selling put options

[osho67]

I am starting this new thread in the hope that there will be valuable comments from experienced traders on options.

In 2002 in about sept time i started to sell put options in uk shares. The option i would write will be well below the price of the share. This reduces the risk but gives lower premiums as income. But this will not require much collateral with the broker. I will leave the premium income with the broker building a good cash sum. In 2002/03 I made about 8k . here was only one share I had to buy which was abbey national and immediately i wrote a call option reducing my paper loss.

This year i have made about 4k and i have not faced any exercises.

My thought is why more people are not using this method to generate premium income. There is a big risk if there is a collapse in market . To lower the risk i pick the price well below the current price of the share.

All comments much appreciated. I think i am making some free money for not much investment. Are there other people following this strategy. I am keen to learn more before exposing myself with larger no of contracts.

Thanks

 

[waqr]

You made 8k , which is very nice, but what was the downside at any one time ? in other words if all your positions had behaved like ANL how much would you have needed to buy the shares that might have been assigned to you?

And did you have the cash required?

 

[osho67]

put options

No i would not have the cash to buy the shares if i was exercised for all positions. I would sell at the market prices immediately and i have kept enough cash for the net losses. I think my risk is very low. But in a crash I will lose substantial sums but if prices are going down i will hedge my positions on sb or cfd. I have not been required to do this uptill now.

 

[warm_machine]

Well done on your returns, but imo it's a zero sum game for all but insiders as you will eventually take a hit, be it a bad call/poor luck. Naked selling of puts means risk levels cannot be determined, as there is no hedge in place to cover downside (the ability to short is not an adequate hedge until the short is made, thus you are exposed to risk until the short is made - if the short is made prior to any downside then you compromise you option - imo not a workable strategy in general but suitable for stock specific arguments). All imo.

 

[waqr]

A few things to consider;

mkt drops heavily, you hedge by selling cfd's [going short], next day mkt goes up by the same amt it dropped, your cfd position will be in big trouble. What are you going to do now? your position has now got the prospect of an unlimited loss to the upside.

You made 8k, which is approx 2k per quarter. What was your total risk [exposure] in any one quarter

 

[Glenn]

Have you considered selling Strangles ?

 

[osho67]

put options

Dear Waqr,

I donot know how to measure risk exposure. Say I have sold one put contract in Barclays. I have sold it at 360 p expiry. What is my risk? In order to keep risk as low as possible i opt for good shares like banking shares, some insurance, bskyb in media gus ( on this shareI have done three times and expiring worthless every time. I donot go fo high volatile shares just to get good premium. Try to stick to bp shell bat , some more steady shares. So what would be my risk. They are not going to have zero value at any time.

Dear Glenn

How do I get two premiums? In order to get call premium normally I do a covered call which requires capital to buy the shares. I do that to some extent as well.

Thanks for the valuable comments from other writers.

 

[waqr]

Osho, lets keep it simple and calculate your financial exposure.

Sell 1 x barc 360 put. NB 360 is the strike price
At expiry you are exercised because the price is below 360, you have to pay for 1000shares at £3.60 = £3600

If you have'nt got £3600 then you have problems and if you have done this exercise with 10 other shares and they all go down at the same time then you have serious problems.

It is unlikely that any of the top shares that you have mentioned go to zero but they can move far enough and fast enough to cause you big problems.

Did you understand the problem with hedging that I mentioned?

Interesting that you mention barclays, last year when the price was above £6-00 I was short the 550 puts. The share eventually traded below 350 . The move from the high at approx 625 to 400 took less than 2 months. Even solid shares can get hammered so be careful.

 

[waqr]

Glenn,

Is your friend selling options on equities or the ftse index?

 

[osho67]

put options

Dear Waqr

Thanks for your reply. Yes I agree the arithmatic can be frightening. For about 12 months I have not faced any problems. Suppose I have shares and the price goed down. What are my options? I can sell the shares and take a loss as quickly as possible. Similarly I can close my open position on put and take a loss. Sometimes I have seen the options donot get exercised till the expiry date and by that time share price might recover as well.

I understand the hedging problems you have mentioned. As I mentioned I have not been required to do anything like that. My best bet is probably to close out my position.

Thanks for your comments. At the moment I feel easy money coming my way and because of the past profits have some funds set aside for losses.

 

[Glenn]

Osh067 - "How do I get two premiums?"

Sell Puts for one premium and sell Calls for the other.

waqr - Friend is selling naked FTSE options. Needs a margin account.

Glenn

 

[cassiopeia]

Selling puts is reputed to be the most dangerous thing you can do, strange since it is structurally equivalent to writing a covered call which is ruputed to be a low risk strategy.

In fact all forms of written options have a deceptivelly higher risk than is assumed. You may find your strategy produces a nice steady income, however once in a while the market moves drastically, potentially wiping out your gains or if it happens sooner generating a painful net loss.

 

[Mr. Charts]

cass, it is selling naked puts which is inherently very unwise as prices are more apt to collapse catastrophically than shoot up

 

[Hittfeld]

May I object ???
Its selling naked Calls, that should be considered the most dangerous strategy, as stocks can make an unexpected and very steep rise -or gapping up.
Selling naked Puts is standard procedure, as the risk involved is even less than buying the stock straight away: In both cases the stock might go to zero, but with naked puts you loose less, as you gain a premium before.

Hittfeld

 

[oatman]

I'm not an expert, but nobody has mentioned trading volatility yet.

Cheers

 

[waqr]

Hittfield is quite right. Sell a naked put and you can quantify the downside. Sell a naked call and you cant measure your potential loss.

cassiopeia's post is very good, read it carefully osho67

 

[Hittfeld]

Cassiopeia, you are right, option writing can lead to painful losses. But more devastating is the pychological side of CC: Being unable to collect the wonderful gains the stock made meanwhile: A loss is not as bad as a gain you could have made.

The greedy write naked, the prudent write spreads.

Hittfeld

 

[Hittfeld]

Oatman, I consider there to be 5 basic strategies:
1 Just moving in and out of stocks (NP, CC)

2 Earning premiums from timedecay. Thats primarily done through option writing and delta neutral

3 Trading volatility

4 Trading directionally (anticipating a stocks one-directional move)

5 Trading on expected news ( straddles)

Hittfeld

 

[osho67]

Dear Hittfeld

Please explain how to write spresds.Thanks

 

[micromike]

Osho67

Many thanks for starting this interesting thread which is becoming quite informative.
I would be interested to know whether you have sometimes used options as a cheap way of purchasing shares ?
Which broker or brokers do you use and have you ever used a self-advisory broker ? I think that self-advisory brokers could be quite expensive but might not be a bad idea until one has gained some experience. (I'm talking about myself and not you here ). I notice that Chas. Schwab have stopped trading in options and I believe that com.direct used to at one time
Finally, can you or any others suggest some suitable reading in trading options successfully ?