Hello all, Last year I started selling cash secured puts and I've been surprisingly successful/lucky at it. However, the last two months I've had to buy some of these puts back at a loss as the underlying(s) had dropped below my break even point before expiration. So, I've been looking for some protection when the stock drops and I'm not on top of it quickly enough. I could set a stop loss order, but I was also considering various put spreads in which I would at least make up for some of the losses on the short side with the long side. So how would this be constructed, sell and buy for the same number of contracts, or use a different ratio of sold puts to bought puts? How far apart would you like the strikes to be? What about a calendar spread, buy the back month put and sell the front month perhaps, and use the same strike or different strikes? The object is to let the whole thing expire worthless, but certainly at times I won't mind being assigned either. Thanks!
If you're worried of a fast movement against your position you may consider a stop order using shares to hedge off your deltas.
First, this strategy (selling cash secured puts) is flawed because the profits/returns are the same as simply holding the stock, sometimes a bit better and sometimes worse. Take a look at the performance of CBOE put write indexes that clearly demonstrate the performance of selling puts vs holding a stock or index.. If any such strategy could beat the stock market or specific stock, then it would be offered as an ETF and you wouldn’t need to do anything either, except buying an ETF. We live in 21st century where everything is automated, packaged and available without you having to pretend that you’re doing something special. Actually, many such ETFs did exist in the past but are mostly dead now because they couldn't beat the market. Secondly, costs of hedging are very high and it’s easy to lose more than gain by trying to sell some hedges to other people while buying different hedges from yet other people. All of those “other people” don’t want to lose money, so the market is self-balancing and as result you may not be able to make more money than the other people who buy & sell your puts, or just by investing and holding a stock. Lastly, there is no single answer to your question because various strategies may perform better in different markets, at different volatilities & volatility regimes, and with different management styles. Even one wrong trade can cause losses that later you’ll be working hard to recover from, thus falling behind the market's performance. To do this properly you’d have to backtest a specific strategy, but then in most cases you’ll see and realize that you may not be able to make more money than doing absolutely nothing beyond picking a few stocks to buy. Options strategies that “kinda work” are rare and may need to be automated to work systematically, consistently, and with understanding of what to expect, whether based on past performance or risk analysis. The only thing that potentially could work for some options traders is trading volatility, so maybe try studying that first (books). For example, selling puts only at high volatility is already more of a volatility trade than regular weekly/monthly put selling (not necessarily safe).
Correction: selling puts turned out to produce much worse results than the market (^SPX) in the last couple years: ^SPX 54% up, writing puts on SPX: 24% up, based on PUTW ETF: https://finance.yahoo.com/chart/PUT...6ImNoYXJ0IiwicGFuZWxOYW1lIjoiY2hhcnQifX19fQ-- And here is the put selling index from CBOE, looking pretty similar:
Thank you all for taking the time to write. zbzb, I assume you mean to sell calls against the shares that I am assigned, yes? bdennis, I'm not sure I understand when you say to set a stop order using shares as a hedge. iys78, ah yes, I read an online article on this topic where the author used the same language. I initiate these trades with a goal of 5 - 10% return if they expire worthless. If I do this each month, using the 5% goal, over a 12 month period that's a 60% return on the money I've allocated to this strategy. guru, I can't argue with a set it and forget it fund or etf, I was once a boglehead. I still have funds of course, they account for a large portion of my portfolio, but I like to tinker, I love to tinker, so doing these trades provide me with enjoyment, and, thus far, have paid off nicely. As noted above, I have incurred losses over the last two months, but they are largely overshadowed by my gains over the last 14 months or so, when I first began this strategy. In my case, it has paid off to focus on a few stocks that I have been following closely (Some I already own shares of, others I am considering owning shares of). One of the reasons for my recent losses are I took positions on stocks I was not familiar with, but the premiums were high, I couldn't resist So that's my fault, but one never knows, of course. To me, investing in stocks is like fishing, it's 50% skill and 50% luck As I'm researching this topic, I see your very words repeated, that being, hedging costs can be very high, hmm. Even though I like to tinker, I also have limited free time, so I was hoping for a strategy, in this case a put spread, in which I can just plug in the same numbers (Strikes, expirations, etc) each month and go about my day. Going forward, I'll probably stick with what I'm doing, but just set a stop order in case things go against me. ps, I've heard of those putwrite funds but never looked into them, pretty neat, although those returns aren't so neat. Thanks again and good luck all!
You know, I've never understood this analogy. Why is picking pennies up in front of a steam roller bad? I mean, really. Shouldn't it be "trying to pick up pennies in front of a speeding train"?