I think the TskTsk summary above states it perfectly. If someone uses excessive leverage, if they invest in a stock at a price that is over valued, if they select prices that have shown no previous tech support, if they over concentrate their cash, if they don't diversify among stocks and sectors, if they don't manage risk by closing bad trades, if their main investment criteria is simply to invest in the "hot" or the "story" stock of the day, if they select stocks with massive debt, puny earnings, insider selling, ect..... Then don't blame the strategy. Blame the moron implimenting it. My issue with credit spreads is, even if you are NOT a moron,... because of the MASSIVE 10:1 or greater margin leverage you get to use free of charge, that ability promotes reckless behavior in undisciplined investors. Most naked put investors, even if they are also reckless, are unlikely to use much more than 2:1 leverage..... as they leave some room for price fluctuations. And 3:1 margin is barely even possible. Compare the potential 2:1 naked put leverage, with the 10:1 or greater, via credit spreads. Whether one uses a strategy of naked puts, credit spreads, or what ever,.... the problem is not the strategy. It's the potential moron implimenting it. Taking a loss doesn't make you a moron, anymore than making a profit makes you a genius. Whether one is a moron or a genius is determined by how intelligently they set up their strategies, and how disciplined they are, when it's time to manage that risk. And frankly, the best time to manage your risk, is before you need to. That being..... before you initiate the trade.
Folks, I am now exclusively using credit spreads.... looking at other strategies and using a "play" to test. I am focused on RUT and NDX and trade far OTM... delta of less then 5... no more then 45 days out. I do plan adjustment strategies if certain levels are met... Delta of 20ish. And I do watch them closely and piss off my wife by spending too much time watching CNBC. Results have been very good (knock on wood)
Your 6 week contract length is reasonable, as you will start benefiting form some "noticeable" time decay in a reasonable period of time. Danshirley's spreads that go out 5 - 7 months don't get any noticeable theta benefit for waaaay to long. What type of strike gaps do you use? What is your annualized % return goal, on a per trade basis? Results are usually good for spreads, as long as the market doesn't suddenly tank,.... as when we had the flash crash. Or gradually tank over a period of a week or two,... as when the S+P downgraded the USA debt, ect. If it does, you'll have plenty more free time to spend talking with your wife. When you talk about adjustments, should I assume you are talking about when the spreads are doing well? When things are not going well, the only adjustment you can make is closing them down. I agree with your wife about watching CNBC. Try FBN.... Fox Business News. They have better discussions, analysis, guest interviews, and most of the women are hotter.
ATTENTION ATTENTION ATTENTION ATTENTION I am going to make a concession to Put_master and say on one point he is correct. EEK!!!!! Put_master and I look at short puts from such different angles that we cannot agree on anything. When he kept tauting that I was 'overleveraged' by using my put spreads I simply couldn't understand what he is talking about so I started a search. My margin requirement for a bull put spread is the difference between the strikes and thus I am covered for my maximum risk....am I not??? There is one caveat and this is where he and I differ the most. That caveat is if I am put to my short strike. I would need much more money to buy the stock than my margin allows for. Here is a pretty complete discussion of this issue on this board: http://www.elitetrader.com/vb/showthread.php?threadid=213026&perpage=6&pagenumber=1 i.e. IF I am put AND I have maxed out my money by margining bull put spreads I will not have enough money to cover the margin on the stock . Let me quote from the above thread: "If the short put is exercised early then you would need to meet the margin requirement on holding the long stock, assuming you would actually want to continue to hold it. If you close out your position right after the exercise then you don't really need the full amount. That is, you get assigned and you don't have enough funds in the account, you get a margin call, you close out the stock position and the problem is solved." I have never thought of this as a risk since, like most people, I never would go into closing with one end of my spread exposed. It is one of the prime directives of doing bull put spreads. I thought that was understood... but PM doesn't do spreads so it was not understood by him. Miscommunication. Put_master does naked short puts, so the risk of being put is something he continually has to consider. I do bull put spreads (as well as a lot of other things) with the intent of never ever being put or even letting myself get into the position of being put... but if I AM put (I checked with my two brokers) my broker would immediately sell the stock and the margin problem is nill. As a matter of fact both my brokers said if I have a spread and AM put they automatically liquidate the position (even if I have the money to hold the stock) since they assume, like me, that my intent on doing the spread was NOT to hold the stock... not even for a minute. Now if I dealt in illiquid stocks (I don't), and/or we are in the midst of a major meltdown... I could have a major problem in this direction... what if my broker can't sell the stock?? AND what if I have maxed out my account and I don't have the money to hold the stock I have been put???? Both my brokers say that is a 'remote possibility', but they both also say they would then begin to liquidate my account at market until I was even. NOT A PRETTY PICTURE. This is one way the market can explode like a bomb. NOW: Put_master keeps attributing to me a strategy I don't follow. He says I max out my account on bull put spread margin. I never do that. My portfolio has a good deal of counter-market holdings... in the form of treasuries, bonds, SSF's etc. Also I have a balance of bear spreads to counter the bull spreads. e.g. right now I have bear call spreads on LOW, SPLS as well as a Bull call spread on VXX and one on SH. I try to make the delta of my portfolio zero (or close to it) at all times... right now I am shooting for a slightly negative delta in anticipation of a negative Fall. e.g. when the market fell yesterday my account went up in net value. Good. Sooo.... Put_master is right to say I shouldn't max out my account on bull put margin because I would be killed in a crash. But then this is only the first directive of adequate diversification... never max out on any holding OR strategy... you could be killed if the market goes to that holding or strategy's nightmare. Now here is another point I will conceed to PUT_Master: He says that my margin of safety in my being OTM is illusory because I could never afford to allow a stock to cross that OTM boundary but would have to do something before the stock reached by short strike. This is true. If my stock had a disaster and started to plunge I would not wait for it to get to my short strike but would close the spread before hand... in order to avoid all of the above from happening. So that 'safety range' is a function of how scared I am. Hows that???? BTW: I HAVE repeatedly said my thread was trade discovery... not portfolio management. Here we are talking portfolio management, and I usually don't talk portfolio management because it is a complex subject and there is much more to consider than just this. Let me close with this: I completely disagree with put_master's short put philosophy for one reason: In the ordinary course of events A stock that has dropped and is put to me is not one I want to hold... no matter HOW well I think I have researched the company.
Am I missing something here? Why would someone allocate 100% of their capital to credit spreads? If you are trying to compare it to a naked position wouldn't you look at how many credit spreads you need to equal the naked short? If his short gets exercised he would get a margin call and they would simply sell out the stock at market price which would be his net loss. They aren't going to require him to come up with millions of dollars and leave the stock in his account. Don't get me wrong, every strategy has it's pros and cons but I don't understand where you are coming from regarding credit spreads. Last thing, I know many professional traders who make their living off verticals both credit and debit. Having your full portfolio maxed out with 5 credit spreads is insane.
Sold put on $10 GLW for Nov. Credit $0.25 Annualized % return....11% The % return is below my usual "minimum goal" of 13%, but I'm making the exception as I like the stock and strike, and don't want to risk missing the trade hoping for an extra $0.05. And besides, if i wait a week or two, and end up getting the same credit, that would have then calculated out to a higher % return, due to fewer days remaining on the same Nov contract. So I might as well grab it now. As a side note.... I already have an active $11 GLW for Sept, that pays a higher % return. Hence the reason i went to Nov and a lower strike. Good company, reasonably valued and financially healthy. I probably listed the $11 GLW on Ryan's original MY OPTION TRADE thread weeks ago.
QQQ Oct. 68 put can be sold for 1.76 the 68/65 bull put spread can be sold for .89 which is over half the value of going naked. After AAPL dropped from earnings if you sold a 570 naked call and I sold 10 570-575 bear call spreads who do you think would be better off today?
GLW: http://finance.yahoo.com/news/corning-reports-line-191444467.html http://seekingalpha.com/article/316699-corning-is-making-a-big-bet-on-life-sciences http://finance.yahoo.com/q/ks?s=GLW+Key+Statistics http://finance.yahoo.com/q/bc?s=GLW&t=5y&l=on&z=l&q=l&c= Trade: Nov 10 short put for $25 Yield = 25/1000 = .025% in 84 days or 11% annualized Prob = 85% Expectation= UNK Daily earnings = 25/84 = .30 a day for $1000 Trade: Nov 10/5 bull put spread for a net credit of $21 Yield = 21/479 = 4.38% in 84 days or 19% annualized Prob = 85% Expectation = .85(21) - .01(479) - .14(238) = 17.85 - 4.8 - 33.32 = -20 Daily Earnings = 21/84 = .25 a day for $479 Trade: Jan 10/5 bull put spread for a net credit of $38 Yield = 38/462 = 8.2% in 147 days or 20% annualized Prob = 77% Expectation = .77(38) - .01(462) - .22(231) = 29.26 - 4.6 - 50.82 = -26 Daily earnings = 38/147 = .26 a day for 462 Spread is a better yield. The long term spread avoids multiple transaction costs to get the longer term yield. The longer term spread earns the same per day of exposure as the short term spread... without the extra transaction costs. I don't like any of em... negative expectations plus I think the up-coming fight over the 'Fiscal Cliff' will put equities down. Recognize that the negative expectations are part and parcel of the low Implied Volatility... we aren't getting paid enough for puts to make selling them worth while. That's what a negative expectation means I used to work for Corning. I was VP of Information Services at what is now COVANCE when it was acquired, and then spun off by Corning http://en.wikipedia.org/wiki/Covance