I disagree with this. First, this strategy does not hinge on the stock being in an uptrend at all; it only assumes that it is not in a very sharp downtrend. It will be profitable also if the stock moves sideways (e.g., NVIDIA) or even goes down as long as it doesn't go beyond your strike price minus the premium received; this happens the vast majority of times if you select the right strike price. Second, this strategy actually reduces losses when compared with buying the stock outright, because you collect premium and your losses are strictly smaller no matter how the underlying goes. (However, as you correctly point out, it also limits your gains when the stock is on a very rapid rise, but this is often not the case.) You can think of this method as using a smart limit buy order: you buy the stock when the price goes down by a certain amount, and you get a premium irrespective of whether your order fills or not. (Of course it is not exactly the same because you could cancel a limit order any time but once you enter the trade you need to buy the put back if you want out.) Your third paragraph does not make sense: the only time you will be buying stock is when the price has gone down by a lot, much below the market price when you entered the trade, not above as you seem to imply. This is a good time to buy the stock if you think it's a normal drop and it's not going to collapse indefinitely. I don't think this is an inefficient strategy at all, as long as you find stocks whose implied volatility is high and overrated, or simply stocks you'd like to buy at a cheap price. I have been using a similar strategy since last year with good returns (70% in 8 months). Its main problem is that the drawdown can be big when the whole market goes down (e.g., in September) because even if the puts you sold are still out of the money, increases in volatility drive the sold puts' prices up faster, which results in a temporarily lower net account value. Thus you incur more risk of getting a margin call in those times.
Theoretically, that's true, but I do CC's and stock-sub CC's ALL the time. In my experience, fills are much easier selling OTM options (much narrower spreads) and selling calls in general (greater liquidity on the target stocks). Now, if you want to sell ITM CC's then you're probably better off for the same reason with naked puts.
Yes if you know your risk then is ok. I do it on put so i know my risk. I try not to go over 10% on any single position so if i am wrong and the stock go burst i am down 10%. It will be very painful but i will still be in the game tomorrow
But the "unlimited upside" risk should be priced into the call you sell, compensating you for that. And such upside risk should be limited anyways because you would have to be NUTS to go all in on one stock or even a few stocks. If you are writing options on 100 different stocks even a Gamestop type event would probably just be a small drop in the bucket.
Fine the strategy will help you a bit when the stock has moved down by less than the premium collected by selling the call but for that, you would need to like you said have a stock that has a high IV or use a low strike to be able to earn a high enough of a premium. Then if that's the case, if the stock has a high IV then chances are, it could still move a lot, down or up and assume that the stock moves up, then you are still cutting yourself off from a potentially huge profit by having the underlying being called away by the assignment and it would be even worse if you used a low strike. So fine this strategy really hinges more on the stock doesn't move a lot while having a high IV, i.e. a mispriced IV, but even for option strategies that hinge on mispriced IV, there are far more option strategies that will exploit this lot more efficiently.
I certaintly do not agree on this. If you have a short straddle on gamestop when it is at $20. Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23. Of course it could be hindsight that we shouldnt sell straddle on gme at 20 strike. Just not for me. I will stick to what i am doing and what has make money for me. I may loss a bit of extra premium but i sleep better at night It is just me.
You do not know what you are doing. Speak about this with as many believable people as you can. Good you are posting, hopefully for input. Best wishes.
"Just 1 contract at the peak of 493 you would have loss 450 per contract or 45k assuming the straddle can be sold for $23." Wait, what? you say ONE CONTRACT at peak 493 you would have lost 450 PER CONTRACT, which makes sense, but they you say or 45k? How do you get to 45k total when you say only one contract and the loss is 450 per contract?
options is trade in multiple of 100 shares you know that right? 1 contract of options = 100 shares when assign or exercise so when you sell a straddle assuming you manage to sell the straddle for $23 and gme shoot to 493 you have lose $450 * 100 shares $45000 just for trading 1 contract of GME naked call you can sell it as 1 of the black swam or extreme event but GME give me a wake up call. The short sequeeze on it is worse than a market crash. market crash the market tumble 30% (when you have long position) but a short sequeeze go up a thousand% when it is against you (that should serve as a wake up call) and talking about diversification the more you diversified the more chance of a short sequeeze occur again. Imagine if you have a 100 stocks and 1 of this happen to be in for another short sequeeze, I couldnt imagine it