Randy, regarding options...
>>If you've sold an option that is, or has become "in the money", and
therefore at risk of assignment, do you have any sort of standard
operating procedure for when to buy it back prior to expiration? Do you wait until, say, the beginning of the week the option expires, or are you generally "safe" until a day or so before?<<
I generally buy back naked options if and when I realize a paper loss of a pre-determined amount...usually 20-50%, depending largely by the volatility of the stock, the number of options sold, and gut feel. The only exception to this rule would be if a stock gapped against me on open by a significant amount. I would have to evaluate the circumstances on a case by case basis.
In terms of assignment concerns, my broker, and my experience (limited), has supported the advice from Lawrence G. McMillan's book, "options as a Strategic Investment" on "Anticipating Assignment". He basically says that you are at risk of assignment when the option trades at parity (no time premium left) or a discount to parity, regardless of time remaining until expiration. He also advises that dividend payment dates may also have an affect on assignment..."If the time value premium of an in-the-money put is less than the amount of the divident to be paid, the writer may often anticipate that he will be assigned immediately after the ex-dividend of the stock".
In the case of my October 55-50 credit spread...I sold it the morning after earnings for 1 3/4 and held on. I had a maximum risk of $3250 per 10 contracts (5k margin or difference between the spread minus the premium received) and really felt strongly it would rebound, at least somewhat, right up to last Thursday. Fortunately I did not get assigned Thursday night (my understanding this happens each trading day after the market closes, you find out the next morning) in that the options closed at parity. By Friday morning I had no further concern of assignment until the close, so I waited, sold the 50's at 1 when the stock hit 49, bought the 55's back at 5 1/8 (ouch!) near the end of the day when the stock was at 50. Rounded out the day by selling ITM November 55's naked at 6 1/4. I very rarely sell ITM options and have my fingers crossed.
>>Would be interested in your selection criteria for credit put spreads and how you arrived at it. I would think you could sell the spread when the stock was in between strikes. Do you look for a certain rate of return vs. the stock?<<
Nothing real scientific in my case. I follow a lot of stocks, mostly tech. All related newswire material is emailed to me and I keep an eye on CNBC so that I am fairly well educated. I sit and look at current month options chains looking for spreads yielding 20%+ return on margin that I feel comfortable with. Over the last three months, my spreads have ranged from 20% to 30% return on margin. The stock price is insignificant in a credit spread and only significant in calcluating margin requirements on naked options.
I generally wait until a stock is at or near the bottom of an established trading range, and sell them on down days. I'm selling more naked puts now on stocks under $50. I determined there are only two reasons I sell a credit spread instead of naked puts...to limit margin requirements and cover myself in case of huge gap against me on open. The margin requirement in many cases for a naked option on a stock $40 or under is about the same as a 5-point put credit spread, so unless I see the possibility of a major pullback, the naked options is much more flexible. Generally, credit spreads are sold until expiration. They are not good trading vehicles in that they can be difficult to get out of and the extra commission if you have to.
The glory to selling out-of-the-money puts or put credit spreads, is two fold, one you bank the cash up front, and two, the stock can go up, stay even, or even go down to strike price of the puts you sold, and you keep the time premium.
>>BTW, what do you think of a put spread that's diagonalized? Although not doable on AGPH, any company with LEAPS would enable you to buy an OTM LEAP put (they're quite cheap, relatively speaking), and write put
credit spreads against it as often as you'd like, for up to 2 years? <<
Interesting idea, I'll have to apply this strategy to a couple of stocks later tonight. Once you own a LEAP put though, you wouldn't have to sell a a spread against it, you would simply sell puts with the next higher strike, or even the same strike, each month between now and LEAP expiration. I'll look further into this.
Good trading.
sf
|
