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

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The Vet
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SVM - September Expiry has been and gone - UPDATE

As there has been so much discussion on SVM and as I was responsible for bringing up the suggestion of selling puts in this situation I thought it was only right to update anyone interested as to how my personal strategy faired at this point.

Initially I sold $7 and $8 strikes, but as the stock dropped I started selling the $6 strikes as I could see that they had much less downside in the event of an even deeper drop.

I closed both the $7 and the $8 strikes September expiry positions on the 9th September after only holding for a short time as it was getting to be obvious that there was more downside to come and both were still in profit.  I made a small profit on the $8 strikes and a decent profit (over $5k) on the $7s.  I then concentrated on building up my short position of $6 strikes September exp and ended up with a good number of contracts sold prices between $0.15 and $0.80 average of a little over $0.40 after commissions.  Today those all expired well OTM so I have made a total (including the earlier trades) of a little over $43k in the two weeks I have been baby sitting these positions.   As it turns out the $7s would have been OK but I don't like taking those positions to the wire and would have closed them or rolled them today had I not done it earlier.

I only made the big additions to the Sep $6s when it became apparent that the shorts were backing off.

It is still possible that there will be another short attack but unless there is seriously bad news I expect the stock to shrug that off.  It will take time to rebuild confidence in the stock and for a while expect volatility and no huge advances.   However this means that the rich premiums will continue for a while until the stock starts trading more reliably.  

I have positions in the Oct month at 6, 7 & 8 strikes and some 9s & 10s in further out months (small positions) .  I also place a synthetic with a 7 strike call financed by a 9 put for March.

For all out there, be careful, do not over commit but don't get too fearful either.  It is the volatility that creates the high premiums so you have to be prepared to weather the ups and downs.  With short puts even if the stock does not trade in the direction you wanted, there are 3 alternatives actions available to salvage the situation right up until the expiry date.

1. Let the stock be assigned.  If you selected the right strike and premium it was a cheap buy.

2. Close the position while there is some profit still in it or at least only a small loss if you have really having trouble sleeping.

3. Roll the position forward by buying it back and selling a longer dated put at the same or a lower strike and gain both time and money to fight the good fight in a later month.

Profitable trading to all,  The Vet....

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Vet

OK so I understand, you have the same strike I ended up getting scared out of. Did you sell the $7's after the insanity hit or were you holding at the same time I was holding? The reason I ask is because the stock price went as low as $5.86 (I think) at one point so I would have thought the stock would have been assigned. If you just purchased, are you thinking that even if the stock hovers at $7 or a little under you won't be assigned? I can't figure out how you are taking the risk on the puts with the strike prices being so close to actual stock price right now. Just wanted to grasp how the crap you are that brave cheeky

By the way congrats on the big return...I knew I picked the right person to teach me... thanks for that!!!

Eric Original
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terri

The Vet would know better, but I would think there's not much risk of getting your puts exercised (getting assigned) until you get right up to expiration.  

Put yourself in the shoes of the person who bought the puts that you sold.  Let's say you sold 7's and the stock sinks to 6.  There's $1.00 of intrinsic value there, but there is also still some time value.  Let's say the options are still selling for 1.15.  What's the other guys best play?  Exercise his option and realize $1.00 of intrinsic?  Or simply sell his puts for $1.15?  He'll just sell his puts.

I would think only the last guy holding them at expiration is going to exercise the ITM's.  

Do I have this right, Vet?

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Exercise fears..

Terri,  Eric has it right. 

While the put is trading with any time value the best alternative for the holder of the long put if he want to get out of the position is to sell the stock on the market and sell his put as well.  The total return is higher because he gains the time value left on the put as a bonus.  Of course most people who buy puts are just wannbe shorts who don't want to actually short sell a stock but want to gain from a decline.  Most of the SVM put buyers would be in that category.  Before they can assign stock they have to go out and buy it and then ask their broker to arrange assignment.  In a violent market the few minutes it takes to arrange this can run them into serious losses, and we assume they have the funds available to buy the stock in the first place.  Those long put holders will always sell the put at the bid and not take the risk of trying to do an assignment.

I have sold puts for many years but can count on one hand (and have fingers left over) how many times I have been put stock.  On a couple of occasions it was intentional, because the spread was to wide to close and I was better off taking the stock and then selling it immediately, and once I got 1 contract assigned out of a block of 100 contracts.  That was annoying but not financially damaging.

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Use of Put Options as Suppression Tool

I dropped this on Main St. on the JPM Lawsuit thread, but thought it was relevant to this forum and ought to e included here too.

Use of Put Options as Suppression Tool

Eric DeCarbonel also discusses the use of ​put options by the FED to control interest rates.   

 

I have also read the work of Rob Kirby where he discusses the use of derivatives (including options)  ​to manipulate the Treasury market and hold down interest rates.  

http://news.goldseek.com/GoldSeek/1314158237.php

http://news.goldseek.com/GoldSeek/1309532700.php

We also know all too well about the downside volatility that coincides with OE every month.

1)Is it possible to analyze option volume and positioning (Put/Call ratio?) in a similar way that the COT is analyzed?

2)Is the composition of the options market for a given commodity transparent? 

3)Why isn't there a similar amount of comment and analysis regarding silver options as there is the silver COT?

4)Can options be used as a leveraged tool by large entities to suppress price?

a)Is it visible?  b) Where would a person look to see if the FED was selling put options on US debt?

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You know, I've actually been

You know, I've actually been assigned more times than I've gone to expiry, and roughly  10% of those times were with more than 2 months till expiration (I'm still waiting to be assigned on out of the money options wink).  Maybe it's just my luck or maybe the exchanges like to pick on me.  I dunno.

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Sterling - would you care to comment on what stocks

you were assigned?   I find that very thin traders with wide spreads are the most likely to be assigned especially when they are OTM and have low volumes and low open interest.  Also some strikes are more popular than others; if you pick the popular strikes with more activity there seems to be less tendency to assign.

It's best to avoid these but if I find myself in an ITM short put with a wide spread and little time value I will roll it ASAP into a safer position with time value and more activity or if that's not possible close it.

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Terri - see my response to Eric above

about assignment.  Eric's answer was spot on in any case.  You have to think like the person who bought the put and work out what is best for them to understand the logic.

I wasn't too worried about assignment on the 7 strike but the 8 was a possibility which was why I closed it early while there was still a profit in it.   The 7 strike I also closed early and took the profit as soon as I saw the stock in free fall.  However I immediately started to sell the 6 strikes as it seemed very unlikely that there would be a sustained push below that and the premiums on the 6's went up to 80 cents at one point.    

It's not a matter of being brave, it's just a matter of acting and avoiding freezing in the headlights.  I also kept watching and listening for ever scrap of news to decide if the allegations about the company were true or not.  It was quickly obvious that it was an opportunistic attack and I was then confident the stock would reverse so all I had to do was to manage my positions to the best of my ability until that happened.   Short puts are actually safer and more flexible in these situations than actually owning the stock.

Was I taking a risk?  Sure, but the odds were well in my favor in my judgment, and the position was within my capacity to carry or close if I was wrong.   I don't win on every trade but I do win 3 out of 4 or slightly better.

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Yes I froze in the headlights

FROZE stiff as a board! Well as stiff as you can be while sitting on a couch looking at your computer while listening to your kids fighting in the background and not understanding what the heck happened cuz you just turned on the computer and people were jumping out windowssurprise and I am watching a stock ticker drop each second and I cannot remember how to buy or sell and I am silently telling myself "don't freak" while IAM FREAKING and saying "what would Vet do?"- maybe I will get a bracelet- and then thinking maybe I should get into a yoga position to calm down AND I DON'T DO YOGA! and then thinking "do I buy a put? crap, I don't know how buying puts works! and then CRAP, I don't even know if I have been assigned! and CRAP "I don't even know how to tell if I am assigned" and DOUBLE CRAP, "maybe I should call Optionshouse, then nope, they will laugh at me"indecision, then "why the hell not, I will call them anyway!" and then I sit on the phone for 3 minutes listening to music and advertising and 'you are #4 on the list to be answered' angrybut then I figure by the time they get to me, the stock will be .02 so I hang up. I look around... still no Vet to save mecrying

So I start the deep breathing exercise... breathe in count of 4 (stop to yell at my son that "no, I cannot make you a peanut butter sandwich!", breathe out. I MUST make a decision! so I finally figure ok Vet said buy back the put so I press the "bid" button while single handedly trying to work the calculator to see how much I am going to lose and can't work the damn calculator so I say "screw that!" and buy the puts - ALL TWO OF THEM!!!

Now you should know why newbies should NEVER EVER EVER NEVER TRADE EVER!!!!!!

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EXK, SLW, AUY - those are the

EXK, SLW, AUY - those are the most recent.  There's plenty more but I usually keep my put selling to stocks that are trading below $10 (which are usually less active)  just in case I'm assigned - otherwise I'll do a spread.

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Eric Original
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Awesome post terri

We all have to start somewhere.

Newbies shouldn't trade.  But then, the only way to stop being a newbie is to trade.  So ummm, there you go....

You probably learn more from a couple of panicky losers than from a dozen winners, so just think how much better you are now!!  It's all about controlling emotions, and now you've seen the worst.

Keep trading.  Just keep the size small so that nothing can kill you.  And maybe not a hot tamale like SVM next time.  Maybe something comparatively quiet like GDX instead.

Good Luck.  yes

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Sterling - EXK, SLW, AUY

Assignment on those stocks? That's odd.  Does your broker charge you a fee or commission for assignments?   Maybe he is actually looking to make money assigning stock to you.  Providing there is time value on those positions you  are generally making money anyway, but it can be inconvenient to be assigned at an unexpected moment.

I have sold puts on all of those for many years and have several positions at various strikes open almost all the time, and have never been assigned on any of those.   I was once assigned on a GFI position which was deep ITM and had virtually no time value and a wide spread so that was to be expected.   Once it was NXG but I actually wanted that stock so I did nothing to avoid the assignment.  

I thought NXG was going to rise, but not rapidly, so I wanted to lock in a buy price close to or under the current price.

In fact I used a synthetic (risk reversal variety) as a way to buy the stock cheaply when it was trading at just under $3.     I sold the $5 strike put which more than paid for a $2.5 call.  At the time the stock was flat so volatility and time value on the call was low, but it was better on the put.   In effect I was locking in a price on the stock for future purchase without current outlay, in fact actually a nice credit.  When the expiry came around, I allowed the puts to be assigned and exercised the calls.  Gave me the stock for about $2.88 after allowing  for the commissions etc.  It was trading at about $3.40 at the time.   If the stock had gone over the $5 put strike I would have only get half what I wanted, but the put premium would have been a handy consolation prize.

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Sorry Terri - I never realised that I was so much in demand....

Seriously though;  Trade small to start with and don't WORRY over what MIGHT happen, but have a plan and think through the possible risks and your planned response in the unlikely event that the worse case appears.   Trading successfully is as much about attitude and staying calm as it is about strategy and smart plays.

SVM was a great example of the returns that selling puts can generate, but there was a risk attached.  That risk was overpriced into the options IMO, but it was real and that's what you got the extra premium for.  There was no free lunch, but it wasn't worth loosing sleep over either.

Just consider the possible results.  Even if you had been assigned on $7 puts it would have cost you $1,400 for the stock less the premium  I assume would be over $1 after commissions.  So the stock actually would have cost you less than  $6.  Apart from a few minutes dip below $6 you would have been in profit again on the stock as soon as it went back over $6 and you could have sold it at any time for a small profit.   

The worse case would be that the stock trading was halted after you were assigned but before you had a chance to sell.  That was extremely unlikely as there was no real evidence that the company or its officers had done nothing wrong and the company was buying back stock and the CEO was buying for his personal account, something I have never seen done by a dodgy company in all my days of trading.   Even that would have only locked up your capital for a while and you would have probably been able to sell later,

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terri5125 - more on SVM puts
I just discovered that one of my posts was reproduced in this thread (I'm honored). I'll add my gratitude to Terri for collating all the information regarding selling puts for fun and profit. :)
 
I see you asked me a few questions, but I assume you already have your answers. I would, however, like to restate the most important point and share my experience with SVM this month.
 
Don't ever forget Vet's Rule #1: DO NOT SELL PUTS ON ANY STOCK THAT YOU'RE NOT WILLING AND ABLE TO BUY AT THE STRIKE PRICE. Following that one rule helps eliminate the fear factor. The absolute worst case when following that rule (other than the unlikely event the stock drops to zero) is that you end up owning stock that you wanted to own at a price you were willing to pay! If at any point you decide you are no longer willing to buy the stock at the strike price, then that is the time to unwind your position, even if at a loss.
 
I was holding a short put position on SVM up through Friday. I had sold 10 Sept 7 contracts at $0.45 before the stock made the initial drop. I still had confidence in the stock, so I sold 10 more at $0.95. I had no concern about assignment, even when the stock dropped to $6, because 1) I was willing and able to buy 2000 shares at $7, and 2) there was significant time value on the options rendering them unprofitable for the put buyer to exercise.
 
I did watch things carefully on Friday because my preference had changed to wanting to close the position rather than undertake assignment (or rolling out). Unfortunately, I had to leave my desk on some business and couldn't watch the action after noon, so I placed a bid for $0.05 to buy back all 20 contracts with the hope that the stock would at least briefly run 5 or 10 cents above the $7 strike and I could close out the position. As it turns out I could have let it all ride and saved myself $100 since the stock closed at $7.02, but I'm very happy with my $1300 (10%) 3 week return. (My calculation was that I was willing to take the risk of assignment over the certain cost of 20 cents that closing the position would have cost me at the point in time when I had to leave.)
 
Terri, and others who may still be struggling with certain concepts regarding options, especially put options, I suggest sitting down and carefully thinking through the other side of the transaction. You are selling a put option, but there is a buyer of that option. What is the buyers motive? How does the buyer profit? When is it in the buyer's best interest to sell that option? When is it in the buyer's best interest to exercise that option? If you can answer those questions you will have a much fuller understanding of your situation as a seller.
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Guys thanks for the

Guys thanks for the feedback... Flex, I was completely prepared to own the stock and had the money to do it but then of course those people "jumpin out the windows" freaked me out. The thing I didn't get (and believe me Vet tried to get it into my thick head) was that I had time value. I kept thinking, "CRAP, it is now below $6 so I will definitely be assigned". I didn't want to be assigned a stock worth nothing. What I did not understand was the time value and that I could have just sold the stock immediately after being assigned. In other words I did not have a plan for the worst case and I should have.

When I sold the put I had a plan to own the stock if I got assigned BUT I did not have a plan for a stock that goes to nothing. That is where I failed this test. SO what I want to do is have a list of things NEWBIES can do if it goes hard against them...

HERE IS WHAT I LEARNED from my experience...

1- Just because a stock goes below the strike price DOES NOT mean you will be assigned. BUT PREPARE!

2- If you are assigned you can SELL THE STOCK or SELL COVERED CALLS against the stock.

3- HAVE YOUR PLAN BEFORE YOU SELL YOUR PUTS 

Guys any other suggestions for the what if situation for newbies would be great here. That way there is one place we can go and see our options especially during a period of high emotional craziness. For the first and last time (PLEASE GODcheeky) it would have been nice to just come here and see if A happens please proceed with B...you know what I mean. Granted Vet had basically told me all that already but when you are paralyzed it is nice to see it in writing so you can understand it one more time. Thanks- YOU GUYS ARE THE BEST!!

And Yes Eric, I will continue to sell puts... I like them I really really docool

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Nice thread, thanks

Nice thread, thanks Terri. 

I'm wondering when you're selling puts to go long, how do you protect yourself when the market is seemingly about to crash at any moment short term?  Let's say Greece is going to default some time soon and you're selling SVM Oct puts... how much farther will SVM price fall if there's a crash and mad selloff because of the default, then you'll probably be assigned?  Wouldn't it be much better then to sell the SVM Dec puts at the same strike and pocket the much higher premium rather than the Oct puts with the much lower premium? 

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Good thread terri

I'm also new to options and sold SVM puts, before the Alfred Little blog post, after seeing the Vet confirm their overvaluation. Nothing for Sep but I have Oct 5, 7 and 9 (the 9 I sold planning to be assigned) and Dec 6 and 8. Only the Oct 5 and 7 are not underwater from my price but with the new sub $6 low and increased volatility that's not surprising. I'm going away until Oct 8th when there'll still be 2 weeks left to evaluate my position.

Frankly I expect the depressed value to resolve somewhat over the next 30 days, but who knows what the shorts are planning. At the worst I will get cheap stock that I would then hold for 12-18 months looking for a return toward $15, but I don't expect that to happen.

To answer the ghost, you sell Oct puts for a lower premium but they have a much more rapid decay of time value due to the earlier expiry compared with Dec. The Nov options should start trading tomorrow.

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ghost - selling puts

I'm wondering when you're selling puts to go long, how do you protect yourself when the market is seemingly about to crash at any moment short term?

I'll add to SteveW's reply by pointing out that selling puts is a BULLISH position. If you think the market, or your stock is about to crash, you should not sell put options, or if you have already sold you should close your position.

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flex, selling puts is safer

flex, selling puts is safer (and cheaper) than buying the stock..  Sure,  if you are certain that the stock is going very much lower then you shouldn't be buying any stock (or selling puts).  However if it is at, or near a bottom, even if it is range bound, selling puts will give you a profit when buying the stock is just dead money....

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You are absolutely correct,

You are absolutely correct, Vet, but that's not what I said and it's not what Ghost was asking. I wasn't addressing the relative risk of selling puts vs owning stock, nor the situation of "at, or near a bottom" - my statement was "selling puts is a BULLISH position" and "If you think the market, or your stock is about to crash, you should not sell put options". Neither of those statements conflict with what you said, nor are they false or misleading in any way. Or were you intending to address your post to someone else?

Actually, I guess I could have been a bit more precise by saying selling puts is a neutral-to-bullish position, rather than strictly bullish, but Ghost was asking about what to do with respect to a bearish outlook.

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