Here's an interesting answer that I came across recently. I agree with most of what the answerer said:
money.stackexchange.com
Here are some reactions to your questions:
If you don't want ownership, selling lower delta OTM puts initially is sensible. Sell less OTM strikes if you want ownership at a price.
Implied volatility increases before pending news, particularly earnings announcements. If you like the stock, it's a good time to capture a fatter premium.
As you noted, when "you get a major correction, the stock is put to you and you take significant losses." There's an old market expression that describes this: "Most of the time you eat peanuts and sometimes you sh*t like an elephant."
As you stated, selling naked strangles doubles the yield but only has one sided risk. I don't have an issue with short selling (equities) but IMHO, you really need disciplined risk management to manage that, whether it be cutting you losses or understanding how to defend the position with other option adjustments. The important point is that it's ok to be agnostic about direction but you need to be prepared to deal with an underlying that has directional conviction.
If you're selling 20 delta weekly naked puts, you're not going to have much buffer between current price and the short strike. If a large drop occurs quickly, you may end up being unable to sell a 1-2 weeks out covered call without locking in a loss. Now it's a marriage for more weeks or months.
I'm skeptical about the usefulness of moving averages and other canned indicators for trade decisions. Moving averages are lagging indicators. The longer the MA, the more the lag. The shorter the MA, the less the lag but the greater the number of whipsaws. There are other reasons but my short answer is to trade in the price domain rather than the derivative which isn't always accurate.
The MACD also has false signal issues but I don't want to write a novel :->)
Personally, I preferred hedged positions because the Black Swans and hard market corrections like last March don't whack you. Accept lower profit potential in return for no Black Swans (vertical spread, iron condor, etc.). |
