Your sensitivity to an audience of retail trader/readers is admirable. That said, your advice is nearly 180° wrong. 1) You declare 'theta is not an edge'. Theta is reality. How constructively you interface with reality versus the rest of the market may or may not be an advantage for you. As a tool, theta is always there -- never taking time off -- whether that tool cuts your hand off or makes great products is your doing. To deny reality is not helpful to anyone. 2) You observe that in selling puts, you gain all the risk, and only limited reward. This is false: as you know, both the reward and the risk of selling a put are probability-driven functions that boil down to the available strikes and the premium associated with those strikes. How the seller chooses the strike/market relationship is a choice function entirely under their own control, and whether they choose a strike more probable to be hit, or less, carries with it reward and risk implications well known a priori. They are encapsulated in that little thing we call "price." TSLA is ~$335 as I write this -- your blanket statement would imply that selling an April 20 TSLA put at $300 ($6.50) or at $370 ($41.25) is "all the risk, and limited reward." But the market -- in another dose of reality -- declares a ~7x difference. "Yeah....." 3) Ignoring the entirely-feasible goal of lowering cost basis in an acquisition target so far as to make your acquisition at $0 (I've done it myself), you instead go further and declare "If assigned, the loss on the position will likely be for multiples of the time premium collected." Wow. You've sunk further. You're saying that if I buy TSLA for $335, and it falls to $250 between now and 1600hrs EST April 20, I would be *better off* in not having sold a put. By "multiples." Well, let's see how your evaluation comports with reality. Buy TSLA @ $335, falls to $250, down by -$85.00 Or, Sell TSLA April20 $300 put, get assigned: +$6.50 - [$300-$250] = -$43.50 Or, Sell TSLA April20 $370 put, get assigned: +41.25 - [$370-$250] = -$78.75 Your grasp of reality has the prospective TSLA owner/put-seller down by 85 bucks. Reality itself -- bracketed ±1σ -- suggests that the trader is not "down by multiples" but is in fact materially better-off. (In fact, being down by multiples is mathematically impossible. Ask yourself why.) 4) And finally, you wish to tie a covered-call strategy to the immediate question -- an entirely false addition to evaluating put selling. The question -- the entire thread -- is about put-selling. [there should be an emoji for "mic-drop."]
What I mean is selling this option not by itself to get some credit/premium. And for the margin, imagine selling 1 ATM put, buying 3 slightly OTM puts, and then selling this nickel. With SPAN margin, you will not have to post 15k margin or whatever that is for this put alone. I see it more as a bet on different moments of the distribution and these 5 cents per contract can add up with time.
Where are you doing all this costless trading? I mean, if it's not a secret or anything, the rest of us want to know. Can you give an example at all? Maybe TSLA? CAT? SPX?
5 cents can add up with time?? Seriously?? To do what you suggest and not being overleveraged, you need at least 25k account for each sold put. Otherwise you are on the certain path to margin call even on modest pullback. 5 cents for a $5 credit will provide you a whopping $250 income a year (assuming you open the next week put before the previous week expires). That's a whopping 1.0% return PER YEAR, just to see those puts increasing in value to $2,000 once in a while (like last February). So let me say it again: THIS DOES NOT MAKE SENSE NO MATTER WHAT YOUR OTHER POSITIONS ARE. THIS IS BEYOND STUPID. IT IS IDIOTIC, MORONIC AND RETARDED. Excuse my French, but when I see someone mentioning free money in the sock market, I cannot remain silent.
Oh god, you are so obtuse. I never said it was free money. Writing in caps and bold does not change facts. Also, just letting you know what when you are long a put spread, you cannot lose more than the premium, so no margin call.
So what is exactly your point? Why you are defending this position? Give me your rationale to collect $5 knowing that they can occasionally become $2,000?
That's where you did not understand what I wrote, so apologies if not clear. I agree with you that collecting $5 as stand alone risk is not a good idea when it can become $20K or whatever. What I am arguing is that if my book is already long downside convexity for whatever reason (hedging or market view...), I don't mind selling this garbage option. Fictional example: I am bearish on SPX for the next 2 months. I buy a 2500 May put. If I sell a 1500 put for 60 cents, I am just expressing the view that I don't think SPX will fall that much. Yet I won't get a margin call because I am long the 2500 put.
This is definitely reasonable. You sell the short put to reduce the cost of the long put. If you reduce the cost by 60 cents, it can make sense. If you reduce your cost by 5 cents, it doesn't. But the original post was not about selling those puts against your long puts. It was about selling naked puts to get some income. The whole topic was about it. So this was a completely different context.
thank you everyone for the input. I need to understand how to calculate the required Margin to hold a contract for say 7-10 days. can someone help me with that? let's use VIX for our example I am selling short $.10 contracts