educational thought for the day. one of the biggest dangers of put selling is specific stock risk. ie stock going to 0. to eliminate that risk i never sell puts on individual stocks. i think it is much safer to sell on indexes or etfs. if you eliminate specific stock risk and do not use leverage put selling is a viable way to earn a good rate of return with risk no worse than being long the underlying.
I am afraid that you may not understand the risk profile of your position. Covered call is misleading. Let's say the stock gaps down 10 dollars overnight, you get to keep your premium $168 but now you are under water on the stock. Please go over risk profile and understand basic synthetics before you sell a covered call. Covered calls are great if you have a large gain already in the stock but if that is the case then you can buy a put to hedge. http://www.optiontradingpedia.com/ As far as your position goes you can buy back your short call at a profit when the market declines then you are simply long the stock. I would be bearish on the stock.
I believe his decision was to either: 1. Buy 100 shares of Teck 2. Sell 1 contract slightly ITM puts. What is the risk differential between the 2 that he should be aware of? You are indicating he doesn't know the risk profile of his position. I think he does. Furthermore, he didn't sell a frickin call.
Here we go, you are correct about the put. I have no idea if he understands the risk of what he is doing? You on the other hand are giving out an awful lot of advice, I am glad it only took you two weeks to master options.
I think he understands because the math couldn't be any simpler. He wants another 100 shares of Teck Cominco and selling 1 put contract will either: a - allow him to own the 100 shares at a slightly slower cost than the market price at the time of the trade b - be paid $168 for the period up to next Friday for the obligation to buy them from someone at a price no higher than $40 per share, at the the other person's option. (Lets do a little Glengarry Glen Ross: A-I-D-A Attention - commodities way down Interest - wants in increase position in Teck as it is oversold Decision - buy stock or sell puts? Action - sell 1 put contract! "Go and do likewise, gents. The money's out there, you pick it up, it's yours. You don't--I have no sympathy for you. You wanna go out on those sits tonight and close, close, it's yours. If not you're going to be shining my shoes. Bunch of losers sitting around in a bar. "Oh yeah, I used to be a trader, it's a tough racket." These are the new leads. These are the Glengarry leads. And to you, they're gold. And you don't get them. Because to give them to you is just throwing them away) It's very basic, and am just spelling it out for the noobs who lurk.
The problem with this - and I've lost 20k in one day because of this - is that your stops don't work after the bell. Stops offer some protection, but they don't make up for properly hedging your risk against extreme volatility.
Here is the chart today These Momentum/RSI/MA systems are quite simple and do well in strongly trending markets. However, in sideways to flat markets they fail. Today was epic. When it broke 1250 I increased position size from 3 to 5 SPU8 lots. Now that we have gone from ST overbot to ST oversold I think markets may pause and rally into Sep 11. My next option trade is to sell OCT SPX puts - possibly 1125 and lower. Chart attached.