Hi all. As you can see, I am new. Currently, I'm learning and struggling most with terminology and how things work. I've already been hitting the books on all of this; these questions are just a result of what all I've learned. I would appreciate it and be very grateful if one or more people could help me with my list of questions that I've developed while studying. I'm sure some will sound very stupid, but I apologize in advance. 1. If, when selling put options, the stock you are selling put options on, starts going below the strike price (thus, you are losing the bet), can you cancel and get out with most of your money, or are you forced to wait for the put option buyer to exercise the option and then walk away with whatever you walk away with? Essentially, can a stop loss be set for a seller when selling put options? If so, is there any punishment from the seller's broker? 2. When people use margin when selling put options, how much more are their gains than if they were cash-secured? (I know it depends, but how much can it generally add?) 3. Can a put option seller be limited by having too much capital? For example, Warren Buffett has too much money to successfully invest in small cap stocks. Does he also have too much money to successfully sell put options with? Could someone using, say, $200,0000,000 sell put options on a few stocks and get just as good of a return percentage as someone using $200,000? If there's a general approximate capital limit, about how much is it? 4. So, if I understand correctly, without margin, a put option seller must have enough money in their account to pay for 100 shares of the stock they are selling put options on, for every one put contract they sell? Someone selling options at a $149 strike price must have at least $14,900 freed up and dedicated until the end of the option comes? 5. What's the difference between selling cash-secured put options and selling put options using margin if you have to have the money for buying the stock in both scenarios (in one as cash, and in the other at least in collateral)? Is the only difference an increase in gains and the fact that you can invest the collateral in other ways when using margin? 6. Is it true that selling put options either cash-secured or with margin is largely unprofitable to your total investment capital in that you always have to have an increasing cash pile on reserve for the put option buyer? For example, in order to make $10,000 in selling put options, you would need approximately $1,000,000 (or $100,000?) to secure it, and once you worked your way up to making $100,000 in selling put options, you would need approximately $10,000,000 (or $1,000,000?) to secure it. The proportion of your return vs. the cash or collateral needed to cover you in case the price falls below the strike price and the buyer exercises the option. With or without margin, the more money you make from selling put options, if you reinvest all that money in selling more put options, the more money you will need to have reserved for the put option buyer in case the stock price goes below the strike price? If someone was looking to make $10,000 off of selling put options, wouldn't they need to have a very high amount of money (like $1,000,000+) “locked up” for that time being, and even more next time? Essentially, if I was looking to invest $100,000, I could only make money on a small fraction of it with selling put options? Am I wrong? Being completely new to understanding options in themselves, I was under the impression that you could make money based off of at least 50% of your capital or so when selling put options. I know I sound stupid, but I'm very new to this. Please tell me what's wrong or right about my understanding. 7. How common is it to make 4, 5, or 6+ percent consistently per month from selling cash-secured put options without margin or even with margin? What's a good, typical range of expected percentage return for selling put options with margin and without margin? 8. What typical returns are offered up front when “shopping” for put options to sell on a stock? For example, you're deciding to sell options on XYZ stock. When looking at the list of strike prices, time spans, etc. available, what's the usual highest return a put seller can choose to get up front? (With there of course being no guarantee they will keep that.) I've read that 2% per month is “reasonable,” but I've never read about the “upper limit” percentage return commonly available (and for what time span). Thank you.
This ET board used to have many options writers, almost dominated this whole options forum, in the last several years! I think, maybe they all retired by now, after selling enough options for so long!
You're starting down a very dangerous path selling puts, especially as a newbie. You will be doing yourself a big favor by focusing on another strategy. The math of selling puts often looks attractive, until the underlying tanks, ties up your capital, and leaves you with a load of stock that you now don't want. The strategy of selling puts is often known as "Picking up nickles in front of a steam roller", and that's for good reason. Good luck.
No, I completely understand. My main focus has been Buffett/Lynch type buy and hold investing for a while. I'm now starting to branch out and take interest in other, additional things. I'm just trying to clarify if I understand what I've studied so far and get answers to my questions. I know I would need years more experience before I ventured close to options strategies, but I definitely want to have the knowledge and increase it as well.
Most option strategies require a directional bet on the underlying stock or index. Thus, until and unless you can really nail a system that gives you consistent profits on the underlying, you are better off not to be sucked into trading options strategies. But your response indicates that you are in fact taking a slow-and-easy approach to learning, which is a good way to go. It will keep you in the game long enough to have learned lessons that aren't so expensive.
Here's another IMO interesting question for beginners in options selling: Can options writing (ie. options selling) be made on margin? (for long term that is, ie. upto 1 year) (OP's Q2 + Q4-Q7 have all to do with margin, implying it is possible to sell options on margin; I just wanted to be sure, because somewhere I had read that margin can't be used for options, meaning only the own cash part of the margin acct can be used. Not sure if that's true). If yes, how much is the interest to pay to the broker? On IB's site they state that margin interest is 1.87%. Is that ok/competitive? And: it seems that at IB one can use only upto 2x of own account value (instead of the usual 4x) as margin when holding such positions long term. Is that true?
IMO take the full profit in relation to just the part that is your own money. That should give you the P/L% based on your own money only... Then just compare the rate against the rate of the fully cash secured variant... Margin means leverage... it goes of course into both directions, up and down ;-) 100k own part plus 100k margin part means of course 2:1 (or is it 1:2? ;-) margin, ie. if you make 5% profit from that investment of 200k, then it means 10% profit for your own money.
I think there are indeed some limits to watch for, especially with options. I'll try to find the link... Here's it: CBOE limits ( http://www.cboe.com/products/equityoptionspecs.aspx ): " Position and Exercise Limits: Limits vary according to the number of outstanding shares and past six-month trading volume of the underlying stock. The largest in capitalization and most frequently traded stocks have an option position limit of 250,000 contracts (with adjustments for splits, re-capitalizations, etc.) on the same side of the market; smaller capitalization stocks have position limits of 200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for splits, re-capitalizations, etc.) on the same side of the market. The number of contracts on the same side of the market that may be exercised within any five consecutive business days is equal to the position limit. Equity option positions must be aggregated with equity LEAPS positions on the same underlying for position and exercise limit purposes. Exemptions may be available for certain qualified hedging strategies."
Yes, that's the case with cash accounts. The counterparty can do an excercise anytime (with options that use the American style), meaning you have to fullfil your obligation immediately thru your broker (ie. you get "assigned"), and the broker of course insists that you have enough funds to meet the obligation anytime during the life-time of the position... I think here some things don't sum up. You can easily make 10% p.a. with just put selling, even more than 20% when using leverage thru margin. Ie. 10%=10k --> means only 100k is needed (plus that for the options, maybe 1k). This is far less than from your millons and 10 millions you wrongly think would be needed. I'll need some more time to study your above example...