....for this thread. Just marking my digital territory some I can come back and learn some more
OPTIONS (PUTS)- great info (easy to understand) from THE VET and others
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.
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.
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.
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....
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.
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.
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.
I did a short piece on synthetics on the options forum here...
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...
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.
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.
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.
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?
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.
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.
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.
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.
@ The Vet,
Thank you sir. Made about 1500 so far on that advice and looking to add more.
Edit - further discussion
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!!
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....
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?
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.
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.
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?
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.....
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 )