I suggest you re-read all my posts on the subject, beginning from page one. If the strategy you are using to trade funds from your account is credit spreads,.... then based on your comments above,....you actually have NO IDEA of the risks you are taking with your accounts cash and value. But that is why i am having this discussion. To inform traders like you of the risks you are taking. And just for the record, I'm NOT saying don't take risks, and I'm not saying don't sell credit spreads. My discussion is all about merely informing spread traders of the actual risks they are taking, so they can invest in credit spreads as informed and safely as possible. You really can not "manage risk", if you are unaware of the risks that need to be managed. And the risk I am refering to is MARGIN LEVERAGE.
Sold puts on $31 LRCX for Oct. Credit $0.60 otm safety cushion 11% Annualized % return........ 14% Solid company. FInancailly healthy. Good value at my $31 strike, with a BE at $30.40. Tech support at $30 per the 5 year chart below: http://finance.yahoo.com/q/bc?s=LRCX&t=5y&l=on&z=l&q=b&c= If/when stock drops closer to $33, I will sell a $30 strike for Dec.
You should turn that into a Put spread. Buy the 28 Put @ $0.25 for "insurance" against a sharp drop. ---------------------
In Theory World, which is connected to Fantasy Land by way of a gold filled path, lined with candy trees and bubble gum bushes,..... you are correct. In the real world, 98% of credit spread investors will invest in credit spreads using the potential for margin leverage. MASSIVE MARGIN LEVERAGE
Insurance is never a bad idea. I decided to spend time analyzing the stock as my form of insurance. My main risk is, the earnings come out for LRCX on Oct 15, shortly before the trade expires. If they miss, the stock could drop. Hopefully the L-T support at $30 will hold. If not, the stock can drop to the $27 area, and i will earn a similar dollar and % return income,... selling a covered call at a 30 or 31 strike. Thus, I have no issues with the stock dropping another 20 - 22% from it's current price. If it does, I'll earn similar income on a Dec covered call. Hopefully the VIX (IV) will be higher at that time,.... if the 20% drop occurs.
Putmaster,how long have you been trading? Not for nothing,you real "risk" is if the stock should rally 2 weekly ATR's in your face. Stop maximising the likelyhood of making money and put on positions tha make real money if you are right.
You can't write outside of a margin account. A margin req is applied to naked short positions; initial and variation. 100 shares of GOOG runs $68,200 in cash and 34,100 overnight. Shorting the 680 Sep put (ATM) runs $14,500 in req for 45-deltas. WTF would you call that? No, the premium is not leveraged, but the notional risk certainly IS leveraged and margined.