Sold puts on $17 TRLG for October. Credit $0.55 Annualized % return.... 15% Company has excellent overall fundamentals. They dropped recently due to lowered current revenue for the quarter, due to discounting of their jeans product. Given their stong fundamentals, and no debt, I see this more of a temporary issue, (buying opportunity), and not a long term problem for them, as they are simply adapting to current market conditions. I don't see most of their competitors able to adapt to difficult market conditions as readily as they can. With the exception of their current inventory issue, which is being dealt with via discounting, I'm very impressed with their overall financial condition. Hence my strike of $17 and a 15% annualized return. I selected October for an expiration date, as I liked the L-T tech support I see in the $17 area, per the 5 year chart below, and a price of $17 is not offered for Sept. http://finance.yahoo.com/q/bc?s=TRLG&t=5y&l=on&z=l&q=b&c=
TRLG: (interesting trade) http://www.fool.com/investing/general/2012/08/01/why-true-religion-shares-plunged.aspx http://www.fool.com/investing/general/2012/08/02/true-religion-gets-low-time-to-bounce-back.aspx http://finance.yahoo.com/q/ks?s=TRLG+Key+Statistics http://investing.money.msn.com/investments/financial-statements?symbol=TRLG http://finance.yahoo.com/q/bc?s=TRLG&t=5y&l=off&z=l&q=l&c=^GSPC Trade 1 = sell October $17 put Trade 2 = sell Jan $15 put Trade 3 = Oct 17/13 bull put spread .................Trade 1..........Trade 2.......Trade 3 Premium........$55................$75..............$35 Cash Req......1645..............1425..............365 Yield.............3.34%...........5.26%...........9.6% Days...............78...............169................78 Ann..............15.6%...........11.36%..........45% Prob................79%.............80.6%..........79% Prob*Ann........12.3..............9.15...........35.6 Expectation.......NA...............NA............-14.23 1. Can't form the expectation on trade 1 & 2 because the bottom is open ended... and would require an integral with infinity as a limit. 2. Comparing Prob*Ann (as a proxy for expectation) statistics would indicate that the spread, over the long run, would average out to be a much better trade... even though the expectation of the spread is negative (which would imply that the expectation of trade 1&2, if we could compute them, have negative expectations also).
<<< 2. Comparing Prob*Ann (as a proxy for expectation) statistics would indicate that the spread, over the long run, would average out to be a much better trade... even though the expectation of the spread is negative (which would imply that the expectation of trade 1&2, if we could compute them, have negative expectations also). >>> The spread is a better % trade, but not a better dollar income trade,... if you assume similar potential cash risk in both trades,. You must be willing to risk considerably more cash via the spread, if you desire to earn a similar dollar amount, "per similar unit of time and strike".
"The spread is a better % trade, but not a better dollar income trade,... if you assume similar potential cash risk in both trades" Lets test that hypothesis: You are getting $55 for each unit... and risking $1645. The spread is getting $35 and risking $365. For the spread to get the $55 you are getting we would need 55/35 = 1.57 units for each unit of the original trade. Thus to get $55 I would need to risk (55/35)*365 = 573.6. Not nearly the 1645 you are risking. Now you said: "if you assume similar potential cash risk in both trades"... but that is just the point. The spread limits your risk which is why the cash requirement is so much lower. There is NOT similar potential cash risk in both trades which is why the spread is so much better. The naked put may seem better because you are getting all of your money up front without having to buy that annoying back-up position. What you really mean to say is: "I don't believe that the risk of $1645 is realistic. How many stocks go to zero??? " And I answer: "not too many... but some... and a lot more go down much more than you think is probable". So the 'real' risk is somewhere between $1645 and $365. But where ? If you have a good market and feel confident AND your stock is relatively resistant to market disasters..it's close to $365... if you have a bad market and feel unsure AND your stock is not resistant to market disasters... then it is closer to $1645. The only time I sell naked puts is when I really really want to own the stock at the strike involved... e.g. to sell calls and get dividends. http://blog.markettaker.com/2011/09/08/selling-puts-naked-or-as-a-spread/ http://www.amazon.com/Trading-Option-Greeks-Volatility-ebook/dp/B003NE620W/ref=dp_kinw_strp_1
<<< Now you said: "if you assume similar potential cash risk in both trades"... but that is just the point. The spread limits your risk which is why the cash requirement is so much lower. There is NOT similar potential cash risk in both trades which is why the spread is so much better. >>> First, I want to make it clear that I am not suggesting investors consider going naked over spreads. But I'm also not suggesting or agreeing, that spreads are a superior strategy over naked puts. I like spreads over naked, when a stock is volatile and/or in a volatile sector. I also like spreads over naked, when a stock is expensively priced, fundamentally unstable, or not near any kind of L-T tech support. I also prefer spreads over naked, for investors who are "trend followers" as a strategy. Those people don't care about any of the above. They just jump on the next hot stock that has "already" moved up. I also prefer spreads over naked for STORY investors. (FB being a recent example). But for investors who are picky about what companies they invest in, and picky about the value of its price, and picky about their fundamental health, and picky about selecting prices with L-T tech support, and picky about the companies ability to "recover" from a drop if a bad market takes it down, and picky about not using excessive margin, and so on..... then I think a naked approach is a reasonable one. I protect my cash BEFORE I initiate a trade. Spread traders prefer to protect their cash AFTER they initiate a trade. I protect my cash by being "picky". I do that because I don't want to be placed in a position, of having to sell for a loss, because my investment(s) are too expensive to buy, and i can't risk waiting for a recovery. Comparing a picky naked investor, to a not so picky protected spread trader,... I think the spread trader is more likely to earn less money during good times, and suffer a greater financial loss during difficult times. I think being a so-called protected spread trader, encourages many investors to take risks they should not take. Both in price selection, and in the amount of cash put at risk if the price drops. Since they can't buy all their stocks, they usually must close for a loss. To be continued....
I don't mean this as an insult, as i respect that you are willing to share your trades. And you obviously do some homework on them. But I think you may be an example of a spread trader not being very picky, because you think are "protected". But I think the extent of your protection may be questionable. While your strike prices are deep OTM, most of your stocks are trading at or near their all time highs, when your spreads are initiated. And while you have that deep OTM protection, due to the length of your contracts, you are exposing yourself to extra TIME RISK with "multiple earnings cycles" to worry about. And you get very little benefit of time decay, while exposing your trades to the risk of a spike in VIX and IV. While the spread helps to mitigate the negative affects of a spike in VIX if you wanted to close the trade, the help is only minimal, since your spreads are rather wide, and your time decay is rather minimal. A more narrow spread of 1 - 2 points would be more helpful in neutralizing a spike in VIX. So between your stocks trading near all time highs, your time risk of several months, multiple earnings cycles, little time decay, and wide spreads not being as helpful as a more narrow spread would be in protecting against a spike in VIX,... I'm not sure your spread strategy is a safe as you may think it is. Especially since, like most spread traders, due to the number of contracts and the high price of those stocks, you probably don't have the choice of buying many of your stocks that may temporarily drop. Thus, you must close them for a loss if you get nervous. Again, please don't consider this a personal attack, as I view it as merely a difference in opinion, and an enjoyable discussion, between 2 traders who are open and honest enough to share their strategies and trades in real time.
My brother used to be a boxer and as a young teen, I used to work 'in his corner' as we used to say. Needless to say that was a good many years ago. The reason I think of this is that when we were working up to a fight any suggestion that we would lose, that our strategy was wrong or that the other guy was better was verboten. We talked ourselves and each other up so that we thought we were the best in the world... and anybody who said otherwise was quickly put down. The reason many sports participants and especially boxers do this is that if you did otherwise you couldn't play. If you thought the other guy was going to smear you you couldn't get into the ring. http://www.youtube.com/watch?v=qxczlps5_bg Your extended apologia of the rightness of your methods (all without data or references) along with the circular ignoring of my points and misrepresentation of my methods reminds me of this approach. Trading IS a dangerous game and self doubt is hard on the stomach... and for some people, just like in boxing, takes them out of the game. So I won't continue the argument... it's obviously pointless. Viel Gluck in your trading... I have better things to do.
<<< The spread limits your risk which is why the cash requirement is so much lower. There is NOT similar potential cash risk in both trades which is why the spread is so much better. >>> OOPS. I forgot to actually adress the important point you stated above. And I wanted to point out that you are incorrect. The reason you are incorrect in many, if not most cases, is as follows: If the spread trader actually "set aside "the extra cash saved by doing a spread vs going naked on stock XYZ, that would be true. But instead, most spread traders will use the saved cash for doing yet another spread, on another stock. Just because the cash isn't used on the "same trade", does NOT mean they have reduced their cash exposure to the market. All they've done is move it into another spread trade. Thus, the spread trader will tend to put the same potential amount of cash at risk as a naked trader. The difference being, during difficult times, a naked trader, assuming he has not used super excessive margin, can buy all or most of his stocks, sell covered calls, collect dividends and wait for recovery. The spread trader, who was not even on margin, can not risk waiting for recovery, can not buy most of his stocks, and MUST close at least 2/3 of his trades for potentially massive losses. Spreads are terrific in "theory". Not so much in reality, when difficult times come.
you know put_master... i follow the gist of all of your posts in many threads.. and i appreciate them unlike Mr Surely trader here.. but managing risk can be very complex.. and a spread trader might just as well be prone to over spreading as you say..( not considering keeping enough reserves to rescue the trade) a naked trader might unknownly expose himself to tail risk in a company that is considered low risk.. (IE. very good future fundemental outlook) thats the thing.. its what you don't know that will kill you... So in theory both strategies have a very high value relative to what your doing.. as you say.. high vol maybe spreading is better.. better fundie's maybe a naked write is good.. but all of this falls back into this abstract idea of sellilng volatility for a price.. is the vol overpriced? is it not? that is the question .. Time risk, Tail risk, margin risk... is this an efficient use of locking up my capital.. my thoughts are always hedge for tail risk.. rare events aren't that rare.. way otm put backspread if you plan on holding a stock is a conservative way to keep from getting shut down in one play with a stock getting cut in half.. reducing position.. as you have said before diversifying out of correlation..