prudent.  Why not close out the calls before that tail ending time decay gets just hellacious against you, but keep the puts to the end and let time decay keep working for you.  Why let those OTM put holding bag holders off the hook right near the finish line?  They need to sell those puts to stay alive but I'd rather just walk away and let them twist in the wind.

Please explain to my poor addled brain....

Eric - closing synthetics

 
3

I did a short piece on synthetics on the options forum here...

https://www.tfmetalsreport.com/comment/42902#comment-42902

In it I explained 3 ways to set up synthetics depending on the strike prices.  Some books only call the case where the put and call are at the same strike a synthetic and other variations are "risk reversal" trades.  I lump them together because they are essentially the same strategy however they way you manage them is different.

As to closing the put early, it depends on the relative strikes and which legs are in or out of the money.  Holding the put uses margin, and if you have a long dated synthetic which has moved  a long way in your favor then it may be better to close out the put for a few pennies and release the margin for other positions.  If the stock is still appreciating then the call will be deep ITM and won't have much time value anyway.  In my Option 2 version (buy the Deep ITM call and sell the Deep ITM put) time value on the call is often near zero.

Your suggestion to cash in the call while it still has time value and keep the put is the right strategy if the call is ATM or only slightly ITM and the intrinsic value is low compared with the time value.  This is a judgment call that really depends on how you feel the stock will move in the time left.

Never be afraid to take a quick profit if the stategy it has met your expectations...

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svm calls and put discussion

I asked for an opinion of what SVM calls Tom liked and there was a little back and forth. Thought it may help some newbies like me.

 
   
     

@Murphy: SVM

I'm not a big fan of any of them right now b/c implied volatility is so high the premiums are out of sight.  I'm not adding to them even though I think the short squeeze is coming.  I'm being cautious (and cheap).

But, if I had to look at it w/o that filter I'd say Dec/Jan $12-14 range should be good for a profitable trade.  I hold Dec $12 and $14's, but I'm solidly profitable on them having bought them last month. 

For the same price as an SVM Dec $13 you can get Oct $15 NGD calls or Nov $15 Calls at the same price as SVM Dec $12's. 

I think there's more value in those NGD calls.  If they pay out then you can roll the profits into SVM after some of the dust settles.

@Murphy: SVM Again

I would do as The Vet has been suggesting and sell puts into the volatility, let it work for you as opposed to against you.  I'm not doing that b/c Scottrade sucks, but that would be a good way to play the high premiums if you're bullish.

Ta,

@murphy

I think reviewing TheVet's posts on the options thread would be a good start.  As far as valuing a put to sell I would say that a premium that is seriously above the Black-Scholes price at higher than normal 'historic volatility' (defining 'higher than normal' as between 0.1 and 0.2 higher) would be a safe bet.  But, that's really too fancy.

Simply put if you can read a chart even semi-competently, nothing fancier than identifying horizontal support and resistance, than any put that is paying you at break even prices significantly below a solid support line is a good buy with minimal risk of being 'assigned' the stock on expiration.

Oct $6 SVM puts are paying you $0.50-$0.55/contract right now.  Do you think that SVM has a prayer in hell of being $5.50 on Oct 19th?  If not, the premium is literally free money.  The other day TheVet was selling them for $0.95.  He could cover those now for a tidy $0.40 profit or hold them until expiration and keep the whole shebang.

Does this help?

@Murphy

One last thing.  As I said before, if you like a stock and its volatility is low (which you can get from a 'full quote' on the stock) then buying some cheap calls to support your share investment is, IMO, a sound strategy.  Selling puts on oversold good stocks like SVM is a rare opportunity for a nearly risk-free premium that a novice could make money at.  But, in no way am I recommending that as a main strategy to go long if you aren't first seasoned in valuing the contracts in the first place.

@Murphy, You can sell the Oct

You can sell the Oct 6 put bid .5 ask .65 and maybe get .55 Ten contracts would be $550 minus commissions. 44 days to expiration. SVM would have to go to 5.45 for buyer to profit. That's a long drop from 9.10.

Tom L & et.al. SVM puts

The calculations for put values include volatility as a major effect.  Higher volatility gives higher premiums, but volatility doesn't have direction.  You get the higher premiums regardless of whether the current direction of the stock is up or down.  SVM has been very volatile in both directions so all of the options are actually way overpriced.  That's bad if you are bullish and want to buy calls, but it's great if you are bullish and intend to sell puts.   The stock just has to settle down into a range for a couple of days and most of that volatility premium for the near months will vanish and your short put will be in profit.

I am still selling puts on SVM going a little further out in time.  I could close all of last weeks positions right now for serious profits but there seems to be little risk at the moment of letting them expire in due course.

@TheVet

Exactly.  That's what I was trying to tell Murphy.  Don't buy overpriced calls... sell overpriced puts.  Or, look for a different stock to buy calls in that you like.  Thanks for the succinct reply.

Ta,

@ The Vet, Thank you sir.

@ The Vet,

Thank you sir. Made about 1500 so far on that advice and looking to add more.

Edit - further discussion

SVM...

After hitting an intraday high of $9.23, SVM has pulled back to the $8.95 area.  At what price would you guys feel comfortable in adding to your long stock position?  Everytime I try to read a chart, I am WRONG!!

SVM - buy point...

FFF- If you have option trading permission in a margin account, just sell an October $10 strike put contract for every 100 shares you want.  You will get $2.30 or better per share.   In October if SVM is below $10 you will be assigned and will have bought the stock for $7.70.  If it is over $10 then you have made $2.30 a share profit for zero outlay.   Your risk in this strategy is less than actually buying the stock outright, but the gain is limited to the premium.

If you are more bullish on the stock sell the $11 put, but that puts your buy price up by 50 cents or so....

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Concrete Discussion

I'm currently long 50 Nov $20 KGC calls at an avg. price of $.484/contract.  They closed today at $0.59/$0.62.  The corresponding put is currently $2.68/$2.74.  If I'm bullish on this stock, and I am... very, given the chart, the timing and everything else.

Would it be a sound strategy at this point to begin selling puts against this position to raise cash and add to my desired profit?

How much margin would could I reasonably expect to keep per contract on those short puts before incurring margin fees?  30%? 50%?

I am correct in thinking that only cash and stocks can be used to margin, not options?  Yes?

Why wouldn't I do this for say 5 short puts to raise ~$1100 cash?

Ta,

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Tom I was thinking of this too

but for futures.  In that case, I can always SELL the future if it gets near or at the stike price - this prevents me from profiting on the decline (should it happen) but will eliminate any high downside risk.  The only danger is whipsaw - you sell, then it pops up - but there has to be danger, or it would be free money, and no such thing exists.

Slightly different for a stock but you could do the same it seems - SHORT the stock if it gets to the put strike price.  Again, same danger there.  That way when you have to BUY the stock, your SHORT covers the cost of being lower than the market price.

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Looking at the discussion

I think this works in the exact same way for futures as it does for any stock.  I also need to check with my broker to make sure I can sell puts in my margin account.  Considering the amount I have there is considerable and I have no margin being used at all, it seems that should be a no brainer for me to be able to do that.

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Short Positions on SVM As New Allegations Arise

As many of you fine folk are already aware (and as discussed here ), what has the recent news and near 20% drop today in SVM in light of the recent wave of new allegations done to your strategy going forward on your positions?

I figure this kind of thing is good learning territory, no matter what pans out.  As I am yet a suckling, gurgling noob with regard to options, I am not too exposed as I am short a naked put for January at 7, which I sold as it was turning back up after the first round of allegations, which I didn't believe.

Still not sold on the new allegations, but obviously, if I get exercised (which there's still a bit to go there), I'm holding some stock that I was comfortable with in the initial order.  I still really don't mind holding SVM overall, but with so much unknown right now, it makes it a bit stickier.

I 'spose they could halt trading on this puppy if they wanted....and who knows how long that would be for.  Any of you seasoned traders navigated through a troubled stock like this before?

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Rear down flank

I had 2 naked puts oct $7 puts plus I had some calls for Dec $12.- I happened to get online yesterday early afternoon when the sky was falling and everyone was freaking out which then freaked me outsurprise. Now I fully understand how fast a panic can happen and shares drop each second! Anyway, I bought back the puts at a loss (sold at $1.10 bought back at $1.95). After discussing with Vet I am holding my calls because well, why not. They are worth very little so I may as well let them ride. Vet held his puts and maybe I should have. When stock had hit $6.38 I had still not had the stock "put" on me so maybe I should have let it ride. I know The Vet had originally said that would normally not happen unless stock went below $5.90 because the owner of the stock would have done better just selling on the market. Needless to say, I was "skeered" out because I thought "crap what if this thing drops to zero!" ... oh well I have experienced the first emotional buy/sell situation.

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terri

Welcome to the FEAR CLUB!  We've been saving you a seat. :)

Sorry to joke.  It's real money, but you'll be a better trader from here on out because of it.  I've done the same on some short puts myself, not long ago either.  :(

Those things seem like easy money, until they're not.....

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Eric

I hear you... it was the most surreal feeling. I am watching the stock drop each second and I froze and then couldn't think what to do. It was like I forgot everything I have been taught !  I could not even imagine if this was a lot of money like some have on the line. That would not have been a good thing for my first time... I am glad it happened (for me) not those who are hurting right now. It made me sit and reevaluate how I would handle a next time and play scenarios in my mind- which I SHOULD HAVE DONE BEFORE I did the trade!!!cheeky

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@ terri & eric

Thanks for sharing that, terri.........the lesson i take is I guess those feelings just helps to realize how utterly lonely it can be holding an unfolding crisis (like SVM) with your position in one hand and a crisis of belief in the other.  A very palpable feeling, especially, if (as you mentioned, terri) one has LOTS on the line.  In those moments, you're being called to account for just what and who you're going to believe about what is happening.  

Kind of fascinating, really....(as long as no one gets hurt wink)

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