What scenario would cause the buyer to execute an early exercise and what would it mean to the seller of the ITM who is still holding the short position? Thanks Again.
I have an account with Scottrade and I sell puts in it, you may just not have enough equity in your account to be approved. A naked put is a limited risk position, with exactly the same risk profile as a covered call, but lower transaction costs (one trade instead of two). Ex.... to put it simply, if you sell a WalMart 45 put, if it is exercised or expires in the money, you will then own 100 shares of Wal Mart at 45 which you will have to pay for at $45/share, a maximum risk of $4500 if the stock is worth $0 at the time your options expire. In reality, a more likely and realistic loss-scenario is that at expiration, WalMart stock might be selling for $40, but it will be "put" to you at $45, so even though you will be forced to buy it for $4500, it is now only worth $4000, so you are in the red for $500 (less whatever you collected in premium from selling the option). A naked CALL has theoretically unlimited risk, however, and is harder to get approved to write naked. Jessie
What level? Thinkorswim.com has no level for option trading. Yes, you can sell naked put. Yes you can sell naked call. You can trade whatever option strategy you want as long you have the money to back it up. Free live data feed. Free top rated desk top application trading software. Free Tech support. Free seminar. They will match anybody's commission rate.
I am not saying the market is bearish "now". This is the problem: the market has been one way for the past 6 months. Problem is you never know when the next bear cycle will come. When it comes to you, the question is "can you still make money ?". The answer could very well be "yes", but right now you still don't know because you have experienced a bull market only. Find out if your strategies holds during the next bear market to come, and you'll know more about if it is time to go leveraged. The way I read your posts, and I mean no disrespect in saying this, it seems to me that you could use a few more months of trading the underlying. Use this time to do serious testing on options.
None taken. I appreciate your advice. I am thinking about applying for a margin account so I can do short sells, which I have never done before (and quite honestly, scare me). This is probably important for being profitable in a bear market, no?
I looked up the Scottrade website and I noticed their commissions on options is $7.00 trade fee plus $1.25 per option contract. Most newby option traders start out only buying 1 option contract at a time until they get a feel for the the "in's and out's" of option trading. Here is the problem with that (example): You buy option ABC for 1.60 and sell it 2.00. On the surface it looks like you made a +25% gain on your option trade. But in reality: $160.00 cost of option contract. $ 8.25 buy commission. $ 8.25 sell commission. $176.50 total cost $200.00 sell price. $ 23.50 net profit That's a +14.68% net profit on your $160 investment. Here is Interactive Brokers rate: $160.00 cost of option contract. $ 1.00 buy commission. $ 1.00 sell commission. $ 162.00 total cost. $ 200.00 sell price. $ 38.00 net profit. That's a +23.75% net profit on your $160 investment. That is a hugh difference. In option trading you need every edge you can find, because of bid to ask spreads, time decay of the premium value....etc.. On the other end of the trade, you have to draw a line in the sand and have stop losses on these options trades. You simply cannot have total losses, or near total losses on your option trade losers and expect to make up for it with +25% winners. So lets say you decide to have a +25% profit goal or a -25% stop loss on these option trades. With Scottrade, if you setup a -25% stop loss, the commmision charges will make the actual net loss -35%. With I.B. the same -25% stop loss would be a net loss of -26%. Another feature with I.B. that is great for newbies and experienced traders, is the feature called a "Bracket Order." Lets say you want to buy the ABC option for 1.60 and sell it for 2.00 (+25%) and also run a -25% stop loss. A bracket order does all three: Buy/Sell/Stop in one click of the mouse and you can walk away and go about your business. This is near total automation. This is just a few things to think about. Jeff
Jeff, Do you work for IB? ;-) I was actually thinking about setting up an account there, but IIRC there are maintenance fees that Scottrade does not have. I'll have to look again later, but yeah ... the Scottrade commissions aren't the best around, but certainly not bad to start with, especially when trading relatively low volume.
No I do not work for I.B., but I am willing to bet you if you ran a survey poll for traders with 4 or more years experience trading, at least 50% of those traders would say their broker is I.B. The monthly account fee is only $10. You will make up for that with one option trade compared to Scottrade (look at my example again in my last post). I.B. gives you a live trade station that is actually displaying what is happening in with all markets active real time. Orders are routed to any of several exchanges. You look at the live ask price, click the ask and you own in a split second. You look at the live bid price, click the bid and its usually sold in a split second. Automated 'Bracket Orders" (buy/sell/stop all in one order) require no attention at all. You walk away and let the tradestation do your job for you. That removes human error and human emotion from the trade. I have used them since 2000. I wouldn't even consider using a different broker. Jeff
IB is fairly good yes, definitely one you should consider. I used them for some time, then had to close my account with them for compliance reasons in Hong-Kong (my company doesn't authorize having an account with a HK broker). I closed my account reluctantly.