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Selling option premium

Posted By phg 10 Years Ago
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phg
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Posted Saturday May 12 2007

Rather than continue to mix this with the context about option chains in another thread, it seemed better to start a new thread.

 

[Copied from post by billb]

a) How long have you been selling puts? 

b) What happens in a bear market?  Have you experienced one with your current strategy? 

c) What is the current method of risk management?  Always accepting assignment probably works most of the time,

d)but what about a case like NFI?

 

a) at least 20 years.  (I held a sold put through the October crash of 1987 !)

b) several. As an example, May 10 last year illustrates a bear correction start, notably how far and how fast things settle. One responds by taking losses until the remaining positions, if all are exercised against you, do not represent more debt than you are willing to carry. You sell covered calls against things as they get put to you. (Cash-covered sold puts, as mentioned in the article, do not require any selling at a loss). Notice that since August this has worked out grandly, as the market subsequently went on a sustained tear. It clearly also demonstrates that, with ‘good’ stocks, there is more money to be made from price appreciation than in options.

c) it is essential that the combined obligation, if they ALL went against you, not represent more of a burden than can be handled. The one cardinal rule is to survive to be able to resume trading after the correction.

d) there will always be a few cases that will never recover. These are rare. This is the classic example of the importance of diversification.

 

-Pete

-Pete

See also Yahoo group about applying RE.

Posted Monday May 14 2007
I can't disagree on too many points.  Selling premium is definitely interesting and takes a lot of work and brain power IMO.

Let me ask you one more question ... you've been doing this for 20 years ... has it beaten the indexes handily?  In other words, is this a "labor of love" or something, with a lot of work, becomes very fiscally rewarding?

phg (5/12/2007)

Rather than continue to mix this with the context about option chains in another thread, it seemed better to start a new thread.

 

[Copied from post by billb]

a) How long have you been selling puts? 

b) What happens in a bear market?  Have you experienced one with your current strategy? 

c) What is the current method of risk management?  Always accepting assignment probably works most of the time,

d)but what about a case like NFI?

 

a) at least 20 years.  (I held a sold put through the October crash of 1987 !)

b) several. As an example, May 10 last year illustrates a bear correction start, notably how far and how fast things settle. One responds by taking losses until the remaining positions, if all are exercised against you, do not represent more debt than you are willing to carry. You sell covered calls against things as they get put to you. (Cash-covered sold puts, as mentioned in the article, do not require any selling at a loss). Notice that since August this has worked out grandly, as the market subsequently went on a sustained tear. It clearly also demonstrates that, with ‘good’ stocks, there is more money to be made from price appreciation than in options.

c) it is essential that the combined obligation, if they ALL went against you, not represent more of a burden than can be handled. The one cardinal rule is to survive to be able to resume trading after the correction.

d) there will always be a few cases that will never recover. These are rare. This is the classic example of the importance of diversification.

 

-Pete

phg
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Posted Monday May 14 2007
Where  the rubber meets the road. Didn't measure things for a number of years, so don't really know how things went against a yardstick.  Made, and lost, two substantial piles selling options. Lost one on the Russian credit crunch, and a year and a half later, starting March 2000, took another hit over the ensuing year as the bubble burst. Chalk the latter up to 'hubris'; didn't follow my own advice. Three is the charm though; sticking rigorously to risk management criteria since has resulted in steady recovery. 'New cash' from selling options runs about 15% of assets, which is over and above price appreciation (if any). Selling premium + price appreciation combined are definitely well ahead of most indexes.

-Pete

-Pete

See also Yahoo group about applying RE.

Posted Tuesday May 15 2007
I'd be curious to hear more about the rigorous risk management.  Seems like a spread could help prevent blowouts, but over time, it may prove too expensive of a hedge.  As you can tell, I'm still researching and discovering.

phg (5/14/2007)
Where  the rubber meets the road. Didn't measure things for a number of years, so don't really know how things went against a yardstick.  Made, and lost, two substantial piles selling options. Lost one on the Russian credit crunch, and a year and a half later, starting March 2000, took another hit over the ensuing year as the bubble burst. Chalk the latter up to 'hubris'; didn't follow my own advice. Three is the charm though; sticking rigorously to risk management criteria since has resulted in steady recovery. 'New cash' from selling options runs about 15% of assets, which is over and above price appreciation (if any). Selling premium + price appreciation combined are definitely well ahead of most indexes.

-Pete

phg
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Posted Tuesday May 15 2007
I use spreads sparingly, though McMillan for example favors them. (I hedge regularly, though, which creates a spread at that point, typically after a 50% favorable excursion, preparatory to establishing a second (unhedged) position. I like laddering on stocks on favoring moves.

I don't favor spreads because of the finality of the loss that is recognized on unfavorable moves. I prefer the 'second chance' that covered calls afford. A key element of my thinking is to only recognize a loss (more than a small amount) as a last resort. The theory is that I was not entirely wrong about the stock but more likely off on the timing. Covered calls bridge the time until recovery, frequently, at an income level above carrying costs for the most part. The single most important risk control is to keep the aggregate implied obligation of the sold positions under the maximum the account can sustain without additional input.

-Pete

-Pete

See also Yahoo group about applying RE.



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