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 Post subject: Selling Puts For Profit
PostPosted: 10/7/15 22:26 
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http://www.fullyinformed.com/articles/2 ... profit.htm

March 31 2011  / Strategy Article - Selling Stock Options
Selling Puts For Profit And Avoiding Assignment
The 13 Rules I Use

Introduction

Selling stock options for income is a favorite strategy and selling puts is my first choice. Naked puts is also often referred to as selling cash secured puts as the investor will often have the cash sitting aside to cover the stock price in the event that the naked puts are assigned. In my mind there is no difference between referring to them as naked puts or cash secured puts. It's all semantics. In this article I will refer to strategy as selling naked puts. Once a put has been sold, the investor is obligated to be assigned shares at the strike price they have sold the put for. Basically they do not own the stock yet, but have indicated their willingness to own the stock at the strike price they have sold the naked put at.

 

What Is Meant When An Investor Sells A Stock Option Termed Selling Puts

To explain perhaps more clearly, I will use Toronto Dominion Bank which I refer to as TD BANK (symbol on TSX and NY is TD) as an example. Today (March 31 2011) the stock is trading around $86.00. If I sell a put at the $84.00 strike which expires in MAY I am indicating that I am willing to own shares of TD Bank at $84.00 ANYTIME in MAY. Selling this put is a legal obligation to be assigned shares AT ANY TIME up until the third Friday of the month of May. Therefore whether I have the cash readily available or whether I am going to borrow the money (often called margin) to pay for those shares, I am legally bound to own shares at that price. Therefore since I do not yet own the shares I am NAKED. The term "naked" means that I have exposed myself to owning shares that I do not yet actually have in my possession. In other words I am naked the shares as I do not yet own them. The only way out of this legal obligation prior to options expiring in MAY, is to buy back the naked puts which effectively ends the obligation. Of course, if the stock ends up higher than the naked put strike sold, then the seller of the naked put retains all the premium earned.

 

 

Pitfalls Of Selling Stock Options Like Naked Puts

Often selling naked puts is a trade of small amounts which over months of constantly selling naked puts against stocks can result in reasonable monthly income. However there is nothing worse than selling a naked put for .50 cents and ending up buying it back for $1.50. Repeated losses like that can wipe out months of many small gains. In other words a large loss will wipe out many small gains.

 

Many investors look at naked puts as "free money", which is not correct. There is nothing free about selling naked puts. As soon as the put is sold I can easily be assigned shares; watch the naked put triple in cost to close if the stock collapses; or end up running repair strategies for months or even years in an effort to regain lost capital. Selling naked puts does not result in "free money".

 

As well, many investors quote statistics that 80% of options expire out of the money every month. This is definitely true but only because there are literally hundreds of options that are so far out of the money that the chance of them ever being in the money is limited to a black swan type event. The real question is how many NEAR or AT THE MONEY options expire out of the money. These are the options I am selling because these are the options that pay enough premium to warrant having my capital at risk. In this event it is closer to 50/50, so the notion that just by placing a NEAR out of the money naked put trade will be successful is far from guaranteed.

 

Further, selling naked puts leaves the seller open to large losses should the stock plummet. For example if I had held naked puts on AIG in the fall of 2008, the losses would have been catastrophic. In many cases a naked put seller will do spreads instead in order to protect against such a potential disaster. This is done by selling the higher strike naked put and buying a lower strike naked put. Therefore if a stock like AIG had a spread on it, the loss would have been limited to the difference between the strike sold and the strike bought.

 

Many investors sell far more naked puts than they can actually handle. Selling too many naked puts is a recipe for disaster. When i first starting selling options, years ago, I was caught up in what I felt were excellent naked put positions. Every so many days I would continue to sell more naked puts and often on the same stock as the stock continued to rise in value. Literally dozens of these trades worked out and I made such great returns that I dreamed of quitting my job and doing nothing but trade options. I thought what a genius I was. Then suddenly I hit a streak where a number of trades did not work out. A stock would pull back and I would wait, confident in my technical charts and my belief that I was indeed a genius. I remember one trade in particular when I was first starting out that I kept selling naked puts as the stock went up AND as the stock came down. In the end my loss was more than $32,000 on just one trade alone. This wiped out 8 months of gains and made me realize that not only was I not the options genius I had thought I was, but that it is not options that are risky, it is the investor who blindly accepts the risk.

 

My Strategy For Selling Puts On Stocks and Avoiding Assignment

Nonetheless there are often many trades that appear where the premiums are so compelling that I would sell naked puts even if I had no intention of ever owning the stock. After all, selling options is all about gathering income. But these compelling trades still had a lot of risk of assignment.

 

I therefore turned to paper trading and spent several years establishing a strategy for myself that could be reasonably successful. Over those years I developed guidelines or rules for myself which I found if I adhered to I had a much better chance of a successful option trade.

 

It is important to always remember that each investor has their own personal goals and levels of risk. I learned through many trades that I could attain far more profitable trades when I sold naked puts on stocks that I would like to own. This was because when a stock I WANTED to own fell placing my naked put into a loss situation, I would not close those puts but be content to "ride out" the whipsawing of the stock. However when selling naked puts on stocks I do not ever want to own, I would close on any downturn in order to either lock in my profit to that point or to avoid what could be a larger loss. Throughout the years of perfecting my strategy I found that FOUR THINGS ALWAYS STOOD OUT.

  1. It is important to LOCK IN THE PROFIT by buying back my puts when the profit was there.

  2. Stocks, no matter how much technical analysis I did, still could surprise to the downside and quickly.

  3. It is important to avoid assignment. This is because, as per this article, I am selling naked puts on stocks I do not care to own and often those stocks can collapse very quickly and leave me holding shares at a strike price that can take months to regain my lost capital.

  4. Last was to be realistic in my expectations. Earning 3 and 4 percent every month was just not realistic. Some months wiped out other months. However I did find that 1% a month was realistic and I developed strategies to that end.

My Rules For Selling Naked Puts and Avoiding Assignment
I found that when I sold naked puts with no intention of owning the underlying stock, these became my rules or guidelines. Remember nothing on my site is financial advice or recommendations. Trade at your own risk. My site is for discussion and presentation of my ideas only. Read my full Terms Of Use.
 

1) Sell only on stocks that are in an uptrend. To check this I look at the 10 day Simple Moving Average and compare it against the 20 and 30 day exponential moving average. You can read about the 10-20-30 moving averages trading strategy here. Below is a good example from TD Bank in March 2011.This stock has been in an uptrend since early January 2011 and has been a consistent naked put sell for three months.

 

2) Try for at least 1% from the option sell. It's important to make at least 1% from the trade in order to justify having my capital at risk. If I am only going to pick up half a percent or less from the trade I have to really consider whether it is worth making a hundred dollars if I have a few thousand dollars at risk of assignment. I try to use 1% as a minimum guideline.

 

3) Sell one month out. I try to stay away from longer time periods. Stocks can fluctuate a lot, even in a month. The shorter the term to expiry, the better my chance to avoid assignment.

 

4) Always sell out of the money. I don't want the stock, just the income so there is no point in setting myself up for a possible loss by selling at the money or in the money naked puts, even if the stock is trending up.  Below is the March 31 closing option trades for TD on the TSX. The $82.00 strike makes a compelling trade. It meets my guideline of a short time period and 1% income if I can get filled at .82 cents.

 

5) I always try to sell on a down day for that stock. As per the example above, TD Bank fell more than 1/2 percent on March 31 and the puts have gone up in value. This would be a good day for selling naked puts.

 

6) I am never in a rush. I place the price I am content with and wait for a possible fill. There are hundreds of stocks. There is never any point in taking less than I wanted. In the above example I would normally place my ask at .82 cents early in the day and wait for a possible fill. That's 1%. If this trade doesn't work out I am always watching other stocks. There will be another trade so no point in chasing any trade.

 

7) I like to spread out my contracts between two strikes. For example, as per the chart below if I was going to sell 8 naked puts I would sell 4 at the $82 strike and 4 at the $84. That way if the trade turns, and I have to close the 84, many times the 82 will still end up out of the money. Also sometimes the $82 may not give me the full 1%, but the $84 is giving me more than 1%. Added together, if both of these naked puts work out I am making more than 1% overall. This splitting can assist the overall trade results.

 

8) Treat selling puts as a business. In business it is never ALL or NOTHING. In a business I set goals and objectives. In a business I set up strategies to reach those goals and objectives. By setting my selling of naked puts as a business, I set my goal firmly at 1% per month and then determine how to make that return but spread the risk over my total capital. For example if I have $30,000 to invest then I need to make $300.00 in the month.

 

To reach my goal of $300.00 I divide up my capital among various naked put trades. For example, in the chart below I can sell VISA for 1.59 which nets a return of 2.27%. If the chart on VISA (10-20-30 averages as per rule#1) shows an uptrend, then I sell the naked puts. I then look at another stock NOT VISA where I can sell farther out of the money, for example Microsoft, and sell the 22.50 for just .57% return. But by combining the two trades I aim to net a total return of 1%. In other words if I have $30,000.00 and I want to earn 1% this month I need to earn $300.00.  If I can sell 2 VISA $70 strike Naked Puts for $1.59 that equals = $318.00. I have made my quota for the month. Two Visa puts at $70.00 equals just $14,000.00 invested. This leaves me with 16,000 I can still place in trades. I can therefore sell 7 naked puts on Microsoft, farther out of the money at 22.50 for .14 cents for $98.00. My return for the month if both trades work out is $416.00 or 1.3%.  1.3% X 12 months = 15.6% annually. On $30,000 a return of 15.6% is $4680.00. Take this concept one step further and consider if I have $90,000 to use for naked puts and I can realize the same returns as above. This would earn $14,040.00. Now consider $200,000 invested using this strategy. This returns $31,200.00 annually.

 

 

Being realistic in my returns and treating my naked put selling like a business has assisted me in being far more consistent, setting goals and establishing strategies. I truly do not care about one trade earning 5% one month and then the next month having a lot of trades losing 2%. I want a steady 1% a month return. By splitting my capital among a variety of trades I can risk a smaller amount at higher strikes on more volatile stocks and the bulk of my capital is being used at farther out of the money strikes on less volatile stocks. (more on volatility in rule number 12 below). I would never do this strategy on the same stock. By splitting up among different stocks the likelihood of a total failure is reduced. Should VISA fall and I have to close the trade, I can possibly still make the trade for Microsoft work out.

 

Taking this strategy 1 step further, whenever I have a month that works out and the capital is not needed for income, I roll that earned income back into my next month's trade. Basically I am compounding my capital. For example if in this month my 30,000 earns the above trade I will have made $416.00. Next month then I have 30,416.00 to invest. Spread out among the same strategy as above for the same strikes means I would sell 2 VISA $70 strikes for 318.00 and then look around further. With Intel at $20.00 I might consider selling  8 contracts of the $18 strike for .20 cents which earns $160.00. If both trades work out my earnings for this month would be $478.00. I then compound that into the next month making my available capital $30,894.00. By continuing this over months and years I found that instead of 12% a year I was continually earning 15% or better every year and lowering my chance of having a month with a complete wipe out as often if the stocks with better premiums such as VISA turned and I did not make the full amount but had to close early, my lower strikes in most cases worked out.

 

The higher place strike such as the VISA $70 are in smaller contract sizes. The lower strikes such as Intel at $18.00 or Microsoft at $22.50 are holding the bulk of my capital with less risk of assignment than VISA at $70. With this strategy I am diversifying my trades and reducing my risk of assignment on the larger portion of my capital. Recall the statistic that 80% of options expire out of the money, but that near or at the money are 50/50, I am basically playing the odds by having fewer contracts exposed at closer to At or Near The Money and more naked puts sold further out of the money on different stocks.

 

9) Learn How To Close and Take The Emotion and Guesswork Out. This was an important step for me. I always found it difficult to close early or even knowing when to close. I experimented with many different percentages. Finally I came up with this method which worked for me.

 

On the high naked put strikes or the At The Money naked puts I had sold, I take the amount I sold the put for and calculate 75% and I put in an offer to buy back my naked puts at that price good until 2 weeks prior to expiry. I put this offer in immediately after I have sold the naked puts.

 

For example, if I sold the VISA strike for $1.59 I immediately put in my offer to buy back the naked puts at .40 cents. This takes away all the guess work and emotion from the trade. It forces me to close the trade and lock in my profit. If I close early, then I look elsewhere.

 

After two weeks if the trade is working in my favor I reduce my offer to buy by 10% per day. For the above that would mean .36 cents on the first day and .33 cents on the second day, etc. If the trade still is in my favor by the week of expiry, I will only close for pennies up until Wednesday. By the Wednesday before expiry I will not close at all barring an unforeseen event.

 

For my further out of the money naked put strikes I immediately set them up to close for 80% of their value. In the case of Intel at .20 cents that would mean I am willing to close the trade for .04 cents anytime up to the beginning of the second week before expiry. After that I do not close unless something unforeseen should occur.

 

10) If the trade turns against me, but I have a profit, I close immediately. I always know that should the trade turn, there is a very good chance I will be able to sell the same naked puts or even lower within the same stock within a few days or a week. There is always an opportunity to make another profit. Losses can mount quickly with options. I often found that an option that I could have closed for .08 cents today is .50 cents to buy back, just two days later. I found that often I was closing too late on downturns and my profit was almost gone by the time commissions were taken into account.

 

11) If I do not have a profit, I close the trade as soon as it is a 20% loss. For example, if I sold VISA $70.00 strike for $1.59 and the trade went the wrong way right from the start, I would put in my offer to close at $1.90. I found overall that 20% was a reasonable loss to take and it did not overall affect my entire year's earnings.

 

On the farther out of the money naked puts I use 25% as my loss buy back point, which seemed for most of my trade to afford me enough room that if a stock pulled back and then turned and continued higher, I did not end up buying back the puts, only to find out a day or two later than it was the wrong trade to have made.

 

By following rules 9, 10 and 11, I found that I was more consistent in earning income every month. Some months all the trades worked out and in other months only the furthest out of naked puts did, but the returns on an annual basis kept growing and the losses were minimized.

 

12) The less volatility in the stock the better. Lower volatility often means a stock has not had large price swings. However lower volatility also means smaller premiums so it is a trade off. For example in the chart below for the same strikes for Toronto Dominion Bank, the volatility is not overly high, but then the premiums are not as great.

 

In this chart I can see that RIM's volatility is twice that of TD, but the option premiums reflect this as well.

 

Higher volatility though meant more often I was either buying to close my puts early; having to close early because of a pull back; had more trades with higher losses; whipsawing of the stock.

 

Lower volatility while it presents lower option premiums also provided me with far more trades that were overall profitable. Being realistic and setting the goal of 1% a month made for much better stock selections when ultimately I did not want to own any stock.


13) I Watch Delta. Finally although there are lots of investors who disagree with me, I found that the greeks as a whole did not really assist in my stock selections and put strike selections. However among the greeks I always look at DELTA. Please don't bother to write me about the importance of the Greeks. I do get it. I understand what Gamma, Theta, etc is all about and why some people love them and wouldn't even trade without them. But honestly, stocks move around a lot more than investors realize. Delta in its simplest of form is a quick way to determine what are your "odds" of the stock reaching your strike point before the expiration of those month's options. In my TD example you can see that the odds of the $82 strike being assigned are below 10%. The $84 strike are 25% or 1 in 4. The greeks change all day long and every day, so honestly I prefer the 10-20-30 to really figure out if a stock is in an uptrend and my chance of assignment are low. But at least Delta helps a bit.

 

 

Summary

Those are the 13 guidelines I follow when selling puts against stock I do not want to ever own. Remember that losses can be large on any investment or investment strategy. These are the rules or guidelines which I developed after paper trading for many years. I suggest every investor interested in selling puts, paper trade first and establish their own set of guidelines or rules. Every investor has their own risk level and investing goals. It is important to learn what they are before entering into any investment.


 



 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/7/15 22:50 
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Abnormal Returns from Selling Index Put Options?

http://www.cxoadvisory.com/1329/equity-options/abnormal-returns-from-selling-index-put-options/

June 27, 2007 • Posted in Equity Options


Are equity investors on average irrationally afraid of market plunges, and therefore willing to overpay for index put options? In their October 2004 paper entitled “A Portfolio Perspective on Option Pricing Anomalies”, Joost Driessen and Pascal Maenhout investigate the benefits of index options positions to asset allocating investors. In the June 2007 version of their paper entitled “Understanding Index Option Returns”, Mark Broadie, Mikhail Chernov and Michael Johannes compare historical option returns to those generated by commonly used option pricing models. These studies find that:

“A Portfolio Perspective on Option Pricing Anomalies” measures index option returns using daily data for S&P 500 futures options from the Chicago Mercantile Exchange for the period January 1987 (including the 1987 crash) to June 2001. It focuses on two short-maturity strategies: (1) buying out-of-the-money (OTM) put options with 96% strike-to-spot ratio; and, (2) buying at-the-money (ATM) straddles. Both strategies trade at the turn of calendar months with closing residual maturities between eight weeks and two weeks (they do not hold to maturity).

The following table, extracted from the paper, summarizes monthly results for the underlying S&P 500 index futures (Equity), the OTM puts and the ATM straddles across the entire sample period. The mean monthly return is +1.3% for the S&P 500 index futures, -41% for the put options and -13% for the option straddles. Selling the put options and straddles would therefore have generated positive returns as rewards for assuming volatility and jump risks. While the volatilities (standard deviations) of the options positions are much higher than the volatility of the underlying index futures, the magnitudes of the Sharpe ratios are still greater for the options.

The authors conclude that:

  • The option positions are economically and statistically significant and robust to inclusion of transaction costs and margin requirements.
  • Short put option and straddle positions should be attractive to most asset allocating investors.
  • Only loss-averse investors who hold highly distorted probability beliefs would buy such puts and straddles as hedges.

“Understanding Index Option Returns” examines monthly returns for short-maturity S&P 500 index futures options held to expiration for various strike prices over the period August 1987 to June 2005 (215 months). It addresses strike-to-spot ratios (moneyness) ranging from 0.94 to 1.02 in 2% increments, covering 85% of all one-month option transactions.

The following chart, taken from the paper, depicts the monthly returns over the entire sample period for 6% OTM put options, ATM put options and ATM straddles. It shows that most of the put option positions expire out of the money (-100% return), with intermittent equity market plunges generating occasional spikes in the return.

The following table, excerpted from the paper, summarizes average monthly returns and volatilities (standard errors) for the put option positions by moneyness and for the ATM straddles (Strdl). It shows that all positions generate on average large, statistically significant negative returns (for example, -30% per month for ATM put options). Selling these options therefore generates positive returns. However, the results for calendar-based subsamples show that the returns for put options are unstable over time, generating large positive returns during the 2000-2002 bear market.

In summary, a strategy of systematically selling index put options generates on average large abnormal returns but suffers occasional very large setbacks when the underlying index plunges.



 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/7/15 23:08 
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Delta Neutral Trading - Unplugged

Posted by Pete Stolcers on June 5, 2006
http://www.1option.com/index.php?/globa ... unplugged/
   

In the last option trading blog I defined non-directional trading. Let’s look how it has evolved “on the floor”.

Twenty years ago option Market Makers had a tremendous “edge” being on the exchange floor and they made a great living without having an opinion. Orders were verbally represented to the crowd and executed. The information was slowly disseminated and it took forever to know if you were filled. It gave the Market Makers plenty of time to adjust their markets based on order flow. As a veteran in option order execution, I will tell you that there were times when the process felt like a “grab bag”. You would stick your hand in and you never knew what you would pull out. In the “80’s”, Market Makers were able to leg into conversions and reversals with relative ease, locking in risk free profits. They were making great money! Over time, competition and technology started to “bite” into that edge.

By the mid 90’s, Market Makers were forced to develop multi-leg strategies that they could leg in and out of to hedge their overnight risk. Remember, Market Makers feed off of order flow and they only buy bids and sell offers. Their commission costs and margin requirements are a small fraction of the retail public’s and that is still an advantage granted to exchange members. These strategies still exist and can generally be grouped as complex spreads. They include 4-ways and condors and iron butterflies. The premise is that the position is neutral and very hedged. Think about this carefully. Imagine seeing all of the order flow on the floor, paying a dime a contract for clearing (no commissions no minimums), having a fraction of the margin requirements, adjusting your markets instantly based on the underlying and legging into trades. The competitive edge they have over you for complex spreads it monumental.

By the late “90’s” it was apparent the exchanges were going after each other and fighting for listings. The monopoly that had existed (IBM only traded on the CBOE, DELL only traded on the PHLX) was going to be broken up and the bid/ask spreads would have to tighten to attract order flow. To make matters worse, electronic quote systems were improving and electronic trade execution was lightening fast. The Market Makers had to be sharp and fast to survive. There was also the threat of an electronic options exchange (ISE). By the late “90’s”, no one on the floor knew his or her fate.

Even with all of the advantages of being on the floor, these complex neutral strategies were barely paying the bills. By the end of the millennium, Independent Market Makers were making $75,000 a year after expenses. It’s a living, but I don’t think that is what you have in mind. The Independent Market Maker is all but extinct and most have a salaried position (with a year end bonus) with a large firm.

These facts don’t stop people from teaching complex spreading strategies. As long as the instructors know more than you do, they’ll charge you $3000 and tell you how easy and risk free it is.

Non-directional trading is now being played by large institutions with deep pockets, a very low cost of capital, the ability to “leg in”, access to over-the counter markets, minuscule transaction costs and instantaneous hedging programs. They have traders at every post on the floor. Let them have this space. It is a very tilted playing field. These strategies can make money for months on end and all it takes is one big move to lose everything.

Imagine an Iron Condor where you have four bid/ask spreads on the way in and four commissions. Imagine that you have to take one side off. You have another two bid/ask spreads and two commissions. Is the picture becoming clearer?

The point, learn how to become a directional trader.


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/7/15 23:34 
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Warren Buffet has become something of a modern day financial icon. A beacon to the success that can be achieved in the free markets. He has just been officially named as the richest man in the world, worth a staggering $62 billion. His company, Berkshire Hathaway, has beaten the S&P 500 index by 14.65% over the past 30 years. His investment strategy has been closely examined yet few follow his incredibly successful investment style and as a result miss these stellar returns. Why? Because his investment style is boring. What I mean is long term in nature and rather inactive. It's steady as she goes. It's not a fast paced, action packed ride to riches. It's a slow consistent walk to wealth.

So what does all this have to do with option selling? I'm glad you asked. While Warren Buffet does not sell options to generate his wealth, the concept of option selling is also slow and on the whole rather boring. It is not fast paced nor will it result in a fortune being amassed overnight. But sure as the sun sets at night and rises in the morning it will provide the educated and patient investor with fantastic returns and wealth.

Selling options mean selling either calls or puts (or both). If you recall the definition of an option is a contract which conveys to its holder the right, but not the obligation, to buy (calls) or sell (puts) shares of the underlying security at a specified price on or before a given date. This right is granted by the seller of the option. So it is the option seller who has the obligations because they have sold the rights to the option buyer.

The option seller receives the option premium in return for giving the right to the option buyer. The option premium represents the entire income the option seller can hope to achieve, while his losses are theoretically unlimited. The option buyer on the other hand can only lose the option premium while his return is theoretically unlimited. So why would anyone sell options? Why doesn't everyone just buy options if they have limited loss and unlimited profit potential. The main reason is probability!

Options are very much like a raffle ticket. When you buy a raffle ticket it costs you very little and the vast majority of times you don't win anything. You simply say to yourself that it's cost you only a few dollars and if you were the lucky winner you'd have won big. But why do raffles exist? They don't exist with the winner in mind. They are not altruistic games designed to give more than they take...oh no, quite the opposite. They are designed to offer the raffle holders a nice return on their raffle.

They know that the cost of paying the winner is less than the income they earn. The same rules apply to options. Investors who understand options know that over time that the loses they have to pay to option buyers will be less than the income they earn from the premiums the buyers pay. Studies suggest that between 75% and 80% of options held to expiration expire worthless. This means that option sellers win 75% to 80% of the time!

In addition to probability there are other reasons in that make selling options incredibly attractive as a wealth creation strategy. They include:

* Excellent returns
* Set and forget
* Inbuilt safety factor
* Consistent income
* Win in all market conditions
* Less risk
* Time is on your side

Let's quickly look at each of these in turn...

Excellent returns:

Selling options can provide a knowledgeable and experienced investor amazing returns...returns like 30% to 50% per annum. One of the best ways to look to understand this is to look at a simple example. Gold in February 2008 had just broken $900 an ounce and all the news was majorly bullish for gold. It had already seen a spectacular rise over the past few years but market conditions meant there was every chance it would continue to rise...but most importantly it was not about to fall...at least not beyond a natural pull back.

Someone was willing to buy the 01 June 08 $525 put options for $0.10. I guess they figured "what the hell it's only 10 cents per option...it's worth a punt." Fantastic! I knew that each option I sold represented $10 (100*$0.10) in income and the initial margin was $34 per option. Gold would have to fall by a whopping $400 an ounce in a little over 3 months to be exercised. Now I'd probably have better luck winning the lottery than being exercised on these options (and odds on winning the lottery in the UK are about 14 million to one!).

Now $10 may not sound like much but we need to look at this in terms of return on capital invested. If you can generate $10 on $34 worth of capital invested you are returning nearly 30% over 3 months, which is nearly a 250% compound return per annum. I'll take those odds and that return!

Set and forget:

While I never suggest that you ever invest in anything and totally ignore it from then on, selling options is about as close to this as it gets. When you sell an option you target options that have very low chances of ever being exercised. How? You look for way out-of-the-money options and you apply sound fundamentals. For example, the Dow at the end of Feb 2008 was 12,700 and all the news was incredibly bearish for the markets. Inflation was at record levels, the dollar was in free fall, house prices were plummeting, consumer sentiment was falling, retail sales were stalling, credit markets were frozen, profit warnings were occurring daily and so on.

I was totally comfortable that the Dow was likely to fall, but what I couldn't predict was when and by how much and whether it might go up slightly before it went down. What I was certain was that it was not about to trend upwards. Selling futures, CFDs, spread bets etc requires excellent timing. You might be correct on the overall direction, but without deep pockets you could get stopped out first before the market moves your way. The solution? Sell deep out-of-the-money Dow calls. I sold 15 May 13,500 call options for $140 premium. That means that the Dow would have to rally above 13,640 before I would start to lose money. That is not far from its all time high! At writing the Dow is at 12,200 and my calls are now valued at $17 giving me $123 profit per option. I don't have to watch my calls minute by minute, hour by hour, day by day. I'm totally comfortable that they will expire worthless and I will earn $140 per option.

Inbuilt safety factor:

One of the biggest problems with using stocks, futures, CFDs, spread betting and other financial products that have a linear type return (i.e. their value moves up and down at the same rate).This means that you need to have excellent timing and deep pockets to use them effectively. While I love the adrenalin that these products give me they do not have the type of safety factors that help me to sleep well at night.

How many times have you bought a stock, futures contract etc on the expectation that its price will rise and sure as night follows day the price immediately starts to fall. Soon you find yourself stopped out only to see its price turn around again and rally just as you originally predicted. Essentially these products give you only a small margin of error. If you have more money to play with you can afford to place wider stops, but the fact still remains...you need to time your entry and exist points fairly accurately.

We all know that markets do not move from point A to point B in a straight line...they zig zag their way there...sometimes with quite violent corrections. The more volatile the market the more difficult using linear products becomes, because your likelihood of being stopped out increases. Options give you that margin of error that means you don't need to worry about timing to anywhere near the same degree.

Option sellers have a much higher degree of staying power. They can withstand the zig zagging of the markets much better. For example, if a market is in an uptrend you can sell an out-of-the-money put at a level that gives you a very large level of comfort that the price will never fall to a level where your option will be exercised. Timing the market is much less important.

Consistent income:

Those that sell options can enjoy a regular income month after month. It will not provide you with a 1,000 percent return in a year, but with education, practice and good option selection you can enjoy 30 percent to 50 percent annual returns. But there is a lot to be said for receiving excellent, regular and fairly stress free income. Everyday your options are getting closer to expiry and time decay is eating away at their value. Every month you can receive income from your options expiring.

Win in all market conditions:

It is said that markets go up, down and sideways. In actual fact they go up a little, up a lot, down a little, down a lot and sideways. With linear products you can only win with one third of the movements. For example, if you are bullish, then you will loose if markets go down or sideways (or at least not gain anything). However, if you sell a deep out-of-the-money put option to take advantage of your bullish view then you will win with four out five market movements. In other words you will win if the market goes down a little (it will not hit your put's strike price), stays flat, goes up a little or goes up a lot. You will only loose if the market falls sharply.

Less risk:

When most uneducated investors think about options their first reaction tends to be "that sounds risky". In actual fact options are a lot less risky than trading stocks, futures, CFDs etc. The key reasons why options are less risky are:

* Inbuilt safety factor - options have an inbuilt level of safety because you can sell out-of-the-money options that are very unlikely to be exercised.

* Most expire worthless - we know 75% to 80% of options expire worthless.

* Insulation from market movements - Option prices do not move one for one with the underlying price. In other words if the price of the underlying goes up one point your out-of-the-money option price will only change by a fraction of this, say 0.25 points. This means that if the market moves against you your option price, and thus losses, will not increase anywhere near as much.

* Less likelihood of being stopped out - by selling out-of-the-money options only on extreme market movements will stop you out.

Time is on your side:

Those that buy options need the price to move beyond the option strike price (plus the option premium) before expiry if they are to make money. From the moment they buy an option time is working against them...it is a race that the price can move enough before their time runs out. For the option seller it is exactly the opposite. From the moment they sell their option they have been paid and the option's time is working for them. Every day the option's worth becomes a little less to the option buyer and a little more to the option seller. The option seller does not have the pressure that time will run out...the option buyer always wants more time, while the option seller happily watches time run out.

I hope you'll agree that option selling is a powerful method of generating low pressured, consistent and extraordinary returns. Novices steer clear of options. Those that are uneducated buy options outright. Experts sell options. Writing options is not for everyone...in fact it is only for experts. Don't be put off by that...become an expert...anyone can. Then you can receive the rewards that are just waiting for you.



 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/7/15 23:38 
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Now, get to real.

Question: how to have consistent 15%+ annual return by selling options? Cool


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 01:26 
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no such thing
野狐禅 wrote:
Now, get to real.

Question: how to have consistent 15%+ annual return by selling options? Cool


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 03:40 
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yellowstone wrote:
no such thing
野狐禅 wrote:
Question: how to have consistent 15%+ annual return by selling options? Cool

大佬们赶紧出来,敲打敲打黄石头。

不过问题似乎需要分成两个,
1. 气死MM:如何获得稳定的 15%+ 年回报?
2. 气死巴匪:如何每年跑赢市场 15%+?


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 08:40 
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Tls 是搞这个的高手,他也会告诉你: 做梦.
野狐禅 wrote:
yellowstone wrote:
no such thing
野狐禅 wrote:
Question: how to have consistent 15%+ annual return by selling options? Cool

大佬们赶紧出来,敲打敲打黄石头。

不过问题似乎需要分成两个,
1. 气死MM:如何获得稳定的 15%+ 年回报?
2. 气死巴匪:如何每年跑赢市场 15%+?


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 08:46 
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小打小闹怎么都行,sell Option很难做大,卖option做上Billion的从来没听说过,很多练家子都是百来M就CLOSE了也不是没道理。option做到几百M市场哪怕是Sp500流动性不好的时候就要出问题。所以和巴菲特还是没法比的。以前我批判巴菲特现在看来比较无知了,给你$200B资金的话除了做long term fundamental hold也是真没别的好办法了。


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 08:49 
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mummy wrote:
小打小闹怎么都行,sell Option很难做大,卖option做上Billion的从来没听说过,很多练家子都是百来M就CLOSE了也不是没道理。option做到几百M市场哪怕是Sp500流动性不好的时候就要出问题。所以和巴菲特还是没法比的。以前我批判巴菲特现在看来比较无知了,给你$200B资金的话除了做long term fundamental hold也是真没别的好办法了。


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 09:41 
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写葡萄这招数老巴也经常用,我现在也渐渐喜欢起来了。


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/8/15 20:31 
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mummy wrote:
小打小闹怎么都行,sell Option很难做大,卖option做上Billion的从来没听说过,很多练家子都是百来M就CLOSE了也不是没道理。option做到几百M市场哪怕是Sp500流动性不好的时候就要出问题。所以和巴菲特还是没法比的。以前我批判巴菲特现在看来比较无知了,给你$200B资金的话除了做long term fundamental hold也是真没别的好办法了。

大资金的时候,UP的再平衡用熬破笋一般是可以的。这时问题的规模一下就变小,反而容易了,虽然不会15%+跑赢市场。

 提问:在 Billion 以下问前面的那两个问题。Mr. Green


 
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 Post subject: Re: Selling Puts For Profit
PostPosted: 10/9/15 01:09 
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我前段时间被人拉到一个小微信群,第一次见到一群人以卖option为生。我不懂options,他们跟我解释为什么理论上风险大,而实际上赔钱的几率要小。这几个人还都是我认为非常非常保守的。因为胆小才只卖不买。


 
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PostPosted: 10/9/15 09:47 
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哪个群?能不能求带入?谢谢


 
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PostPosted: 10/9/15 09:55 
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哪个群?能不能求带入?谢谢


 
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