Selling puts and calls one week out on ETF's

Discussion in 'Options' started by toben, May 31, 2013.

  1. toben


    I am wondering how to evaluate the following strategies to compare which would give me the best results.

    1. Sell covered calls on an ETF I own weekly. Buy the ETF back if it gets called and repeat.

    2. Sell a put on an ETF I want to own weekly. Sell the ETF if my put is exercised and repeat.

    3. Sell a call on the EFT I own each week. If the ETF is sold sell a put the following week until I receive the ETF back and start selling calls again.

    I have 10K and was recommended strategy #1 by a broker, however I thought strategy #2 has a similar effect and maybe I should just a combo - strategy #3.

  2. All three strategies are essentially the same. I would start with selling put, then getting assigned, then selling calls. This should be more cost effective. What broker do you use?
  3. benjjj6


    Please tell me why I am wrong but I thought that when you are assigned you will be buying the underlying at a worse price than the current ask, if you then sell the underlying you will loose money on the bid-ask difference. So you would need to wait for a favourable price move in your direction in order to sell your stock back at a profit.

    Why will this not hold true? Or what is your alternate strategy when assigned?
  4. vmaiya73


    I use this strategy on stocks actually; an example:

    Sell put on PSX to collect X

    if i get assigned I then will sell a call at the same strike or slightly above; if get called away I will repeat.

    Question is what if I get assigned the stock and it keeps going down? I only use this strategy on stocks/ETF's that I dont mind getting assigned

  5. This is generally called the "wheel trade". It is not a bad strategy per se, but be careful because this is a LONG strategy.

    Picture this - your ETF sits at $30. You sell a $28 put and collect a few bucks. Your ETF proceeds to crash to $20. You get assigned. Now what? Selling the $21 call ain't gonna help much, especially if the ETF continues down to $15 or lower.

    So be sure to map out the WORST CASE scenarios first, to get an accurate assessment of your risk. Then choose your SIZE accordingly.

    Don't fall for the "stock I'd like to own" crap. There's no such thing.
  6. toben


    I am pretty happy owning the russell 2000 for the long run. And I am only selling them 1 week out at a time.

    As to the other question, I was using etrade, but I am moving my account to options house due to the better fees.

  7. All those strategies work well in uptrend market.

    Good luck when the bear market hot, you will loss A LOT !!!
  8. Will option house allow you to sell naked with only 10k deposit?
  9. Sure. You could do it with as little as 5K with OH. You just have to sign up for a margin account and convince them you have sufficient assets and option trading experience.
  10. The margin required for selling naked options is generally the same as buying the underlying. So theoretically one could do this without a margin account at all as long as you have enough cash to cover the max loss.

    e.g. You sell a put on 1 $70 put for 0.60 on QQQ @72.58. The max risk is when QQQ falls to 0 after you've been assigned at 70 = 70 - 0.60 = 69.40 = $6,940.
    #10     Jul 8, 2013