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Old 10-30-2011, 06:35 AM   #61
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Some 10 years ago, after a month of back and forth with Morgan Stanley, they agreed to let me sell naked puts. Fortunately, by the time they agreed I had invested elsewhere. I'm still counting my blessings because I subsequently inherited a bushel load of JPM with a cost basis of ~ $40. If I had pursued the naked puts, I would probably have a long term holding of 2 bushels of JPM with a considerably higher cost basis.
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Old 10-30-2011, 08:23 AM   #62
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I have accounts at E-Trade and OptionsHouse. I do most of my trading at OptionsHouse which has 2 commission schedules and you can switch back and forth daily. The better commission schedule depends on how many contracts you normally trade. $5 per trade up to 5 contracts and then $1 each after that....or $8.50 per trade + 0.15 per contract. Basically the cutoff is 10 contracts. Either plan is $10 for 10 contracts. Less than 10, its cheaper to use the first one. More than 10 and its cheaper to use the second.

I dont see how the short time frame has any bearing on the trading costs. If I make $400 and pay $10 in commission, I don't care if the trade was open for 6 hours or 6 weeks. The amount of my profit that my trading costs eat up is the same.

I believe what you are doing is called writing a strangle. Personally I like those better when the VIX goes lower. The lower the VIX goes, the less money you make but the higher percentage of the time the trade will be a profitable one. Lower VIX equals lower risk and lower reward. It doesn't mean the trade is no longer a valid one.

Speaking of the VIX, I sold some puts on the VIX on Friday. I think the VIX is going back up very shortly.
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Old 10-30-2011, 08:25 AM   #63
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Some 10 years ago, after a month of back and forth with Morgan Stanley, they agreed to let me sell naked puts. Fortunately, by the time they agreed I had invested elsewhere. I'm still counting my blessings because I subsequently inherited a bushel load of JPM with a cost basis of ~ $40. If I had pursued the naked puts, I would probably have a long term holding of 2 bushels of JPM with a considerably higher cost basis.
I try to stay away from writing naked puts on individual stocks. Too risky for my blood. I mostly write puts on the SP500 index (SPY). I use spreads for individual stocks.
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Old 10-30-2011, 10:37 AM   #64
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Ive started selling SPY ATM puts on the day of expiration. For example, yesterday I sold the 128 Puts when SPY was at 128.05 about 30 minutes after the open. I collected 0.43 each. That's a .34% premium and expiration is in 6 hours. Nobody can tell what the market will do in any 6 hour period. It may go up and it may go down. If it goes up, I make money. If it goes down but less than .34% I make money.
Interesting.

One consideration is that in order to sell the naked Put, you need to have the cash (or margin) to back it up. In effect, that means that money is out of the market the rest of the time. I'd say you should measure your gains against B&H in that same index over the time you have that money (or margin) on the sidelines.

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Old 10-30-2011, 11:45 AM   #65
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I'm using margin created by collateral from my long term B&H investments. I would never use this margin for anything other than short term trading.
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Old 10-31-2011, 06:51 AM   #66
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Overall real time results over 24 weeks

SPY....-2.8%
Naked Puts...+11.5%
These past 24 weeks have been a pretty good test of your strategy in that we have had large market moves in each direction. I have a couple of questions:

(1) What was the average gross (before commissions) put premium (as a percent of SPY at the time of trade) over these 24 weeks?

(2) What was the maximum weekly loss on the naked puts?
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Old 10-31-2011, 04:34 PM   #67
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Avg put premium so far is 1.77%, but I expect that to be lower long term as the VIX goes back down to normal levels.

Maximum weekly loss so far is a week where I sold the puts for 1.97 and bought them back for 9.92.
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Old 11-01-2011, 07:27 AM   #68
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Maximum weekly loss so far is a week where I sold the puts for 1.97 and bought them back for 9.92.
I assume this loss occurred the week of 9/16 - 9/23 when SPY dropped 6.6%. When you "rolled out" your short put position did you roll down the strike price (thereby locking in the loss) or did you keep the strike price the same to retain the upside?
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Old 11-01-2011, 05:35 PM   #69
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No, that was a bad week, but actually 7/29-8/5 was worse. SPY dropped about 7.1% that week.

I rolled down the strike price. I always use one strike price below whatever SPY is trading at.

PS..Lets hope this week doesn't set the new mark for bad weeks. At least I did sell some VIX puts to offset the possibility of the market taking a dive after such a run-up. This has nothing to do with the strategy of selling weekly puts, but it does help money wise on the overall ledger.
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Old 11-01-2011, 06:41 PM   #70
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I try to stay away from writing naked puts on individual stocks. Too risky for my blood. I mostly write puts on the SP500 index (SPY). I use spreads for individual stocks.
Different philosophies. I limit my speculation/gambling on the SPY to a small position only say 5 contracts because I have no clue where the market will be in couple of months, other than my underlying belief that we are in a trading range of Dow 11,000 +/- 1,000 which won't change until their fundamental change in the economy. Your point about lower VIX increasing the probability my strangle trade working is correct. I just feel that if I am writing insurance premiums because people are scared about the market I want to collect a nice premium if the disaster doesn't happen so that have money to pay off the case when it does.

On the other hand I am comfortable writing puts on individual stocks, because I have pretty firm opinions (and/or rely on M*) about the value of individual stocks. So I have been watching Chevron CVX for a while I figured it was reasonable buy in the low 90s, but I didn't have cash at the time. Now I have cash, but it moved into the 100s in latest rally but today I wrote a 95 option that if exercised will get me the stock I want at price I comfortable owning. If it doesn't get exercised than I making good money on my unused margin, even Chevron drops to the low 80s in the next 7 weeks, I comfortable owning the stock with its 4% yield (at that price).

ERD raises a good point about measure the returns vs buy and hold, and I have to say I haven't been good about doing that. I personally am comfortable have short roughly twice as much short puts as I have cash on hand. So this changes my benchmark quite a bit.
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Old 11-01-2011, 08:49 PM   #71
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Its very difficult to make an apples to apples comparison between B&H and trading especially when it comes to options. However, in the case of my naked put writing, I do think its a fair comparison. If the year starts with SPY at 120, 100 shares costs $12000. Its easy to figure the return of those 100 shares at the end of the year. Now if I sell one contract every week or every month and take the total profit at the end of the year and divide that into the same $12000, I think the returns are a fair comparison.

Trying to compare total trading profit any other way really doesn't compare.
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Why Naked Puts?
Old 11-04-2011, 04:42 PM   #72
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Why Naked Puts?

Just curious why you choose naked puts..I've dabbled a bit in options over the past couple years, started out with covered calls and writing puts and recently have done a few credit spreads and iron condors..this week was the first time I did them on the weekly options. I'd love to understand opinions on standalone puts v. spreads?
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Old 11-04-2011, 06:07 PM   #73
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I do trade spreads on individual stocks. I only sell naked options on an index. Trading spreads is less risky than trading spreads but since an index will generally move less than individual stocks do, Im OK with the extra risk from selling naked options. You could go broke on one really bad naked options trade on a volatile stock but indices just dont move as much so I prefer not to pay for the extra protection by buying the option that makes up the other side of the spread.
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Old 11-04-2011, 06:30 PM   #74
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I do trade spreads on individual stocks. I only sell naked options on an index. Trading spreads is less risky than trading spreads but since an index will generally move less than individual stocks do, Im OK with the extra risk from selling naked options. You could go broke on one really bad naked options trade on a volatile stock but indices just dont move as much so I prefer not to pay for the extra protection by buying the option that makes up the other side of the spread.
Ok, this makes sense to a certain degree, but still trying to rationalize it. I am using some numbers from today on the SPY and 111111 puts

So the 120 Put last traded at $.40 and the 119 at $.33, thus in a put credit spread, for each $1 I put at risk, I gross $.07 or 7%...if I sold only the 120 Put Naked, I would get $.40, but, I'm technically having to allocate $120 to collect the $.40. I guess what you are saying is that to collect the same $.07 as me selling naked, you can go down to the 114 Puts and the extra "risk" associated with having to put up the $120 is worth the extra cushion on the downside for the same gross return in dollars at the end of the week? Am I understanding correctly?

Thanks,

Chris.
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Old 11-04-2011, 06:55 PM   #75
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So the 120 Put last traded at $.40 and the 119 at $.33, thus in a put credit spread, for each $1 I put at risk, I gross $.07 or 7%...if I sold only the 120 Put Naked, I would get $.40, but, I'm technically having to allocate $120 to collect the $.40. I guess what you are saying is that to collect the same $.07 as me selling naked, you can go down to the 114 Puts and the extra "risk" associated with having to put up the $120 is worth the extra cushion on the downside for the same gross return in dollars at the end of the week? Am I understanding correctly?
Actually, the required margin on a naked put struck at 120 with SPY at 125 would be more like 20 to 25 per share depending on your broker, not 120. Also, with only a 0.07 credit, commissions will eat up a large part of your return.
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Old 11-04-2011, 09:15 PM   #76
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I don't think you can really get an apples to apples comparison between a naked put trade and a put credit spread trade using percentage of return. There are too many factors.
Today when SPY was at 125.23, you could've put on a put credit spread using weeklies. You could've sold a 125 / 120 put spread for 1.23. Your max profit is 1.23 and your max loss is 3.77. So if you end the trade with max profit, what is your return? 1.23 / 3.77 or 32.6%? Do you divide your profit by the margin you tied up instead of dividing it by 3.77? If I sell a naked 125 Put, how do I compare my return to yours? Like I said, too many variables for my tastes.

I sold 125 weekly Puts today for 1.81 just before the close. To put on a 125 / 120 spread I would've had to pay 0.58 for the 120 puts. All I'm doing is buying insurance against to cover me against a really big drop and for me, that's too expensive when using an index that doesn't drop 4% or more very often in one week. Like I said, if you're talking about individual stocks, its a whole different ballgame.
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Old 11-05-2011, 09:23 AM   #77
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OK CB7010, I have a bone to pick with you. Your question about using spreads got me to thinking and I spent quite a while doing some research. I blame you for making me go to bed too late last night

I'm much better at executing these things than I am explaining what Im doing so I hope this doesn't get too convoluted.

A while ago I was curious as to whether or not spreads would be better than naked puts on a risk reward basis, just like you are. I actually have exactly one quarter (13 weeks) of real time data that I have been tracking while selling these naked puts. I struggled to find a way to make a fair comparison and still do, but I think I may have a semi fair way to do it. The only thing I can think of to compare the two strategies is the amount of margin required to put on the trade. The amount of premium collected when selling a naked put will obviously always be more than selling a put spread but since less margin is required to put on a put spread, why not find out how much margin is required for each and adjust the number of contracts to where the margin requirements are the same? Making sense so far I hope?

Now I cant make heads or tails out of trying to figure out margin requirements. 20% of underlying minus XX amount of premium...blah blah blah. What I do know is that if I put in a naked put trade and then a put spread (both ATM), the margin requirements at OptionsHouse are 8X as high for the naked put and 5X as high for a spread where the short put is 3% below the current SPY price.

My spreadsheet with 13 weeks of real time data includes the following 2 types of spreads. Assuming SPY is 125. One spread is a 125 / 120 and the other is a 121 / 116.

Ive been selling 10 naked put contracts each week, so based on these margin requirements, I could put on (80) 125 / 120 contracts or (50) 121 / 116 contracts. Again, I dont understand margin requirements that well. It seems to me that margin requirements would be less for the 121 / 116's since its a lower risk trade, but whatever.

So on to some results. Over the past 13 weeks which I have similar spread data to compare to, my real time naked put trades consisting of 10 contracts sold at whatever strike is just below the current SPY price resulted in a profit of $8,930.
Assuming that I can sell 80 spreads due to the margin requirements being 8X lower, those spread trades would've resulted in a profit of $20,640. Putting on 50 spreads 3% below the SPY price would've resulted in a profit of $19,000. This is all not including commissions.

Naked Puts...$8930
ATM Spread...$20640
OTM Spread...$19000

So it seems that the spreads would be better trades except for one major problem. The max loss during these 13 weeks wouldve been the following:

Naked Puts........-$6270
ATM Spread......-$38160
OTM Spread....--$15600

This either means that I'm figuring the margin requirements incorrectly which I don't believe is the case (I actually entered fake trades to see what the software platform would tell me what the requirements would be on that trade), or the margin requirements are not commensurate with the actual risk profile of the trades.

Based on all of this data, at this point I'm considering moving away from the naked puts and moving to selling the 3% OTM spreads, but instead of selling 50 spreads, I may start selling 25 spreads. That would give me a 6.4% higher profit, while only using half the margin buying power. At E-Trade, selling 25 spreads would cost a fortune but at OptionsHouse, its only $20.

Thoughts on any of this?
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Old 11-05-2011, 09:41 AM   #78
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As I said, I dont understand margin requirements at all. I just went to the CBOE margin calculator and got different results which would skew the data I just posted for the OTM spreads. According to them you would need ~5X less margin for either spread than you would selling the naked puts. I know for a fact that's not what E-Trade or OptionsHouse uses but I guess its a starting point. It might be easier to just use 5X margin as the comparing factor for any spread.
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Margin..
Old 11-05-2011, 11:00 AM   #79
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Margin..

first..I'll apologize for your losing a few hours of sleep..then..I will disclaim that I am pretty much a beginner with options and frankly have not been able to take as much time as I'd like to work through all of the math and study the back data as you have. And, thus, my original questions and desire to learn more.

I am probably doing myself a great disservice by not factoring in margin to my calculations, prefering to take the easy way and base my calculations on 100% cash backing. I am trying to figure out a way to acheive income, with managed risk and without a ton of adjusting and worrying down to the wire on expirations days. Thus, I am always sell OTM credit spreads, and specifically the condors (bull put spread and bear call spread, both OTM) and balancing the return with my comfort level and VIX at the time of the trade. For example, if I look at the SPY right now, 125.48, and at next Friday's 111111 options..in theory before the bell yesterday, I could have done the 120/119 (.07 credit) on the Put side and the 131/132 (.06 credit) on the Call side..my total risk is $100 per contract, as with any "condor" only one side can go bad, so total at risk is only one side of the spread; and, my total GROSS credit is $.13...a couple side notes..the SPY might not be best suited for these types of spreads, I've been doing mine on individual shares, and as you and a previous poster point out, you must use OptionsHouse or your transaction costs will eat up your profit; but, in the example above..you have a roughly a 4.4% cushion on both sides and a gross 13% return (again, not factoring in margin or commissions). So, unless my math is way off some where, this is intriguing to me, in fact, I'd be happy with a 1% per week return if I could broaden the condor out further for more safety. I am still working on figuring out the best ways to accept losses and/or roll out when one of the spread are in danger and rationalizing if there is an inherent problem in my logic because of option volumes and commissions; but, again, I am intrigued by the possibility and I love glancing at the market and not really caring if it's going up or down most of the time knowing that my spread is wide enough to accept most normal flucutations. I really just need more time with my calculator and data..in the meantime, I've just been doing a few spreads and condors to get my feet wet and haven't been burned yet..
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Old 11-05-2011, 11:02 AM   #80
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oops, reading back through my post, I meant to say while my total risk is $100 per contract, the total associated gross credit is $13 or 13%...
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