Hi, I have been buying bull-puts for stocks trending down and bear-calls for stocks trending up at 1.2 SD with > 30 days expiry. Some of them have been assigned. These stocks have reasonable liquidity. What is the best strategy to handle the assignments? a) Close them out and take an immediate loss. b) Close them out by writing ATM calls for long assignments and puts for short assignments in the next expiry date. c) Continue believing in mean reversion principles and write covered calls for long assignments and covered puts for short assignments. Thanks!
I presume you mean *selling* bull puts since you're getting assigned (and you're bullish with puts)... I don't have any hard rules for it. Usually I have the other side of the spread still open, and I just let that exercise since it usually is well in the money too... The only time I'll go naked is on stuff I'd invest in anyway at a strike I'm happy to pay, so I just move cash into trading account and shares into investing account. Sometimes I dump it immediately. No right or wrong way to do it...just whatever makes sense for each position
Thanks for the response beerntrading. In IBKR my bull put spreads are shown as a "Buy" - for instance, on an order like this on ESRX Short $55 Put for June 2017, and, Long $52.5 Put for the same expiry. ...and so I called this a "Buy" too. Is that incorrect? And just to make the question more clear, the assignments have occurred as the price of the stock was in between the short and the long at expiry. So there is no other leg of the spread available. In my previous long assignment, I had made some money with a series of covered calls and a protective put. But this time, I am losing heavily, especially on one of the shorts that got assigned (WYNN) which seems to be overbought. So I was curious to know, should I bite the bullet and close out (buy-back) WYNN? For generating consistent income, I am trying to be fully invested in options with appropriate position sizing - without 'holding' long / short stocks - and keep rolling cash. What would be the returns that I can expect with 1.5 SD on bull-puts and bear-spreads?
Well, that *should* be a credit spread--if you pay the outside of the BxA spread though, it'd be a debit (and a guaranteed loser). And weather to hold or dump WYNN depends on your time frame, risk tolerance, and opinion of the stock (and if that rather substantial capital could be better used elsewhere)...
This is the lesson I learned after paying my tuitions: Unless the underlying is one I wanted in my long term portfolio, I just got out before assignment, limited my loss and moved on. I learned to view each trade as a stand alone trade, any further actions like roll, etc. should be view as a separate trade that should stand on its own merits. Usually things got ugly if you have to figure options a), b), c)... pekelo had a series of excellent posts advising me on how to deal with selling put, got assigned and then selling covered calls and the pitfalls/risks of doing that. Good luck to you and best wishes.
Your interaction with Pekelo was enlightening. Thanks for guiding me to it, Ironchef. Agree with your point on looking at each trade as a stand-alone. I started off writing nakeds. Burnt my fingers with margin calls. The "tuition" helped me understand the importance of risk management. And so branched to spreads. Pekelo's principles of ... writing calls after a rally writing cash-secured puts (CSPs) after a sell-off choosing underlying with: big cap, low-beta, slow-moving but good dividend paying stocks with side-ways or upwardish movements rolling covered-calls and alternating between covered-calls / cash-secured puts on call-off / assignment of the underlying - especially after abnormal movements ...makes perfect sense. I am slowly realizing the following from my journey so far: When assigned, being long is better than being short. (I am still not used to thinking in reverse with shorts - and so am having trouble with WYNN). One advantage I see being long is dividends. Writing puts (& bull-puts) has produced more winners than writing calls over the 7 months. (I remember reading somewhere that statistically writing puts is a better strategy than writing calls due to volatility skew. Is that true?) The broker's inbuilt risk management can be used to "protect" me from foolishness. For instance, I write trades upto 50% of Net Liquidation minus initial margin to get me a remaining margin. with a max defined loss of 1% of remaining margin per position Any inputs to sharpen these are welcome The whole exercise of selection, evaluation, ordering, recording and analyzing is very painful and time consuming. Makes me wonder how to speed things up.
I am new to options trading (only doing it since 2013) so it is just a non professional opinion: 1. Writing puts is a bullish bet, in a bull market like we are having now, it should produce more winners. Even in the long run the stock market has an up bias so writing puts should give positive results. However, you have to compare the results with buy and hold the underlying, what the pros at ET called "risk adjusted returns". 2. There is something call the risk premium - IV is generally > HV (historical volatility, the standard deviation of the underlying itself). But I don't really know whether it produces real "excess" returns. Trading options requires a lot of work and I personally haven't found any easy tools to speed up the analysis so I am in the same boat as you. Regards,