anyone sell options to collect premiums ?

[cc]

Of course selling covered calls is a common trading strategy.

How about selling naked puts?

Or, selling credit spreads?

I read Warren Buffet sells naked puts when wanting to buy shares in a company.

It seems to be working.

[jfoxcpacfp]

I really don't think there are a lot of gamblers hanging around here.

[VagabondMD]

^^

I do not consider selling covered calls to be "gambling". If anything it tends to cap your upside, under the guise of generating additional income.

[Zaphod]

Not necessarily gambling though you certainly have to constantly fight against it. You should also make sure to really understand whats impacting options and their prices. The best thing about options are they are complicated and most who trade them wont even take the time to learn about them properly which can help you.

Yes, I sell options weekly, and posted something about it under that thread "what kind of returns are you getting". What I do depends on where the market is. If you go naked then you really have to understand the risk and probabilities and size accordingly. I dont do any single name options as they are more volatile and prone to one off events that you will never know about, much more than indexes.

I am hopeful next week has some antics and brings some premium back into the market, last month or so has been tough r/r profiles.

[jfoxcpacfp]

Naked puts, credit spreads, even covered calls are, imho, short-term market timing techniques that attempt to outperform a well-diversified long-term strategy. Gambling to me, but I have no patent on the definition and appreciate your viewpoint  

[Zaphod]

jfoxcpacfp wrote:

Naked puts, credit spreads, even covered calls are, imho, short-term market timing techniques that attempt to outperform a well-diversified long-term strategy. Gambling to me, but I have no patent on the definition and appreciate your viewpoint  

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They certainly tend that way and its likely the great majority of what happens. What I like about options is it allows me to control price and duration, stuff can happen in between and it doesnt matter. TBH and a bit cynical, these are the people you are selling to. I like selling to the biggest lottery ticket buyers that exist in the most broken products and categories that exist. Now, when I come across them online I always advise against these actions, but still do sell to them.

The desire to do better than just the market is certainly a driver for anyone selling options for sure. Doing well for a stretch is really the big danger that leads you want to go too big, where you then get crushed. I have an investing plan that lines out strategy, goals, and sizing, etc...so as to keep the gambling from rising up. Definitely a struggle. I just try to view it as a long term cumulative process.

[StarTrekDoc]

My parents do a lot of covered call and selling naked puts.   Covered call actually is a safer bet than individual stocks as you artificially limit the upside on it as a protection instrument.  It is an alternative where one speculates on stock A and have a set point of selling once it reaches price X.  If you do that on a regular basis, covered call is a way to do that with a guaranteed premium on the that sale regardless of the stock performance.

Say for example you really like Amazon but getting in at 950 is nerve racking, but you really think it'll do 1000 in the next 3 months and then you'll cash out if it hits that number regardless and you'll be happy even if it goes to 1200.   That's a perfect situation for covered call.

Is it gambling?  sure.  Anything beyond CDs can be construed as gambling, just different risks.   I personally don't do options since no time with full time job.  A stay at home SO can, but yes--- it is a form of speculation no much more than individual stocks   ie not for retirement investing IMHO-  this type of $$$ falls squarely in the wildcatting investment column

[Hank]

Not a fan of selling options. You get the downside risk of individual stocks and your upside potential now is like a bond instead of like a stock. You also are far more likely to pay taxes at ordinary income rates instead of long term rates. Plus it takes a lot more thought and time than just putting money into Vanguard total market each paycheck. Pretty bad combination overall.

[Zaphod]

Hank wrote:

Not a fan of selling options. You get the downside risk of individual stocks and your upside potential now is like a bond instead of like a stock. You also are far more likely to pay taxes at ordinary income rates instead of long term rates. Plus it takes a lot more thought and time than just putting money into Vanguard total market each paycheck. Pretty bad combination overall.

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Obviously depends on how you do it. I wouldnt expect to be paid well for something that is very easy.

Like I said, I wouldnt do anything with individual stocks unless you're doing some form of covered calls, but I dont own any individual stocks. Indexes are better/safer, less prone to some specific company issue. You can definitely pay ordinary income tax rates for short term stuff, but that again depends. Everythinig I do is a futures based product so it falls under the 1256b tax code being 60/40 capital/ordinary tax mix even on short term stuff. That mix is lower than my effective rate. Always an angle.

I totally get why people dont mess with options, they are complicated and most people tend to lose money. Those two reasons are why I like them, you take the opposite site of that trade. I also stick to things with an underlying futures market that make the products I trade more complicated and dependent on factors the great great majority of people are totally unaware are effecting the index price.

This obviously takes time to learn and such, and most wont have it or the desire. But yes some will do it.

[Crazyroadtodublin]

Ok I will bite,

 

I sell naked puts every month,  collect about 10 grand in premium,  I never sell on an underlying stock that I wouldn't want to own.

Rather than buy on the open market , I would rather own the stock 45 days from now at a lower price.  Just my thoughts but given my annual compounded return over the last 12 years I can't see a reason not to continue.  The risk is exponentially higher as are the rewards.

[jpa]

That's pretty impressive. Do know what % you usually choose to buy-to-cover vs allow just to expire?

[Crazyroadtodublin]

Delta, Gamma, Theta and Vega are prob beyond the scope of a single post,  but yes I am selling puts out of the strike price usually 45 to 60 days away for stocks that I would love to own.  Think mostly dow stocks.  These options tend to be dramatically overpriced on marked correction down days.  Sell the volatility.

 

I suppose it is a valuation play and I have had some traps that have been painful but for the most part I will just roll the option down and out or just take the stock if I get tagged.  The traps do exist but are few and far between with good solid companies with large cash positions and dividends that hold them up or at least make them bounce back.  Take a big drug company that just gets crushed from a trial.  Down 15 percent in a day,  thats the one I would sell a put for 45 days out 10 percent less than its current price.

 

 

[Zaphod]

There are lots of ways to go about it. You dont necessarily gain an edge that isnt priced in, you take a stand on where it will or will not be on some specific date. Options are incredibly complex at first pass, so always difficult to try to distill in a digestible manner, but its a good exercise so...

There are many factors that effect price/premium.

-strike/underlying price; closer the option strike price to spot, the more premium it has which will be a mix of intrinsic value (how much it is "in the money) and how much time value it has (how long it has to get in the money)

-historical volatility compared to current-vol goes up prices go up and vice versa

-basically boils down to more premium makes it more likely your strike is breached at some point, less premium less likely and more likely you keep all the premium but you dont get much unless you sell a lot, which is unwittingly taking on a massive amount of risk should the not impossible occur. So there is a balance and you have to position size accepting a certain amount of maximum loss as ok. If your not ok, its too much risk. This is what happens to most people and they blow up.

you can sell very out of the money strikes, but they dont pay much at all and your risk the one time in a thousand it gets hit (say naked puts/calls) will obliterate long term profits. You have to pick some sort of sweet spot or predefined profit level play (a structured one that defines profit/loss at the outset). For example right now there isnt much in the way of premiums as volatility and vol of vol is low, and that affects premium as well. These are all good things to know as it helps you have cushion and know when to take an out sized position and when to cash out.

 

If really interested I would buy an intro to options book as its far too technical and you need to draw some pictures, graphs, tables, etc...to make it more obvious.

[Zaphod]

Crazyroadtodublin wrote:

Delta, Gamma, Theta and Vega are prob beyond the scope of a single post,  but yes I am selling puts out of the strike price usually 45 to 60 days away for stocks that I would love to own.  Think mostly dow stocks.  These options tend to be dramatically overpriced on marked correction down days.  Sell the volatility.

 

I suppose it is a valuation play and I have had some traps that have been painful but for the most part I will just roll the option down and out or just take the stock if I get tagged.  The traps do exist but are few and far between with good solid companies with large cash positions and dividends that hold them up or at least make them bounce back.  Take a big drug company that just gets crushed from a trial.  Down 15 percent in a day,  thats the one I would sell a put for 45 days out 10 percent less than its current price.

 

 

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I do this as well, wait til something has occurred and is near a statistical/percentage/probability extreme and choose something further than that while its premium has been increased due to the move. I sell strangles (out of the money put/call) when VVIX is high since premium is juiced, and I will often enter asymmetrically opening the put near the low and the call after the bounce.

I only trade options on indexes, and volatility ones at that. So its a bit of a different ballgame and I have other things to monitor and help with decisions like the futures curve term structure, VVIX, history, etc...

[ITEngineer]

cc wrote:

Of course selling covered calls is a common trading strategy.

How about selling naked puts?

Or, selling credit spreads?

I read Warren Buffet sells naked puts when wanting to buy shares in a company.

It seems to be working.

Click to expand...

Warren Buffet's advice to individual investors is to buy the S&P500 and forget about it. You find out who's swimming naked (pun intended) when the tide goes out. (Famous Buffet quote) Yes it's well known that Buffet used puts to buy shares in KO when he was building the stake. I would proceed with extreme caution. The biggest risk with naked puts is when the whole market goes down. Are you going to have enough cash on hand to buy all the securities you insured at the promised price? What happens when you sell a Put for Disney at $100 and Disney is at $80 b/c ESPN subscriber base plummeted in 2017?  Are you ready and willing to spend $10k to buy 100 shares of Disney that are currently only worth $8k? Do you have the cash on hand to do so?

Naked Puts are great when the market is steady or rising. Pocket the premiums for what feels like no risk! But remember you are selling insurance. Do you have enough liquidity when the market drops?

That said, I sometimes do sell covered calls when the price is enticing enough and there has been volatility with a security that I own. I've been successful enough that I think I'm good at it. But I'm probably just lucky.