Anybody ever traded options??

[fmhealth]

ERD, you bring up an interesting point. I simply don't consider any of my funds "Tied up". I have enough equity in my account that a reserve is set up by Schwab to cover the possibility of a total loss. None of my long positions are sold & my cash is still earning reasonable MM rates.

So I understand your logic, but I just have a different perspective on this trade. I look at this trade as picking up $2,400 with a total downside of about $3,600. Since the overwhelming % of these trades expire worthless. I have found that this strategy gives me a constant cash flow with a minimum of risk.

Now, I'm writing this after the 283 point debacle today. Only action I took was to buy back my Sept GS 190 PUTS & sell the Jan '09 180 PUTS. Took a considerable loss on the Septs but picked-up $24,000 on the LEAPS. I'll probaly use the same tactic wih MS & RIG early next week.

IF GS was PUT to me, my effective cost would be around $143.00. Which may or maynot look like a bargain 17 months from now. I'm simply betting that sanity will return & iconic companies will once again begin to be appropriately valued.

Time will tell. Best of luck!

[ERD50]

Originally Posted by brewer12345

You guys eating at the trough now that option premia have gone through the roof? Or getting whipsawed?

Some of both. I sold puts at a strike price below their underlying at the time and still got a nice premium. So I had some downside protection built in. Some are below my break even point (if this price holds until expiry), some are above. Overall, not bad considering how far down this market has gone. But I'll be holding these until expiry, so that will be the real test.

I've also done some betting on buying calls on this drop with the intention to sell on a rise. Looks like I'll lose as much as I have made so far on those, but I haven't closed them all yet, so we will see.

This game had gotten pretty boring the past 9 months - well *that* certainly has changed!

I'm feeling OK about my positions right now, but next week may be another roller coaster ride. I'll feel a bit lucky if i come through this better than the overall market, but there is a pretty good chance I will.

-ERD50

PS: At least I have a nice batch of 'Griffin Spit Ale' from the Big Brew on May 5th to help me through this!

[ERD50]

fmhealth, yes, selling puts that are far below the current stock price can seem like a pretty safe bet (and it almost always is), but be careful. May I suggest that you read Taleb's ' Fooled by Randomness '? It's a good read, IMO, and makes you really think about the risk in your positions. Those 'black swans' are rae, but can we be ceratian that one will not appear over a 30, 40 or 50 year investment period?

The problem that I see, is that you can't really say your max downside is $3,600. It may appear that way with your stop loss, but those can get blown through. I held a stock that was somewhat volatile but there was no reason to think of it as crazy volatile, and it dropped in half overnight on after-market news, and I couldn't do a thing about it. I decided to double-up in the morning, assured that it was an over-reaction by the market. It continued to drop another 40% from that level before recovering. If I had been leveraged on that, and had a big position, I could have been wiped out. Maybe that was my 'black swan event'?

One exercise I do is to look at my portfolio and say - what if every stock I own dropped 60% overnight? Sure, that is a very, very unlikely scenario, but is it impossible? Not really, put sellers are usually drawn to volatile stocks. If that could wipe me out, maybe I should reconsider how much risk I am taking.

I'm not saying that your positions are good or bad, just that you might want to take a fresh look at the kind of risk you might be exposing yourself to.

-ERD50

[ERD50]

I had to click to get back to the OP.

Hey VaCollector - how are your friends with the 50% gain in two weeks doing in this market (maybe Brewer was directing his queation to you also)?

-ERD50

[haha]

Originally Posted by ERD50

fmhealth, yes, selling puts that are far below the current stock price can seem like a pretty safe bet (and it almost always is), but be careful. May I suggest that you read Taleb's ' Fooled by Randomness '? -ERD50

I am not able to recall tonight who told this story, but I believe it is credible as the guy telling it looked stupid and the other guy looked very smart. These two young guys were hustling institutional accounts at some brokerage. One of them became convinced that a crash was likely and scraped together about $60,000 to buy far OTM puts. This was in late September, 1987. The crash came, this guy sold his puts for $7million+ and immediately retired in his late 20s. The other guy just couldn't see it, said buying puts was a sucker's game, etc, and continued to work.

The put buyer was a genius or more likely very lucky. But my point is that someone wrote those puts, for damn little money- and that someone was wiped out forever.

Good thing to consider when you plan to become an undercapitalized insurance company with no actuarial department.

Ha

[ERD50]

Originally Posted by haha

Good thing to consider when you plan to become an undercapitalized insurance company with no actuarial department.

Ha

Very good observation, Ha.

My studies led me to set these rules for my put selling:

A) Allocate no more than half my NW
B) Keep every sale *fully* capitalized
C) Apply no more than ~ 5% of my NW to any one transaction.

That still leaves me w/o an actuarial dept My proxy for that is the diversification and a little research and avoidance of the temptation jump on the really high premium positions.

I have bent rule C under one condition so far. If I was comfortable buying SPY with the rest of my equity anyhow, and I run out of other attractive put sales, I will allocate a large % to put sales on SPY (or just buy it outright, depending on my outlook). My thinking is, heck, I was going to buy the SPY anyway, why not contract to buy it at an even lower price? Of course, I accept the option premium against the chance of an immediate spike in SPY, which I would not participate in.

You win some, you lose some. You just don't want those loses to hit too hard.

-ERD50

[FIRE'd@51]

Originally Posted by ERD50

I have bent rule C under one condition so far. If I was comfortable buying SPY with the rest of my equity anyhow, and I run out of other attractive put sales, I will allocate a large % to put sales on SPY (or just buy it outright, depending on my outlook). My thinking is, heck, I was going to buy the SPY anyway, why not contract to buy it at an even lower price? Of course, I accept the option premium against the chance of an immediate spike in SPY, which I would not participate in.
-ERD50

Very good explanation and reasoning, IMO. What you have described is "targeted buying". I think this is just fine (bending rule C) since SPY is a broad-based index and doesn't face the bankruptcy threat that an individual company faces (besides, nothing wrong with having an incremental allocation greater than 5% in a broad-based index - we all do that anyway when we rebalance). You are selling puts which are fully capitalized in lieu of buying the index. The folks who got into trouble doing this in 1987 (as Ha described) sold puts that weren't fully capitalized, thinking it was "free money". Especially now with the premiums being so attractive due to the high implied volatility embedded in them. Yes, you may be able to buy the index lower in the next few days or weeks, but, as you say, you will be better off having sold the puts than buying the index today (and you have made this buy decision) if the index languishes or goes down further. If the market runs up, the implied volatility embedded in the premiums will likely drop, so you will be compensated from this effect as well to offset some or all of your "non-participitation" in an upward move.

[fmhealth]

ERD, once again, points well taken. I also have been in the unenviable position of getting stopped out much lower than my stop price. Not a pretty picture.

I try to diminish this by selling PUTS in various industries & at numerous exp. dates. I have found this mechanism somewhat useful in mediating risk. Not a guarantee, but a viable tool for some degree of risk-adjustment.

Essentially, my mind-set is that I usually sell PUTS on stocks that I wouldn't mind holding for the L/T. If they're PUT to me I'll take another look & either hold, sell or sell CCs on this position. I have been utilizing this strategy for so long that I'm very comfortable with the downside. An example would be one that I used earlier, GS. It's selling at around $177.00. Say they announce a significant sub prime exposure today & the stock tanks to $125.00. I'm going to get A LOT of GS stock. Avg. price around $145.00 or so. I'm simply willing to take the risk that over time this will become a very profitable position to hold. Other examples would be, RIG, MS, C, SBUX, WAG, CVS, GE, WMT, TGT, WYNN,YHOO, BOT, DNA, AMGN.
I would have vey little problem adding these companies to my portfolio at prices below their mkt price today.

So I look at PUT selling as a two-fold dynamic. Primarily, to provide a steady cash flow, secondly, to possibly acquire stocks I'd like to own at prices lower than their mkt price today.

Thanks so much for your sage insights. They are very much appreciated.

[teknobucks]

Originally Posted by VaCollector

Ok....I'm not sure if this is the proper area to post this inquiry.....or if it might be considered heracy to post such an idea on this ultra-conservative board BUT at the risk of takin' a lickin' from you guys ....I just wanted to ask

I visited with a couple of friends yesterday, informed them of my new part-time FIREing...and after the what I come to find as normal confused,surprised looks and explanations....we began a discussion of "how" it could be possible....

My explanation included the conservative approach that I have read regarding index funds, apportioning, etc.with a focus on safety, etc.......and after they finished rolling their eyes at me....I was introduced to their newest foray in investing - OPTIONS.

It seems that they took an investing course in the fall of 2006 ~ paying $25K for the priviledge ~ .......and have attended several investment seminars to learn the ins and outs of the stock market....and while they have learned about the basics (mutual funds seem to be a joke to them) they are completely enamored with trading options and spent a couple of hours trying to help me (mental midget) to understand the process....

While they are admittedly new in this field, their results are impressive to say the least.....a 54% NET return since they began trading REAL MONEY (after paper trading for several months).....HOLY POOP BATMAN....I want some of that!!

OK...so I DID feel like I was at an Amway convention...with all of the sunshine being blown up my butt....and after the euphoria wore off....I still couldn't shake the fact of their results!!

Anybody here ever traded options with positive results?? Any other advice (other than to run the other way - hard and fast)??

Opinions and experiences appreciciated ~ thanks!!

RUN from um.
if u must be leveraged my practice is 2 buy dual inverses such as SDS...u can go short here for a nice long position. much more volume in the short stox than the long version counterparts. liquidity liquidity liquidity!

look at: BigCharts - Interactive Charting

versus: BigCharts - Interactive Charting

[teknobucks]

if u do buy/sell an illiquid stock/etf be sure u use a limit order only.
market orders in high volume stocks trade close to the current strike price.
*limit orders are the only smart way to trade as a rule.

[haha]

I've noticed the last couple of days that as volatility ramps up, the bid/ask spreads widen considerably, even on very active options- such as near the money QQQQ options.

Also, a related question- do any of you options traders have brokers that support web based spreading of different months/strikes on the same underlying?

When I roll, I have to do each leg separately. When I used to trade commodities the roll was much easier as only the differential had to be specified. Since that is what counts it seems lot better to me.

Ha

[fmhealth]

Ha, Schwab's "Street Smart Pro" supports the type of trading you're looking for. I find their platform very easy to navigate & intuitive as well. Many times you'll be able to get numerous free trades if you open a new acct or transfer one.

Best of luck!

[ERD50]

Originally Posted by haha

Also, a related question- do any of you options traders have brokers that support web based spreading of different months/strikes on the same underlying?
Ha

Ha, I have e-trade, and (though I've never done it), they do support spreads as one entry. You can choose two different symbols (so I assume they could be diff months), and for 'Price Type' you have the choice of Market; Net Credit; Net Debit; and Even.

Hmmm, I just noticed that you can do a Buy-Write (Covered Call) with those 'Price Types' also. As you say, it is the delta you are most interested in, not the absolute prices so much. I'm going to have to give that a try.

I'm glad you asked - I learned something!

-ERD50

[FIRE'd@51]

Originally Posted by fmhealth

Schwab's "Street Smart Pro" supports the type of trading you're looking for. I find their platform very easy to navigate & intuitive as well. Many times you'll be able to get numerous free trades if you open a new acct or transfer one.

Originally Posted by ERD50

I have e-trade, and (though I've never done it), they do support spreads as one entry. You can choose two different symbols (so I assume they could be diff months), and for 'Price Type' you have the choice of Market; Net Credit; Net Debit; and Even

Does Schwab and e-trade give you a bid/offer on the spread or just on the individual options?

[fmhealth]

Schwab gives you the individual bid price on each side & then nets it for you. Subsequently, you can increase the net price & submit your order.

[FIRE'd@51]

Originally Posted by fmhealth

Schwab gives you the individual bid price on each side & then nets it for you. Subsequently, you can increase the net price & submit your order.

For commission purposes, does Schwab treat a spread trade as one trade, or as two?

[fmhealth]

One trade & one commission. But just to be clear, this requires a free D/L of their StreetSmartPro platform.

[FIRE'd@51]

Thanks fmhealth.

[fmhealth]

My pleasure. Good trading!

[haha]

Thanks ERD50 and fmhealth!

Ha