Quote from cactiman: It should have read, "But if I sold PUT SPREADS further out of the money over shorter periods of time, I'd probably only get credits of .25 per spread, and if there was a drawdown before those earlier expiration dates, I'd lose 75% of my total account value! What's the solution?" I don't trade Credit Spreads unless I get a 2/1 Risk/Reward ratio or better (this trade got a 1.33/1 ratio), and that's much harder to achieve since the $VIX has fallen. Even before the $VIX fell back, one had to add quite a bit of time to get such a ratio. Thus the need for 6-7 month out expiration dates on the GLD >>> I suggest you change your investment criteria. You are overly focused on risk/reward ratio, when you should be more focused on other criteria. Selling a spread 6 - 7 months out, with a mere 3% otm safety cushion, on a stock you can not possibly afford to buy, in an attempt to earn a super high annualized % return, on a trade with a low probability of being successful.... While GLD does have reasonable tech support in the area of your strike, so that's a positive criteria,.... but I'm not just talking about GLD. I'm refering to your overall strategy in general. If you set a more realistic annualized % return, you would be able to select strikes more otm, and thus have a higher probability of having a successful trade. Wasn't it you that said you wanted to earn about 13% return per month per trade??? And if you selected lower priced stocks and strikes, you could at least consider buying them for a period of time, instead of being forced to close for a loss. <<< As to naked puts, I've always heard you shouldn't sell them unless you are prepared to buy the underlying stock. >>> You can close a naked put any time you want. Buying is merely a choice. However, if you are closing a deteriorating stock, you may wish it were a spread. And if you are put the stock, you can sell it any time you want. Yes you will sell it for a partial loss, but at least you don't risk being wiped out if all your stocks dropped, as with credit spreads. It's one thing if this or that stock drops. In which case you may want to be in a spread with it's smaller dollar loss. But if all your stocks drop, isn't it better to own the depressed stocks than to be wiped out via a spread strategy? <<< The Naked Puts are used as a way to "get paid to wait" for the price to fall to a level you're willing to pay for the underlying. >>> You make it sound like that's a bad thing. It's a good thing. Even if you don't plan to buy the stocks, it's a nice way to pick a price you want to invest in. It's no different than with spreads. <<< I don't want to buy Stock or ETFs right now, and don't want to deal with the large margins required for Naked Puts either, so it's not an issue for me at this time. >>> The larger margin requirement is actually the reason I like naked puts over spreads. The smaller margin requirement of spreads, is the reason the average spread traders over leverage their accounts to insane levels of 10 times their account value. So the question is, would you rather deal with the restrictive issue of a higher margin requirement,... or would rather deal with the potential issues of actually being on higher margin?
PM: I suggest you change your investment criteria. You are overly focused on risk/reward ratio, when you should be more focused on other criteria. Selling a spread 6 - 7 months out, with a mere 3% otm safety cushion, on a stock you can not possibly afford to buy, in an attempt to earn a super high annualized % return, on a trade with a low probability of being successful.... While GLD does have reasonable tech support in the area of your strike, so that's a positive criteria,.... but I'm not just talking about GLD. I'm refering to your overall strategy in general. If you set a more realistic annualized % return, you would be able to select strikes more otm, and thus have a higher probability of having a successful trade. Wasn't it you that said you wanted to earn about 13% return per month per trade??? And if you selected lower priced stocks and strikes, you could at least consider buying them for a period of time, instead of being forced to close for a loss. Cman: The 13% per month was with Iron Condors (because of the double credit), but as I mentioned in an earlier post, I've gone off them a bit now. Don't like trying to call a top in an uptrend with the upper leg's Bear Call Spread, because I think it's a low probability trade. And betting on sideways movement in today's volatile markets is not very reliable either. I have won on Condors in the past, and should win on a few of them still out there, but after they expire I doubt I'll be opening any new ones for now. As to directional Credit Spreads, I still very much dislike risking $90 to make $10. I feel it's the main drawback of far OTM, shorter term Spread trades. You win 9 in a row and then lose it back with the 10th, due to market volatility? Not good. I think after my current Spreads expire I'll just use them when I can't buy a Call Option for a stock, at -2% to -3% of my assets. A stock like AAPL for instance. I've done very well with AAPL via Bull Put Spreads this year, but could never have purchased an AAPL Call with a high Delta within my cost restrictions. PM: You can close a naked put any time you want. Buying is merely a choice. However, if you are closing a deteriorating stock, you may wish it were a spread. And if you are put the stock, you can sell it any time you want. Yes you will sell it for a partial loss, but at least you don't risk being wiped out if all your stocks dropped, as with credit spreads. It's one thing if this or that stock drops. In which case you may want to be in a spread with it's smaller dollar loss. But if all your stocks drop, isn't it better to own the depressed stocks than to be wiped out via a spread strategy? Cman: Will keep this in mind after my account size grows a bit. Just can't afford to buy much stock right now. [Cman: "The Naked Puts are used as a way to 'get paid to wait' for the price to fall to a level you're willing to pay for the underlying."] PM: You make it sound like that's a bad thing. It's a good thing. Even if you don't plan to buy the stocks, it's a nice way to pick a price you want to invest in. It's no different than with spreads. Cman: No, I don't think it's a bad thing at all. I've heard of a trader who makes $250K per year just selling Puts for stocks which he never gets! Of course he must have quite an account size to pull that one off. PM: The larger margin requirement is actually the reason I like naked puts over spreads. The smaller margin requirement of spreads, is the reason the average spread traders over leverage their accounts to insane levels of 10 times their account value. So the question is, would you rather deal with the restrictive issue of a higher margin requirement,... or would rather deal with the potential issues of actually being on higher margin? Cman: I take your points about "what if" risk via Credit Spreads. But it should be less of an issue for me as I phase them out and get more into purchasing Calls. Anyway, thanks for all your time and thoughts. I know we see things from slightly different angles, but am still looking forward to more "head bumping" discussions in the future!
Quote from blueplayer: 1. The only way that the credit spread will have 100% loses with that fall is if the black swan ocurrs on expiration day around 1:00PM at least But for the sake of this discussion lets assume that anyway. >>> The swan could occur anytime during the contract, and the result would be 100% loss.... assuming it remained below your strike on expiration day. <<< 2. The fact that you are using margin to sell the naked puts, means that you will not have the required amount of money to fulfill any assignments in the contracts, it is called margin for a reason. That escape route is not an option at all in your scenario, so your only solution is to buy the contracts back. >>> According to Schwab, because I didn't have an actual stock in mind to plug into their computers, it was a somewhat general review. But they said if the stock dropped under $22, I'd only need to sell a few hundred shares out of 10,000. Perhaps several hundred. They also said I could sell covered calls to generate income instead of selling any stock. And I forgot to bring up the issue, but I also collected premium when i sold the puts. That becomes cash when the stocks are put to me. So bottom line is, if the stock dropped to 21, I would be at max margin with covered calls or have to sell about 10% of my theoretical shares.. But my account would not be 100% wiped out as in the case of the spread trader. Or did I explain the theoretical example to them incorrectly? Either way, i used an example of being on 40% margin, which was a bit excessive. Being on less margin would have been a more realistic example. A 40% margin is using $250,000 worth of stock on a $100,000 account. But again, either way, the naked put seller is NOT wiped out. The spread trader is. Or am I mistaken?
<<< Either way, i used an example of being on 40% margin, which was a bit excessive. Being on less margin would have been a more realistic example. >>> To be at 40% margin, according to Scwhab, would mean that traders $100,000 account is using $250,000 dollars worth of stock. I should have used a more reaiistic example.
Sorry, but any trades shared days, weeks, or months in hindsite, vs real time, don't count in my book. Just out of curiousty, what is the annualized % return on the trades posted?
I only have this info. I'll let you and oldnemisis discuss it further. It seems you have issues... But would someone really just sit around and make this stuff up? Why? That gets into a weird areas.....
Cman: <<< The 13% per month was with Iron Condors (because of the double credit), but as I mentioned in an earlier post, I've gone off them a bit now. >>> But isn't that the equivalent of earning a 6.5% return via a credit spread? That is a goal of trying to earn close to 80% a year. That seems a bit unrealistic. Bottom line.... the higher your % goal, the lower the probability of actually achieving it. Set a goal of earning in the range of 20 - 25%, and you have a much higher probability of actually achieving it. My personal goal used to be in the 20 - 25% range. But with the VIX being so much lower these days, I adjusted my goal to adapt to current market conditions. Hence, my current goal is in the teens (13 - 19). I'm not happy about it, but it's better than putting my account at risk of severe damage, by not adapting and adjusting to current market conditions.
Do you subscribe to the "Buy Options when the $VIX is low, Sell Options when the $VIX is high" theory?
I'm not suggesting the trades are real or fake. I just find it questionable when traders are willing to share their trades. But only in hindsite. Not in real time. While those trades are still active, I have no idea when they were intiated or what credits were received. Remember how Danshirley would just make up trades. And when questioned about those credits, he responded by simply putting people on ignore, or saying it was just a theoretical "what if" trade. Something just for study. All I'm saying is, if a poster is willing to share trades in hindsite, then he should be willing to share them in real time.... that day.