Options Trading, The Wheel Strategy and anything Options

[Eric]

Just to return to one of the original queries, the risk profile for buying or selling options is not the same. To restate the obvious, option buyers can walk away at any time, whereas option sellers can be exercised / assigned, call it what you will.

I would say covered/secured option sellers have less risk because all the possible outcomes are known in advance and the seller is getting paid no matter what happens.

The risk of selling puts is that shares tank massively. Let's assume that you sell NVDA puts @ 200 strike because you decide that you would be happy to buy @ 200 anyway. Overnight news is released that NVDA have made a terrible investment in a huge chip factory that turns out to be for tortilla chips. NVDA opens @ 140. All of a sudden you aren't so happy at being obliged to buy the shares @ 200, you would much rather have been in the position to decide (or not) to purchase in the open market @ 140.

This "risk" is imagined, if you take two steps to the side and rotate fifteen degrees you'll see from a different perspective... The put seller is $3.85/share better off than John and Jane Public who had a $200 GTC limit order outstanding and placed a market order that filled for $200 respectively. All three of you are deep in the red but the put seller is $3.85/share less deep (or maybe $46.20/share less deep if they've been selling month out puts for a year before getting assigned). The illusion that you had any control regarding the massive drop is just that, an illusion. That bullet was coming one way or the other and you were either standing in front of it or you weren't... Wether or not you spent the last several months walking around picking up $50 and $100 bills on the sidewalk makes no difference to the bullet. (Except since you've spent the last several months picking up fifties and hundos you can pay better private doctors to remove the bullet and help you recover faster.)

For covered calls, you might find that the price rises significantly and you lose good shares that you wanted to keep (so your upside is capped). As Sol suggests, if this is your strategy from the outset then you wouldn't really mind and you would look for another candidate.

Again imagined danger, it's no different than setting a GTC sell limit order at a profit level that makes you happy. Additionally, nobody is holding a gun to your head and preventing you from buying back (or selling puts for) shares to replace the ones that got called away. Finally, the guy (or gal) that has made $50/share in covered call premium and gets the shares called away only capturing $5 of a $20 surge is still $35/share better off than the 2% of people that exit exactly at the top and $55/share better off than the pigs that ride the surge all the way to the top AND all the way back down to the mean.

Of course all of the above assumes you're taking at least minimal precautions like not YOLOing your entire portfolio on a single meme-stonk and some techniques might be out of your reach... If I combined all my portfolios into one that was 100% in cash I still couldn't write a cash secured put on AMZN.

[harryg]

The risk of selling puts is that shares tank massively. Let's assume that you sell NVDA puts @ 200 strike because you decide that you would be happy to buy @ 200 anyway. Overnight news is released that NVDA have made a terrible investment in a huge chip factory that turns out to be for tortilla chips. NVDA opens @ 140. All of a sudden you aren't so happy at being obliged to buy the shares @ 200, you would much rather have been in the position to decide (or not) to purchase in the open market @ 140.

This "risk" is imagined, if you take two steps to the side and rotate fifteen degrees you'll see from a different perspective... The put seller is $3.85/share better off than John and Jane Public who had a $200 GTC limit order outstanding and placed a market order that filled for $200 respectively. All three of you are deep in the red but the put seller is $3.85/share less deep (or maybe $46.20/share less deep if they've been selling month out puts for a year before getting assigned). The illusion that you had any control regarding the massive drop is just that, an illusion. That bullet was coming one way or the other and you were either standing in front of it or you weren't... Wether or not you spent the last several months walking around picking up $50 and $100 bills on the sidewalk makes no difference to the bullet. (Except since you've spent the last several months picking up fifties and hundos you can pay better private doctors to remove the bullet and help you recover faster.)

It's minor details, but in my example of a large overnight gap, GTC orders would have been filled at around 140, not 200.

However, I was not making a comparison with a GTC order, I was pointing out the risk to anyone who might not have fully appreciated it.

[SOL]

Everything has a risk attached to it, it just depends on how you deal with it.
Being born equates to death, as after birth it's all downhill in terms of time.

[AstuteShift]

What’s a funny paradox is when the masses perceive something is high risk it’s actually a helluva opportunity and with a awesome risk to reward ratio

[harryg]

Everything has a risk attached to it, it just depends on how you deal with it.
Being born equates to death, as after birth it's all downhill in terms of time.

I disagree old chap, life is fine until the age of 6.

Par contre, from then it is downhill all the way.


https://youtu.be/Qun5K3IiuEs?t=198

[Yodean]

... life is fine until the age of 6.

Well, even in today's nascent clunky Oculus Metaverse, you can choose to be six for as long as you want ...

[Eric]

It's minor details, but in my example of a large overnight gap, GTC orders would have been filled at around 140, not 200.

However, I was not making a comparison with a GTC order, I was pointing out the risk to anyone who might not have fully appreciated it.

My point is that you have no way to predict a 30% gap down. That tornado is going to flatten XYZ stock no matter what and it's just dumb luck if you are in the play or not when it gets flattened. Selling a put on a stock that subsequently gaps down is less risk than buying the stock before it gaps down because you got paid to sell the put. Your scenario requires too many low probability assumptions... You're either in the play or you're not and it makes no difference if you're in the play by buying calls, shares, or selling puts; they're one and the same.

If you're so worried about highly improbable massive drops like that then buy a put at a lower strike price to limit your down-side risk. You'll be giving away most of your profit, and you have to maintain insurance (puts) on all your actual equity positions at all times because any one of them could be the next Enron or you're being the world's biggest hypocrite.

Check out my post about selling puts on QS and how it bit me in the ass here: viewtopic.php?f=2&t=99&p=1493#p1493
I need to reconcile my "bad trade repair" spreadsheets (to figure out which one is current) and get back on the trade repair process. Having a newborn at home has taken up a lot of time. Note: I bought a lower strike put for insurance against the down-side and it would have been more productive to light $500 on fire... At least that would have provided some warmth.

[Yodean]

My point is that you have no way to predict a 30% gap down.
If you're so worried about highly improbable massive drops like that then buy a put at a lower strike price to limit your down-side risk.

On balance, I think selling puts to own shares is definitely a great strategy, when applied in the right situation, but it's not as risk-free as you think.

There is no perfect strategy for profits - if there were, Wall Street would be using it secretly, and it would be outlawed for retail investors like you and I.

Besides the TIT CHGG example I detailed in a previous post, Facebook is another great, recent example. If I had applied the selling puts thing during its recent crash, I would have gotten crushed like little bug when it gapped down in afterhours trading. Instead, I got in at a much better price in the morning. And for a real stock like Facebook, a single "lot" for me is in the six digits or so.

Harryg's been doing this thing we call investing for a very long time, knows his stuff. While I won't pretend I am a master of TA or fundamental analyses, I have made millions, and lost millions, in the stock markets, sometimes even in the same year, in my 18 years doing this. Overall I am up.

Experience trumps fabricated math, even when the fabricated math is very well thought out.

[SOL]

My point is that you have no way to predict a 30% gap down.
If you're so worried about highly improbable massive drops like that then buy a put at a lower strike price to limit your down-side risk.

On balance, I think selling puts to own shares is definitely a great strategy, when applied in the right situation, but it's not as risk-free as you think.

There is no perfect strategy for profits - if there were, Wall Street would be using it secretly, and it would be outlawed for retail investors like you and I.

Besides the TIT CHGG example I detailed in a previous post, Facebook is another great, recent example. If I had applied the selling puts thing during its recent crash, I would have gotten crushed like little bug when it gapped down in afterhours trading. Instead, I got in at a much better price in the morning. And for a real stock like Facebook, a single "lot" for me is in the six digits or so.

Harryg's been doing this thing we call investing for a very long time, knows his stuff. While I won't pretend I am a master of TA or fundamental analyses, I have made millions, and lost millions, in the stock markets, sometimes even in the same year, in my 18 years doing this. Overall I am up.

Experience trumps fabricated math, even when the fabricated math is very well thought out.

If you sell a put, it is not triggered after hours. So if the stock tanks you can cancel the order before the market opens the next day. Generally, on volatile stocks, it's best to enter day orders. So if it's not filled today. You re-enter it the next day. I agree with you that experience generally trumps everything else and Harry has a boatload of it

[Eric]

On balance, I think selling puts to own shares is definitely a great strategy, when applied in the right situation, but it's not as risk-free as you think.
...
Besides the TIT CHGG example I detailed in a previous post, Facebook is another great, recent example. If I had applied the selling puts thing during its recent crash, I would have gotten crushed like little bug when it gapped down in afterhours trading. Instead, I got in at a much better price in the morning.

I'm not trying to argue that puts are risk-free. I'm arguing that once you commit to being in a play, selling puts is less risky (even if only slightly) than buying shares traditionally. See my QS campaign journal linked in the previous post. Trust me, although my lot sizes are much smaller than yours I have been bit in the ass every bit as hard as you ever have as a percent of net worth. Being >$5,000 down on QS is nowhere near going to break me, but it is a LOT of money to me (I drive a 15 year old car that only cost me $10,000 and I think it's a sweet ride.)

Your Facebook example is exactly what I've said multiple times: You are either in the play or you aren't. With Facebook you weren't in the play, but committed to getting into the play after it gapped down. Can you say you're better off having bought Facebook Feb 3rd at $235.75 (I'll give you the day low) vs selling a Feb. 11th $260 put (deep ITM to be almost certain it will be exercised) for guesstimate $30-$32 ($20 intrinsic value plus $10-$12/share time+volatility premium)?

If Facebook opens tomorrow at $150 (Zuck commits suicide tonight) will you take a smaller, equal, or bigger hit owning the shares conventionally than someone who sold a put for premium and gets the shares put to their account?

[AstuteShift]

Scared money makes no money

Options is not for those who can’t deal with volatility, out of all the strategies selling puts is very conservative provided you want the stock to begin with if you get assigned

[SOL]

On balance, I think selling puts to own shares is definitely a great strategy, when applied in the right situation, but it's not as risk-free as you think.
...
Besides the TIT CHGG example I detailed in a previous post, Facebook is another great, recent example. If I had applied the selling puts thing during its recent crash, I would have gotten crushed like little bug when it gapped down in afterhours trading. Instead, I got in at a much better price in the morning.

I'm not trying to argue that puts are risk-free. I'm arguing that once you commit to being in a play, selling puts is less risky (even if only slightly) than buying shares traditionally. See my QS campaign journal linked in the previous post. Trust me, although my lot sizes are much smaller than yours I have been bit in the ass every bit as hard as you ever have as a percent of net worth. Being >$5,000 down on QS is nowhere near going to break me, but it is a LOT of money to me (I drive a 15 year old car that only cost me $10,000 and I think it's a sweet ride.)

Your Facebook example is exactly what I've said multiple times: You are either in the play or you aren't. With Facebook you weren't in the play, but committed to getting into the play after it gapped down. Can you say you're better off having bought Facebook Feb 3rd at $235.75 (I'll give you the day low) vs selling a Feb. 11th $260 put (deep ITM to be almost certain it will be exercised) for guesstimate $30-$32 ($20 intrinsic value plus $10-$12/share time+volatility premium)?

If Facebook opens tomorrow at $150 (Zuck commits suicide tonight) will you take a smaller, equal, or bigger hit owning the shares conventionally than someone who sold a put for premium and gets the shares put to their account?

Your statement that I boldface warrants a tougher look. In case the email that was sent to you does not get through. I think this picture will cement your look better

[jlhooter]

Is it weird that I like options now?
I am understanding the potential downsides, but I "have" to learn this stuff and feel like in a short amount of time I went from fear of options to getting an understanding of Calls and Puts. I figure the only way to really learn this stuff (like many things in life) is to dive into it. But I don't dive lightly and like everything else, I do as much research as I can before diving.

I have Sold very few Calls and Puts and I am viewing the expense as learning at this stage, so the amount of $$ I am investing is viewed in that manner. I think of it this way, if I lose all of it at this point, I figure what I learn will be worth it and the $$ spent (lost) is at least 1-2 orders of magnitude cheaper than the college education I received.

With that said among a very few other Sells, I am taking URA and selling 2 puts (I have Day Limit orders set before the market opens today; I set them at the premium's BID price): (1) .URA220429P24 ($1.50 premium before market opens) to cover the 1st buy in the newsletter and (2) .URA220617P21 (~$1.15 prem) to cover the second.

Of course I have a spreadsheet setup to record my actual sell (if it happens today) and I can track if it sells. In the spreadsheet I have a column to enter a Buy to Close in case later I want to close and roll my position into a new STO Put. I evaluate that choice by monitoring the stock price and if the BTC is much cheaper than what I paid (I do a live equation that takes "Premium-Paid" - "Ask-Premium of the Position"), I close it and open a new position.

The golden rule is that I want this stock anyway and I am trying to pick a premium that may Put the shares to me, but in the meantime, I am trying to get great premiums at the initial and rolling actions.

Once I own these I may play around with them to Sell Calls and try to just get premiums before Sol triggers a sell order. Maybe I will make some $$ before Sol triggers and maybe I will get Called, but in the end, this is play time!!

Outside of losing money, I realize that I can spend a lot of time monitoring these plays, so I will plan to limit how many of these I do to limit my time spent on the computer.

[Eric]

I have Sold very few Calls and Puts and I am viewing the expense as learning at this stage, so the amount of $$ I am investing is viewed in that manner. I think of it this way, if I lose all of it at this point, I figure what I learn will be worth it and the $$ spent (lost) is at least 1-2 orders of magnitude cheaper than the college education I received.

I didn't go to a 4 year school, but I do have at least a bachelor's degree from the school of hard knocks. IMO dollar-for-dollar the school of hard knocks teaches you more than any American University.

With that said among a very few other Sells, I am taking URA and selling 2 puts (I have Day Limit orders set before the market opens today; I set them at the premium's BID price): (1) .URA220429P24 ($1.50 premium before market opens) to cover the 1st buy in the newsletter and (2) .URA220617P21 (~$1.15 prem) to cover the second.

Nice setups. Your $24 put is generating 6.25% return in 50 days, that's a damn respectable 45% annualized if you don't get put and a nice 6.25% boost to whatever return it generates if you do get put. Your $21 put is generating 20% annualized which is nothing to sneeze at either.

[jlhooter]

I didn't go to a 4 year school, but I do have at least a bachelor's degree from the school of hard knocks. IMO dollar-for-dollar the school of hard knocks teaches you more than any American University.

I was a college flunky when I barely graduated high school. It took me 15 years to go back and finish a degree to be an engineer, but I have to tell you that my engineering degree when I first got it was nothing compared to the true engineers (those who fix the cars and farm equipment, weld structures from scratch, build homes, etc.). Those very practical people who built this country are true engineers in that they look at a problem and solve it, and move on to the next problem. I always admire those who build things from scratch and make a living off of it.

Nice setups. Your $24 put is generating 6.25% return in 50 days, that's a damn respectable 45% annualized if you don't get put and a nice 6.25% boost to whatever return it generates if you do get put. Your $21 put is generating 20% annualized which is nothing to sneeze at either.

I was inspired by your WEAT calls you did and gave it a try myself with OIL. It is not doing well at the moment, but I was able to sell a call at $1.35 (Mar 18 @ $45 strike) and within 2 days I closed it at $0.20 netting $1.15 and opened a new call @ $1.30. My goal is to deal with the stock decline by trying to reduce my cost basis by rolling calls. In reflection OIL was not the right position to make (??) at the moment, but whatever, I am learning and it is fun in a sick kind of way.