Greetings all, I am new to this forum, and also relatively new to options trading. Apologies if I write things that are too obvious etc. I am starting to delve more deeply into other options strategies besides the usual long calls and puts for hedging. One of the strategies I am looking at is the shorting puts, which to most newbies to options looks very attractive mainly because of the fact you receive the premium instead of paying it. What I'm wondering is- Is profiting from shorting puts as easy as it sounds? I have found a number of options on the Oz market that seem like winners- underlying price way above the strike with many contracts available and 1 week from expiration. But before I get too excited and start shorting puts that I believe will be winners, I want to hear from experienced traders about this. Do a lot of you short calls and puts for the purpose of retaining (profiting) the premiums at expiration? What are the negatives of such practice? Thanks for your insights and advice.
First thing you need to ask is what is the risk of the position. It matters not whether you get the premium instead of paying it, it matters what you keep or make when the position is closed. You need more of a reason to sell naked puts than the fact that you get a premium. You need to understand the risks, what factors affect the position (volatility, time decay) and what your loss would look like on a day like when the Dow fell 500 points. Your journey has just begun...
Trading on a monthly cycle during the course of a year, you can expect to have ~10 small profits and ~2 large losses on your statement. You can also expect to have some sleepless weekends along the way too.
Optioncoach is right. You sell puts on stocks you like. Look at a Covered Write. Very similar risk/reward. Limited gain potential on upside, big loss potential on downside. Understand the risk before you do any trade. Don't look at the premium, high premium might reflect an earnings report or some other event. Selling naked calls has theoretically higher risk, and your broker might not allow for a newbie. If you have the money and think a stock/ETF will do all right for a while, and understand the risk, give it a go. Good idea to research a strategy before jumping in. kny 3
A naked put (NP) is equivalent to a covered call (CC). Since you are a self confessed newbie (g), for the time being, consider each NP position as a CC and ask yourself, would I be willing to take that buy.write position (ignoring subtle details like margin, sufficient cash, etc.). The reason that I sugeest this is that most newbies cut their teeth on covered calls and long option purcahses. For example, suppose XYZ is 40 and you're thinking about selling 10 Jun 35 NP's @ $1 each. Would you feel comfortable buying 1,000 shares at 35 and selling 10 Jun 35 CC's @ $6 each? (made up numbers) Now multiply that feeling by all of the NP's on all of the different stocks that you're considering selling them on. Still feeling like you can handle the position and the risk? And FWIW, the position on the other side would be short the stock and short the put (equivalent to a naked call). But that's probably too much info now. With all due respect buy some good option texts. Read some of the multitude of option web sites. Paper trade. Prepare yourself for the battle otherwise the tuition may be steep and painful. Good luck
I do naked put writing, and i been doing it for a few months.. I've have multiple positions blow up on me for 200 - 500% losses. My advice to you, is be prepared to take 500%+ losses, they can and will happen. If you cannot accept a loss of > 500% of the premium you collect (and don't think you can stop out, when bad news hits the wire after hours, you're screwed), then don't do it. Another thing is, if the option premium declines by 75% or so, take your profit, don't sit around for the last bit. You may feel like "oh, the stock is 5% OTM, only a week to expiration, why pay a few cents to close out a worthless position?" I used to think that way, then February 27th rolled around, and all my practically worthless short option contracts suddenly went ITM. There's rarely a reason to hold a short position open to expiration, unless the contract is so deep OTM that a nuke would have to hit NYC to make the market go down that much, and if that's the case, you probably should've closed out the position earlier (or there was a major news event that pushed the price up). Even if you feel like there's no risk, why put up the margin requirement on that worthless option? Find a better use for your margin. As far as naked put VS covered call goes.. if you have the stock already, write the call against it, if you don't own the stock, there's rarely a reason to do a covered call instead of a naked put, since you'd be paying 2 commissions to open the position instead of 1 (and 2 to close it instead of 1), and there's more slippage.
Maybe you're shorting puts on the wrong stocks? Chasing the big premium means accepting larger implied risk, hence the whackings these stocks take when news is adverse. Short puts/CCs aren't my thing, (so I didn't save this) but I read some research recently that suggested writing against low IV stocks was more profitable in the long run. I'll see if I can dig it up.
I took a big hit writing 20 puts on motorola right before they came out with that little warning that pushed the stock down a lot in january, then making the mistake of rolling that position forward instead of closing it out and taking the loss. I also took a hit on AMD when i wrote 15 puts thinking it hit rock bottom, boy was I wrong on that. Those 2 weren't ultra high premiums, but I still took huge losses on them. With writing options, you will ALWAYS have big losses once in a while, provided you do it long enough.
If you do any strategy long enough, you will lose money at some point. The original poster has been given some good pointers as to when and when not to try this, and to what the risks are. When one sells options and collects cash, one incurs an obligation. Did you understand that? I fail to see what you have contributed to this post, other than showing what happens when one sells high volatility options and doesn't realize that the company is due to announce earnings the morning of expiration Friday. kny 3
Sure The same applies for being long the common. The same comments could equally apply had you bought those underlying stocks fwiw. Both of those situations were on downtrending charts. trading 101