Selling Put Options

RedRochey

Does anyone have any experience selling put options? Thinking about starting to sell put options on companies that I wouldn't mind owning so that I could get them a slight discount or earn a premium depending on the price movement

zpehtsfd

StockTwat29 wrote: »

Does anyone have any experience selling put options? Thinking about starting to sell put options on companies that I wouldn't mind owning so that I could get them a slight discount or earn a premium depending on the price movement

The risk in holding naked options is substantial and requires massive leverage. Not a trading strategy for anyone who isn't a seasoned trader.

A couple of weeks ago optionsellers.com went bust after they sold calls (Naked position) in Natural Gas and Oil. Some of their clients are now left owing $100K+ after they were forced to cover their margin calls.

https://www.bloomberg.com/news/articles/2018-11-21/founder-of-stricken-hedge-fund-promoted-selling-of-naked-options

RedRochey

The difference here is that it would be put options on companies I wouldn't mind owning, so if I do get forced to buy them it wouldn't be such a bad result, I'd be getting a company I like at a cheaper price.

Fair enough the share price could be down for a fundamental reason and therefore I mightn't like them by the time the option expires, but hopefully that's where some good research will come in and I'd avoid companies where that might happen.

That's where the risk (and possible reward) is.
The other side of your transaction has presumably done their research too and have come to the opposite conclusion.

Your theoretical losses are capped as the lowest a share can fall to is 0.

Do you have a channel in mind of how you intend to sell these?

Why do you say you will be getting them at a cheaper price?
If someone forces you to buy them it is because the contract price is higher than the market price?
Are you considering the fee as a discount?

RedRochey

Let's just use Microsoft as an example, currently trading around $106, I like the company or maybe I already have a position in it, but I'd like to get in at $100.

Rather than wait for the share price to drop again, I could sell a put option for 15th February 2019 with a strike price of $100 for $3.05 (according to Bloomberg).

My outcomes are either:

1) The price stays above $100 and I get to keep the premium of $3.05.
2) The price falls below $100 and I am forced to buy it for $100. Since I received $3.05 for selling the option, my effective cost of buying the share is 100 - 3.05 = 96.95.

Now of course I know the price could drop further than $96.95 and therefore I'd have lost money, but since I like Microsoft in general anyway I don't mind taking that risk.

Fair enough.
Just be sure that you factor in appropriate taxes and charges into your model and that you have the cash to pay for the purchase if it is exercised.

Not a hardnosed trading question but if you wanted to buy MSFT and it stayed high how would you feel?
Do you have any mitigation strategies to limit losses - Microsoft have traded between 81 and 116 in the past twelve months

RedRochey

I guess this strategy would be best suited for big companies who trade within a certain range, and maybe they pay a reliable dividend so you wouldn't mind owning them if it comes to it.

I know that if they do trade within a certain range then the premium on an option wouldn't be that attractive either.

Not saying this is a fool proof strategy, just feel like there is something there to work with, so thanks for all the inputs.

In terms of mitigation strategies, that's where the research comes into it, if I'm happy to hold the stock at the strike price I should be happy to hold it for any price below that as well

zpehtsfd

StockTwat29 wrote: »

Let's just use Microsoft as an example, currently trading around $106, I like the company or maybe I already have a position in it, but I'd like to get in at $100.

Rather than wait for the share price to drop again, I could sell a put option for 15th February 2019 with a strike price of $100 for $3.05 (according to Bloomberg).

My outcomes are either:

1) The price stays above $100 and I get to keep the premium of $3.05.
2) The price falls below $100 and I am forced to buy it for $100. Since I received $3.05 for selling the option, my effective cost of buying the share is 100 - 3.05 = 96.95.

Now of course I know the price could drop further than $96.95 and therefore I'd have lost money, but since I like Microsoft in general anyway I don't mind taking that risk.

Your example makes it all sound so easy but the main reason you are getting such a high premium is due to the fact that earnings are in February (week before the option expires). Option sellers seldom take on this risk event unless they are covered. GL

Gruffalo22

StockTwat29 wrote: »

I guess this strategy would be best suited for big companies who trade within a certain range, and maybe they pay a reliable dividend so you wouldn't mind owning them if it comes to it.

I know that if they do trade within a certain range then the premium on an option wouldn't be that attractive either.

Not saying this is a fool proof strategy, just feel like there is something there to work with, so thanks for all the inputs.

In terms of mitigation strategies, that's where the research comes into it, if I'm happy to hold the stock at the strike price I should be happy to hold it for any price below that as well

I haven't done it myself but I have considered this too. I believe the options would be in 100 share blocks so you would have to be happy to buy 100 shares at the strike price

RedRochey

zpehtsfd wrote: »

Your example makes it all sound so easy but the main reason you are getting such a high premium is due to the fact that earnings are in February (week before the option expires). Option sellers seldom take on this risk event unless they are covered. GL

I was only using February as an example, you're right about not messing around an earnings date, I do try to avoid doing any buying or selling around these times.

Gruffalo22 wrote: »

I haven't done it myself but I have considered this too. I believe the options would be in 100 share blocks so you would have to be happy to buy 100 shares at the strike price

Yes this is another half issue, large-ish amount of capital to have waiting on the sideline in case the option does get called.

Maybe this strategy could be used for high-dividend paying companies who have a stable price, buy the share before the dividends get announced, sell after, sell a put option for just before the next dividend announcement.