Uncovered Option Writing

[Beachbumz]

Ok, since Peter76 brought it up in another thread, and sense I know I'm not totally alone, I'll come out of the closet on this.

Like Peter76, I write uncovered (and covered) options on stocks from time to time (ok all the time* ). I've had some success and some failures. I did this some in 2002 at a profit, but I'm not sure how much. In 2003, my profit was a little over $98,000. Then in 2004, I had a $3000 net loss. Why, I made some mistakes, broke my rules, got greedy and went on vacation with large open positions right as the market tanked in July! For 2005, I'm up about $12,000.


Peter76 wrote:
Let me know if you come across any good dividend/option plays Beachbumz. My current plays are
WIRE (price: 11.30, cost with option premiums is 10.20, August 12 1/2 call currently written)
HDI (sold the November 42 1/2 put the day it was hammered down to 47 1/2), PKZ (OUCH....sold total of 6 August puts, average strike price of 37 1/2 with 4.80 in premiums...currently down at 26!!!)
ENDP (July 17 1/2 put for 1.15, stock is at 20.43)
UTSI (sold Jan 2006 12 1/2 put for 1.7, back when the stock was at 17 1/2. Now it's at 7 and some change....double ouch!)

I like your approach Peter, it is very different from mine. What is your net performance so far? I mostly write puts on stocks with above average volatility and go 30% or more oom. I will get closer to the money with better stocks, such as HDI, which I just wrote an August 40 on for a whopping .55 premium. With these trades, I'm trying to make an annualized return of 30% or more. I had to put up about $5000 collateral on 10 contracts and received $535.00 for about 3 months.

I do something similar with some IRA money, only I get much closer to the money since there is no leverage. So, I only do it on stocks that I don't mind owning for a while. WGO, IGT and IRF are some recent trades. I had to purchase both WGO and IGT. I've written a few calls on both, but IGT has been in the crapper big time. I bought it at 35 and it's at 28.50 now. WGO has recently rebounded nicely.

Some recent put writes in taxable account (Not quite as exciting as yours):
HDI Aug 40 .55
IRF* Sep 35 .95
NFI* Sep 25 .75
SPW Sep 35 .80
URBN Sep 35 .50

A friend of mine likes buying calls and he's been pretty accurate. He goes in the money deep enough to get a delta of around .90 and buys calls on stocks that have just seen some good news. I have piggy-backed him some and done a couple of my own. Some recent examples were DE, QCOM, and ADP. I had the HD and ADP, but also IGT and NFI. IGT did good, NFI kicked my butt! He just tries to make $500 on a trade, with an average investment of about $4000 and hold time of a week or two.

Beachbumz* 8)

[MooreBonds]

Quote:

Originally Posted by Beachbumz I like your approach Peter, it is very different from mine. What is your net performance so far?

Well, I first started with options back in 99 with covered call writing...did okay (might have made a few $1,000) but gradually fell to the wayside as I shifted strategies over time. I started things back up last year, and here's my option records so far:

PKZ Covered call: cost 28.56 (July 04), Feb 30 call was exercised, and picked up 2.70 premium (net gain: $4.14/share)
SAFM Covered call: cost $36.37 (Aug 04), Feb 35 call was exercised, and picked up 5.10 (net gain: $3.73/share)

Those were my first two option trades when I resumed my option activity. My others were as mention in the other post..some so-so, some depressing.

Would you be interested in starting up an option trading thread (or just using this one) on options anyone finds that they think are an attractive play?

I normally start my scouring the "disaster d'jour" list of CBS Marketwatch's "Before the bell" page....but will now start looking at some of those juicy dividend stocks for potentials.

Quote:

Originally Posted by Beachbumz A friend of mine likes buying calls and he's been pretty accurate. He goes in the money deep enough to get a delta of around .90 and buys calls on stocks that have just seen some good news. I have piggy-backed him some and done a couple of my own. Some recent examples were DE, QCOM, and ADP. I had the HD and ADP, but also IGT and NFI. IGT did good, NFI kicked my butt! He just tries to make $500 on a trade, with an average investment of about $4000 and hold time of a week or two. Beachbumz 8)

What is his rationale for buying deep in-the-money calls, versus going long in the stock with a margin loan? That way, you get a delta of 1.00, much better bid/ask spreads for what should be a lower cost of a short-term margin loan.

[Beachbumz]

Quote:

Originally Posted by Peter76 Would you be interested in starting up an option trading thread (or just using this one) on options anyone finds that they think are an attractive play?

I'm all for it, although there's probably not a lot of other interest here. I would say, just use this thread. Take a look at OSTK, very volatile, had a big run up and has come back down to earth, good premiums. Who knows...

Quote:

I normally start my scouring the "disaster d'jour" list of CBS Marketwatch's "Before the bell" page....but will now start looking at some of those juicy dividend stocks for potentials.

The dividend stocks strategy is pretty much part of a long term buy and hold strategy. I don't think you are going to find a lot of 'juicy' trades with those. Just hitting singles, vs triples & HRs.

Quote:

What is his rationale for buying deep in-the-money calls, versus going long in the stock with a margin loan? That way, you get a delta of 1.00, much better bid/ask spreads for what should be a lower cost of a short-term margin loan.

I agree with what you are saying, but he's not going that deep. I think it depends on the stock price. FI, he recently did DE (and told me about it, but I was a chicken). He bought a June 60, when the stock was 62.xx. It was probably between the 55 and the 60, but he didn't want the risk of the 55s. His total investment was under 4K and he made his $500. Had he stayed with it, he would have made $1500, but his goal is $500 per trade. There are some cases where the 50% margin plan would be the better trade for sure. (and maybe the delta is .80 or higher, I'll have to check with him). He purchased a 'system' called Options Made Easy and that is how he learned, although he picks his own stocks now, because he said they are usually late on the trade.

Beachbumz* 8)

[MooreBonds]

On a somewhat unrealed note.....do you happen to know of any resource/screener that ranks options (or just the underlying equities) by the size of their volatility premium? I know of no such website/screener...

Thanks for the tips so far Beachbumz....I'll take a look and keep my eyes peeled for the next stab (although, given my current hemoraging with my puts, I might have to play it safe and either close out a few or wait for them to hopefully climb a bit before I take another bite).

Peter

[eridanus]

Ok, I'll admit it too. I'm a net writer of options. I stick to the indices...I learned my lesson when I was short some naked puts on US Airways just before it declared bankruptcy. Ouch.

To avoid a complete Niederhoffer meltdown, I'm doing ratio writes and vertical spreads...and some naked selling.

It's all in my "play" account. I had a 30% return last year but, one of these days, the account will blow when it's limit down day on the Dow.