I'm just getting started (again) with options. I bought some OEX calls in 1987 and have a handful of single-sided trades since then. Now I am planning to try to generate some monthly income by writing spreads, most likely put credit spreads. Is there anything wrong with letting the short side go to expiration and taking ownership of the stock if it's ITM? If it happens then I would immediately write ITM covered calls, hoping to at least break even. If not then I might write OTM covered calls for a few months, but my long term goal would be to have the stock called away. If the stock really tanks while the spread is open I can always sell the long leg at expiration to pick up a few more bucks. Just to get my feet wet I did a May 32.50/30 spread for $0.80 on EBAY last Thursday morning, when EBAY was trading just around 32.50. Of course it started tanking immediately along with the rest of the markets. So if I get assigned my cost for the stock will be $31.70. Right now the June 30 calls are selling for about $2.35. If they are about $2.00 in a week then I would make about 30 cents overall. Or maybe I should sell the 32.50 calls if they are like a dollar or so. Any comments are welcome. BTW, I just joined here.
Hey Hoser: Nothing wrong with having stock put to you, as long as your account can take the heat. If your account gets short, you will have to respond to a margin call. If you screw with them or delay, some brokers will put your account "on hold" effectively cutting you off from further transaction for periods out to 90 days. Good luck Steve
As long as you have the cash being assigned is no big deal. Of course, that cash is no longer earning the interest your broker pays so be sure to consider that in your P/L calculations. If the plan was to accept any assignment and then write CC's I would prefer to just write a NP rather than a spread. IMHO one of the big advantages of a credit spread is to limit your losses should it go against you and let you cut and run to your next play without marrying the original play. Don
Thanks Steve and Don. Maybe I'm making things too complicated here. My original idea was to generate some income from the spread premium. If I got assigned then do covered calls. Since I do have a lot of cash maybe I should just plan to write CCs. I could still do short term NPs to get a discount on the stock price initially.
A systematic approach to selling premium <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1071549>
Nice chart and a good practical scenario. However the following is equivalent and probably more clearly depicts what is happening. Note I think the original chart should end with + 5 premiums. The equivalent is: 1) Sell Put, if not assigned +1 prem, else sell assigned stock then 2) Sell two puts, if not assigned +3 prem, else sell stock then 3) Sell two more puts, if not assigned + 5 prem, else + 2 stock +5 prem then 4) Take your lumps Again the original scenario is better because there are fewer transactions. The above is meant to better show what is happening. That is, continuously selling puts hoping for a bounce which can be a good strategy. Don
When using the naked put (synthetical covered call) selling strategy: protect yourself with (market) stops or protective puts don't Martingale
Yeah, I was going to add that I would never sell a NP or CC without some OTM downside protective puts. I guess that's still a spread (or a collar in the CC case?). I never owned Enron, but I did own a few shares of Worldcom, and way too many shares of NXTV, which peaked at $202 and finally closed out at $1.18. Edit: What's a Martingale?