I sell slightly out of the money puts every month. I do it on quality stocks I wouldn't mind owning at those lower prices. My question is, when do you guys take your profits and close the position? I have a bunch of May puts that are now way out of the money. A lot of people subscribe to the theory that you close your position once you've made 80-85% of the premium not to risk a catastrophic event. If I do that though, I'd be leaving a lot of money on the table every month. Those $0.10 - $0.15 options do add up. Just interested to see what different strategies people use. Thanks.
Losses add up too. Better to leave $0.15 on the table then steamrolled over if the market reverses hard. I know you are willing to own these stocks but no need to have them forced down your throat if the stock is dropping fast.
1) It's good to offset short-option positions that have lost 80%-90% of their value. At that point, you're "risking a lot to make a little". 2) The "nickels and dimes" that you believe you are missing out on still carry a lot of risk all of the time. 3) If you are concerned about catastrophic risk, you should reduce your position size on outrights or consider trading option-spreads instead if you want to sleep better.
Coach offered a good answer from a risk viewpoint. In terms of profit, wouldn't it make sense to close your current 10 to 15 cent-ers and open some new ones with higher premiums on other stocks that meet your criteria?
It's unanimous so far. Holding out for those last couple of nickels is a gamble, pure and simple. Why would you want to do it? And especially with more than two weeks remaining before the options expire. I'm with SPIN on this - can't you find a position in which you can earn more than a nickel per week? Let someone else have the risk and reward for the last dime. Not you. Mark
Spin and Mark raises a good point that at $0.15 it is time to look at the position like a new one and make a determination whether it is better to go in with a $0.15 reward for that risk or better allocate your resources and risk elsewhere. I think most of the time, as Mark pointed out, you will find a better return in a new position for the same risk more or less.
Thank you all for the replies. To those who say to close those positions and look for new ones, I'd love to do that. But the closer you get to expiration, the harder it is to find a decent premium without being closer to the money (and hence more risk).
1) Look at your open position everyday as if you are about to make that new trade, if you wont make that new trade, then close your position. Question, will you write a call/put that has only $0.15 premium with 2 weeks left? If the answer is yes, then leave it open, otherwise close it. 2) You said you are just writing cash covered contracts with the intention to buy the underlying if it goes itm. Then why are you afraid to be "closer" to the money? If you want to buy the stock, you suppose to write atm. 3) There is nothing wrong with holding cash, a lot of option writers think you HAVE to have an open position every sec of the day to get that theta. But keep in mind underlying movement is still the key driver of the option price, if you are having your doubt about the current underlying price/technicals, dont force yourself to write a call just for the sake of having something open to gain that theta.
Usually, I have a limit as to how much "heat" is the portfolio. Certainly closing something out for .10 - 0.15 removes a lot of heat and frees up capital to do other things with. That being said, how many days to expiry matters to me. This is the "event risk horizon." If the stock has gone waaay in your favor but there's still 20 days to expiry (in other words if delta did all the heavy lifting) I'll buy it back at 80% for sure and maybe even more. If the option has 5 days to go .. and things look safe ... if it is an ETF ... I'll just let her slide and try to buy it back commission free for .05 or less! (ToS)
I close out my positions once I am satisfied with my profit, usually buy to close for like 10-20 cents