Selling Puts - How to decide which month ?

Discussion in 'Options' started by stony_broke, Jan 23, 2010.

  1. Being new to selling putts, one of the most difficult decisions I face is deciding which expiry month to select.

    Does anyone have any interesting guidelines or views ?

    For example at the moment I am considering selling the GXO 1000 Putt ( Glaxcosmithkline UK share @ 1000 UK pence )

    GXO closed at 1270p which means the 1000 is currently 27%
    below the price. At 1000 GXO pays a nice 6% dividend,
    so I am more than happy to take the shares if put on.

    The June 1000 ( 5 months away ) sells for 7.5p
    The September 1000 ( 8 months away ) sells for 17.5p

    Here in the UK our contracts are for 1000 shares.

    So running the options to expire the premium return
    on the June putt would be 75/5 = 15 GBP per month

    Whilst on the September putt it would be 175/8 = 22 GBP per month.

    Which option would you sell and why ?
  2. If I really wanted the shares, I would sell the longer term puts as it gives more downside protection and reduces the commissions. You really don't get that much more if you sell the June and then sell another 5 month option after it expires. I like the added cushion up front, but that's just me.

    I would also do only a portion of the puts for the # of shares I wanted.

    For example, let's say you wouldn't mind picking up 10000 shares at the 1000 price (10 contracts). I'd sell 6 puts and hold the remainder in cash for any extreme pullbacks. Imagine GXO tanks big time before Sept. Since you want the shares anyway, you can now buy 4000 shares to reduce your cost basis. You're not averaging down because you had initially allocated for 10000 shares.

    I'd also leg in to the position a few contracts at a time...if GXO takes off, oh buy back the short puts and pocket a few bucks.
    If it tanks, you can now get a much better premium on the 1000 strike.
  3. Which strike to sell is a more complex decision (profit potential versus downside protection). But given that you have decided that and wonder which month, it's a bit easier.

    Under normal circumstances, near term months offer more premium per day than far month even tho the total premium for a far month is larger. Theoretically, you can collect more from 12 one month writes than one 12 month write but one can't assume that the stock will cooperate and you'll get those 12.

    Dividends are priced into the options so with further months, the more dividends to be collected (by the owner of the stock), the higher the put premium, relatively speaking. But even so, a 6% div (at 1000) isn't enought to account for the disparity in your quotes. So if they're correct...

    I'm not familair with UK options but assuming that they have the same mechanics as US options, your decision seems pretty clear. If you're comfortable with owning the shares at 1000 (less premium received) and the Sep 1000p pays 7 GBP more per day than the Jun 1000p, go with the Sep 1000p. More premium per day and more net downside protection is the better choice.
  4. spindr0 the 6% dividend is actually the amount paid out over a year. This particular company pays its dividend 4 times
    a year. During the option periods the following dividends
    are expected to be paid, based on last years dividend payment.

    ex div date 10 Feb - Dividend 0.17 GBP per share
    ex div date 5 May - Dividend 0.14 GBP per share
    ex div date 28 July - Dividend 0.14 GBP per share

    So the June put needs to price in 2 dividend payments
    and the September, 3 dividend payments.

    Options in the UK are American type. (can be exercised at any time) The only difference being that the contract size is 1000 shares, rather than 100.

    Due to the larger contract size, TheGoonior's suggestion of buying
    more contracts and spacing the purchase out over time, would
    be difficult with this particular share due to the high sums
    involved. But his suggestion would work well with a share
    with a much smaller strike price.
  5. Small detail but you're selling puts. Typo or change of strategy? The Goonier's suggestion of scaling in is fine if you have some sense of market timing or want to leave your purchase price up to chance (hoping the price will decline so you can get higher premiums or sell lower strikes). Otherwise, if the potential purchase price based on current premiums will make you happy, go for it.