I have been selling puts for a long time and make great money at it. 1% per week selling weekly options is not unreasonable assuming you are using close to 100% of your margin. Risk management is key as you don't want to get caught holding a dog for a long time if you take the stock. However with every strategy there are adjustments to the trade one can make or do what I do and simply spread out your risk amongst 10-15 positions. Always avoid large concentrated positions. One can also apply stop losses as well but base those stop losses on the underlying stock, not the option. If I get put the stock, I want the stock to be near the strike price I sold. Otherwise, I would not take the stock. But if you assume the stock and it is trading near the strike you sold, simply sell an atm covered call against it. Another risk management technique I use when selling weeklies, is to start by selling puts that are 2 standard deviations otm. In addition, I like to use the 52 week moving average as my support line. In other words, sell puts against stocks that are trading above it. The rational being that investors are less likely to dump a stock that has long term capital gains that are beginning to be realized. Therefore, i look for stocks that are just breaking above the 52 sma and beginning a bullish trend or simply trading in a neutral fashion around the sma. YTD, I'm up 20%, but again I use leverage to juice my naked yields (premium collected / cash outlay if assigned). My average naked yield is around 0.4% per week, but with leverage average 1 to 1.5% per week. Roughly 95% of my trades expire worthless. roughly 2% of the trades may result in taking losses and the other 3% result in being assigned. But the beautiful thing about being assigned near the strike I originally sold allows me to turn around and sell an atm call which usually affords me a 2-3% naked yield. Usually those assigned positions return to cash the next week, because I have huge 52 week sma support underneath it. Keys to successfully trading this strategy are diversify amongst 10+ positions. Sell otm puts that are two standard deviations away, close out positions if stock goes below 52 week sma. And assume positions and sell atm cc if assigned near your original strike sold.
How far out do you sell options? When do they expire? 1 month out to capture the most out of time decay? But at the same time highest risk. Do you sell them naked or are they always credit spreads? In your worst case scenario, where every position works against you, how much money do you lose if you had to close them out at a loss. In other words, how much % of your NAV do you risk at any given time?
I almost always sell weekly options. Sell them on Monday or Tuesday and wait till expiration on Friday. I always sell them naked using margin to juice returns. I mitigate the dreaded margin call thru diversifying amongst multiple positions. To be honest, Ive never experienced a situation where every position goes into the money because I am diversifying amongst 10 positions. However, when a position goes into the money, I have several choices. I can either buy to close the position and take a loss. Assume the position and sell covered calls until I go back to cash, or I can roll the put down and out. I will only take a loss, if the underlying stock has closed the week below the 52 week moving average but even in that case, I may sell a deep in the money covered call and except a smaller profit or a breakeven if I think I can get out and move back to cash the next week. My general philosophy is to not take losses and continue to sell "time" if the math makes sense and the return is acceptable to me. But to answer your question another way if every position goes into the money, what would I do and be willing to except for losses all depends...If every position was to go in the money and I found myself looking at losses, I would have to seriously look at the broad market and determine if staying in made sense. Because most likely if all positions collapsed, it would be because of some type of tail risk, I wasnt planning for. In that situation clearly a significant market event has occurred and a shift in trading strategy or just simply complete liquidation would be in order.
Dude you're going to get killed at some point. You're juicing things up to get any return and completely open yourself to gamma risk in a big way. This *will* happen. You're diversifying against different holdings but I seriously doubt you're diversifying from a delta perspective. It has been covered on ET countless times on how these "strategies" carry huge embedded risk and will not survive a market regime change.
Am I really concerned about the rate of change in the "price of the option"(Gamma) or how much an option will move (Delta) when the only thing I really care about is the price of the underlying stock?
what do you think will happen to your obook if ALL of the underlying stocks move two standard deviations against you? How did your strategy perform in August 2011 or in September 2008?
Remember my positions expire within 4-5 days. Plenty of time to react to events and changing market conditions. 2008 wasn't a problem. Look at a weekly SPY chart and remember I'm not selling puts on stock that trade below the 52 week moving average. So back in December of 2007, SPY traded below the average and didn't look back for quite some time. The easy thing to then was simply sell puts on the 3x bear etfs and make a killing. But in regards to flash crashes and black swan events, yes, I may find myself owning a bunch of stock. But I also may get hit by a car crossing the street too. ")
Remember Im selling two standard deviations away to begin with so if the stock moves that much on all positions, I'm theoretically flat or have assumed stock at the strike I originally sold.