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Strategies & Market Trends : Option Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Hank Scorpio who wrote (2248)	2/25/2021 12:45:20 PM
From: Thehammer	1 Recommendation Recommended By THornsby Read Replies (1) \| Respond to of 2591

Thanks Hank! A couple of other comments: Wither zero interest rates, it is hard to find safe s/t bonds with decent yield. Yes, margin is risky to a degree but my thought was that I could sell the bonds close to par if I had to. I was 99.99% sure that the bonds would be redeemed at par (actually a couple were called at a small premium) at maturity. The thought was at worst, I'd be paying a carrying charge for a short time. What works for you is what works for you. I don't mean to diss the indicators. I sometimes follow stocks up as well selling puts as i go, but if it keeps going, I eventually say "no mas" and move to a different security. I definitely think your system has merit but if you do it long enough, you may ( as have I ) run into a change of conviction. That is why, my number one question is my comfort with the stock. I have a long term outlook and a ton of patience but will dump something if the story changes. You are right ( or write) as the case may be on giving up some of the premium. Since the value of the underlying is my driver, if I can roll down and out and still get a credit, I view it as a gift. I have a friend who professionally manages funds geared towards DGI. She is much like Warren Buffett if she can buy something "on sale". Option writing is secondary to me. It is a fun thing to d. When I look back on the 10 years of data, my thought is that I probably would have just been better off in many stocks by just buying and holding the underlying. Bob goes after a nice yield and value and that seems to work really well. Others have done fantastic with trading and analyzing a lot of metrics. Individual stocks and markets don't always move in the same direction. Premiums will probably be a lot less lucrative at some point in the future. I do live off the dividends and don't have to liquidate anything (knock on wood). I do however, reinvest a portion of the option proceeds into additional holdings when i see suitable bargains.

To: Hank Scorpio who wrote (2248)	2/25/2021 3:44:57 PM
From: THornsby	1 Recommendation Recommended By Thehammer Read Replies (1) \| Respond to of 2591

> I have in the past rolled positions too. The reason I am not doing so here is simply because on a roll you usually give up some premium to accomplish the roll. If I were to simply take the stock, I am immediately writing the same premium next week. Just in a call. Rolling is a loss aversion strategy for when a naked option has moved against you. It should be done before the option gets mildly ITM otherwise as the underlying drops, the intrinsic increases (a higher delta loss for you) and the amount of premium that you might get for a roll diminishes. In addition, if you allow assignment, because your underlying is now well ITM, the amount of premium that you get for the covered call could be greatly reduced. You lose either way by waiting too long. IMO, a good rule is to sell premium to avoid intrinsic value. As long as the underlying hasn't gapped big time, you can often roll to a lower short strike for a later week or so for a credit. It may be a smaller credit than than the initial credit but in return you've gained more margin for error (distance down to the short strike) for a position that went wrong. Here's an extreme example. Last year I was chatting with someone relatively new to short writing who was convinced that he could roll naked put risk away. He did but only through the good grace of market cooperation. With TSLA in the high $800's, he sold the one week $800 naked put (I don't recall how many). As it dropped through each short strike, he rolled down and out in time for a credit (let's say a strike $50 lower). With only 8 weekly expirations, at some point he had to use monthlies and then, the only way that he could get a credit was to roll out horizontally. So he's taking in 5-10 points of credit while losing 50 points of intrinsic. TSLA bottomed out near $350 and by then, his expiration was 15 months out. Let's say that he was net down $200 at that point. Huge loss but it could have been a lot worse had he not proactively defended. If TSLA had continued dropping, he might have run out of expirations to roll to. Contrast that to doing nothing and waiting for assignment. In late Feb 2020, TSLA dropped from $800 to $680 in 2 days and pretend that $680 was expiration. What call strike could he then sell for break even? To put that in today's context, suppose TSLA was $900+ and you sold a you sold a one week $860 put $15. A week later it's $740 (pretend that today is expiration). Where's a covered call's break even? $840 strike next week ($5 premium)? $835 the following week ($10 premium)? $825 the following week ($18 premium)? $795 two months out ($40 premium)? Nice premium but TSLA is going to drop another 300+ points. Not a good situation to be in. So AFAIC, rolling down and out stems the losses far better than accepting the losses. As for this chap, he lucked out as TSLA rallied 300+ points in the next month and he got to break even. After it all, he said that he learned an inexpensive lesson.