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Strategies & Market Trends : Option Strategies
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To: Joseph Silent who wrote (2172)7/26/2020 10:31:41 AM
From: Thehammer  Read Replies (1) of 2591
 
Hi Joseph,

I think you are correct and taking your time to learn the tactics with options. I have witnessed a lot of "plans" that worked extremely well until they didn't. There are a ton of books out there about how to retire wealthy writing puts.

I stick mainly with selling puts on stocks that I own and would like to increase my ownership. I also do some covered calls. Occasionally I will be short both Puts and Calls with the Put Strike lower than the Call strike. It is called a Combination. Using the same strike is a called a straddle.

Every position has a profit potential that can be mapped out with long calls being infinity.

Typically I have quite a few positions open at any given time and I use a software package to monitor the positions and provide alerts. I usually look at 1) Time value remaining - as it is a good indicator of potential early exercise. 2) % option change - once the option has declined 80% - 90% I consider rolling or buying back and 3) "X" days until expiration. The further out that I am, the longer I set this.

The most common "error" that I see among folks learning is the notion that you are locked in until they expire or or called. You can always close them out or roll them. I use spread orders to roll with one order closing the existing position and the second opening up the new. I find that I get a better execution that doing the legs separately and it eliminates a certain degree of market risk. You also can put a limit on the credit (or debit) you receive or pay on the trade.

It sounds complicated but it really isn't.

For instance let's say that I sold some covered calls on LOW that expire this coming week. I sold the July 24th options $145 with a current bid ask of $1.87 $2.50 midpoint $2.18 (Black Scholes is $2.19) .

Let's say for argument's sake that i don't want to sell my LOW at least at this price. I look at the Oct monthly and see that OCT $155 is at ( $4.75 - $5.35 midpoint = $5.05)

I'd probably put in a spread order to Buy the JUL $145 and sell the OCT $155 for a credit of $3.36).

Usually if I get the order in early in the day, I often get a better execution that what I asked for. Sometimes, I have to lower the credit to get an execution. I always place them as limit GTC (assuming that I have time).

This accomplished 3 things:
1) I get to keep my LOW's (for a while at least)
2) I keep the cash flow going as well as the dividends and
3) I have gained 10 points of potential profit if I do sell.

One note here is that premiums now are extremely rich which allows roll up or roll down at narrower time frames.

I think the market makers are probably not as bad as one may think. Often times, the bid / asks come from clients (like me). Sometimes, I put in an order and the market immediately moves away from me but that is perhaps 10%. The more active an option, the narrower the spreads. When you trade thinly traded options, the spreads are much greater especially if they are far away from the market.

Black Scholes is a model. Models don't always work especially when we are in the midst of a black swan event. The software package that i use does calculate it as well as a lot of the other metrics that many traders use.

One other note and I mention it often, but I seldom ever get assigned for a short put or call. I usually roll them and continue to do so ad infitium. I do get assigned occasionally though and am expecting some on some of the puts that I sold before the virus. I like the underlying companies though. If i didn't I 'd close them out and take my lumps....
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