How do you determine probability? You talk a lot about free cashflows, PE's, and multi-year support levels; but you never provide a probability analysis.
Actually, I've never mentioned "free" cash flow. However, to answer your question, I analyze "probability" by viewing the overall picture. That means evaluating the strikes otm safety cushion, relative to its stock and sector,... technical support,... reasonable price value,... reasonable levels of debt,... the stocks "potential for recovery" if a bad earnings report or a bad market takes it down,... insider buying/selling,... the companies history of missing/meeting/beating earnings expectations..., the length of contract,... the 4 quarter "trends" of various fundamental criteria,... various fundamental ratios, and so on.... It's all about the big picture. For example, if I see a company is showing a "trend" of reducing it's money spent on R+D, and it's not paying it's bills on time, and it's depreciating its assets considerably more than it's spending on cap ex, and it's selling off assets to raise cash, and it's level of cash is dropping each quarter, and it's debt level is rising, and the stock is heavily shorted, inventories are rising, tech support is weak, ect..... This is NOT a good overall picture. I don't care if the analysts upgrade the stock, or if the stock is rising, or the news is full of positive stories about its "potential" going foward. This is NOT a stock that has "potential for recovery", if a bad market takes it down. This is a low probability trade. Since my trades are naked, I have to be concerned about its potential for recovery. Credit spread type traders don't care about recovery potential. They simply close for a loss and move on. Hence the reason I am more selective about my trades then those type traders. Hence the reason I pay more attention to a trades probability, than merely it's potential.
So you don't actually calculate a probability? You determine you think a company isn't doing as badly as people think and then you sell puts? Who mentioned anything about spreadtraders?
So you don't calculate an actual probability figure? Given all this information how do you determine that a put at 40 cents (representing 25% annualized return) is expensive and the same put at 30 cents 30 minutes earlier (representing a 22% annualized return) isn't worth selling?
PM, You often mention the 'recovery' thing. Have you ever tried an alternative route of staying with the stock, i.e. when things head south, exit the current short put and roll down, plus maybe sell a call so you've got it strangled? I know you've done the research with the stocks, and you talk about being comfortable taking assignment, but collecting what are probably meager dividends and selling covered calls could be a long recovery process, no? Plus I think it would tie up a fair amount of margin. Again, not judging, just wondered if you've compared both methods real time or back-tested the roll down strategy on the types of stocks you sell options on.
I don't waste my time trying to make such a determination, on a fluctuating stock and option. Obviously a higher credit is better. I select my credit based on where i think the stock will trade, what strike I desire, what changes in IV may occur, where i see tech support, what the length of contract is, ect.... and then place my order GTC, for the annualized % return that i desire. Sometimes the order gets filled and sometimes it doesn't. Bottom line..... I don't care where a stock is currently trading. My focus is on where i think it will eventually trade, per unit of time.
When you put your GTC orders, do you come up with your own valuation for the option? Do you based the price on whats in the market? If you don't care where the stock is currently trading, then you must really only look at absolute floors for the stock price. Because if you don't look at where the stock is currently, then you can't care about the speed it needs to get to your stock price. Given that you don't look at speed, what do you use the IV number for?
I will consider a roll only AFTER I have considered other stocks for investment. Afterall, I just dumped the deteriorating stock. I am NOT going to get right back into that same deteriorating stock, if I can find a more stable one that meets my criteria, and pays a similar credit per unit of time, for that remaining unit of cash. Afterall, the trade is over and my cash has been released. As long as that cash is now free, I want to evaluate other opportunities for it, before I consider putting it right back into the same deteriorating stock i just dumped. Too many investors automatically roll into the same deteriorating stock they just dumped. I'm not doing that until I've considered other more stable opportunities for the remaining unit of cash. There is nothing special or magical about a rolled credit vs a non rolled credit. A $1 credit is a $1.00 credit. I'll only consider a rolling credit in a deteriorating stock, AFTER I've considered a more stable stock alternative and it's non rolled credit. Gotta take a break, as my eyes are getting blurry and I still have work to do, to prepare for Mondays market. Good discussion.
LOL. You care not where the stock is trading, but do care where it might trade in the future? Nothing like a bipolar options trader. If you trade half as well as you write B.S., you are pretty damned successful.