Please let us know when and why you enter an option position. Especially why you pick the strike and month, that's the part I find the most difficult. Anything past 2 months scares me off.
JavaGuy, there are other individuals on this thread (PAL,edamo,and others) who are far more qualified to answer your question than I. But like your preference for style of clothes, cars, friends, etc., each individual acquires a preference for one or more option strategies.
I never sell naked calls. People who did today on CMGI and didn't hedge their positions got only a brief moment of glory before being pulled out to sea.
I used to sell naked puts, but after the UAL buyout fell apart in 1989 (went down from around $300 to $85 in three days), I stopped selling puts when I realized I did a pretty poor job of it trying to catch falling knives. (Caught one? Think you've got the hang of it? Now try to catch 1,000 at the same time - well, that was nearly 11 years ago and I just don't need to pay for another expensive lesson).Size matters. Stay away from trades in size unless you fully understand what you're doing and are prepared to accept the loss for an error in judgement.
But if I own the underlying stock, I'll sell an option (typically only one month out because that's the way I did it as a market maker) at any strike if it's overpriced. The more experienced individuals on this thread can probably look at a quote and tell you if it is fairly valued or overpriced. I use the Black-Scholes model to determine if the option is trading at a higher than normal volatility in a particular market. If it's overpriced, I sell it.
When you think about it in terms of real estate, the concept is not so difficult. If houses in your neighborhood are selling for $180,000, and, all things being equal, you have the option of selling one for $240,000 because someone is willing to pay you that price, wouldn't you be inclined to sell it? Now if you could do that over the next 30 days 100 times, would you be so inclined? I would.
Options sales are no different. But the mistake that threaders and other investors make all the time is that they buy call options that are overpriced because they think the stock is going to run and they sell options that are underpriced because they don't have the analytics to determine option values.
Others may disagree but you asked me for my point of view and this is it.
I generally don't sell out farther than a month, two at the most, even though it's relatively easy to "pick off" the options specialist on a variety of stocks in father out months where the options are infrequently traded and mispricing is more likely to occur. Just alot can happen over time and unless it's a great sale, I'm usually better off doing nothing or looking for pricing disparities above or below theoretical values one month out.
But as I said, other individuals on this thread are far more adept at a variety of strategies. However, this works for me and that's fine for now.
BTW, I use ATFinancial, a service that costs about $2,200 per year for real time quotes, NasII, options pricing, time of sales, news, yadda, yadda, yadda. There are other comparable, perhaps better, and less expensive services, but hey, it works for me.
Hope this helps and good luck with your investments. Also read all of PAL's posts on options...
But get the options bible and READ IT!
Best regards,
Mark A. Peterson |
