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Weekly Options on Stocks
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Weekly Options on Stocks

 
Elite Member
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Hey Rich

Those are good questions. I am sorry about "jargon" or if I am assuming things that might not be widespread or accepted knowledge.

First let me say that general discussion is appropriate for general approach but each trade or possible trade is specific. What that means is that options math is a concept for general discussion but each trade is significantly more specific.

Your first question on the roll: The roll happens when the initial short put is at 50 delta. So a put that I sold when it was 30 delta is now 50 delta...this means the stock has gone down and the likelihood of exercise is about 50/50. The action points to consider are 1) do nothing, maybe you skate with your premium, maybe you buy stock at the strike price of your short put. 2) look to roll out (in time) usually to the next expiration. The first place I look is to the next expiration week 30 delta put. I like to stay credit, meaning that the net on the put I have to buy back and the net on the new sell are still a credit. (premium I collect) Sometimes to maintain a credit I have to look at a different strike or a longer expiration.

So I don't want to roll AND buy the stock. I want to roll to avoid buying the stock...if I can stay net credit. Sometimes I decide that I'm keeping the premium, staying short the put and if I get exercised I'm doing it at a net that I'm okay with because I think the stock is at or near a bottom. So there is a directional assumption there that is separate from the premium selling strategy.

The second question on buying put spreads. Long put spread is long the farther out expiration and short a near expiration. The advantage here is that you have less risk. As one goes up the other goes down...and your theoretical worst case is the difference in strikes. Sometimes I will use the short put premium to finance the long put, meaning that I'm long the put spread as a hedge against a long stock position. Sometimes though the spread has enough front ex premium that you can swipe considerable premium buy selling each new front ex. However this long put is an expense and you make less premium.

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Trading Apprentice
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Pugged's Avatar
 
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Backratio Spreads


Husker View Post
IMHO, it's better to sell OTM put spreads rather than naked puts. You can take 2x the number of positions to collect the same amount of premium but will have your losses capped to prevent the big losses. Your margin requirements are much smaller also so can use the additional margin for positions in other stocks.

I was actually selling backratio spreads OTM on spy, qqq, and iwm for the last 2 years when things went sour in october. i did pretty good selling the vertical off on the downside. unfortunately the downside kept seeking newer lows. I had to pony up & sell qqq at a big loss in my cash account (or pay $25 a day in margin interest). I'll try them again on etf's sometime in the future, but only in an ira account (which don't allow margin).

 
 
Elite Member
San Francisco CA
 
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wldman View Post
@TraderRich

The basic notion is outlined above.

I have a list of about 50 stocks that I would not mind owning. At any given time I do typically own between 10 and 30 of those names.

There is a fairly complex methodology that creates that list of "basket target" stocks. The list is under constant review with two or three adds/drops each month or so. Current list:

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So from that list I typically write puts on 5-10 names each week. Again, there is a metric for that based mostly on my hallucination about those companies and how they are trading. One item I like to look at is what I call front Ex 30 delta put yield. I take the mark for the put and divide it buy the strike price. That gives me a put yield coefficient that I track to see where the juice (risk /reward) is best...again based on my accumulated experience "hallucination". You can get an annualized return number by taking (premium raised divided by strike) times (365 divided by days remaining).

I use a similar series to sell calls against long stock when I feel that a company is overvalued or about to take a shit.

These are options I sold today. None of these are rolls, all are new sells. I usually sell or roll on Thursdays or Fridays depending on when I think the DPM will dial out the weekend theta. I sold these because I felt the premium was right for the risk.

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Hope that helps. Dan

Hey Dan,

Thanks again for sharing. Learn something new every time.

For "That gives me a put yield coefficient that I track to see where the juice (risk /reward) is best".
Since the mark changes as the stock price changes, how do you use the coefficient to assess the risk/reward? What do you do next once you have that number?

This attachment is as of today for JPM. Delta 30 is strike price 103 with Mark at $0.45. Put yield = 0.00436.
Current price is 104.17.

Also, do you use price action in your charts for trend/directions and perhaps sell a closer put/closer for higher premium?

Thanks!

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Weekly Options on Stocks-capture.jpg  
 
 
Elite Member
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Posts: 2,472 since Aug 2011
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Yes, almost all manual..

I made a spreadsheet that has my current list. Usually I only do the calculations once or twice a week. Thursday after the open and Friday afternoon. I don't limit when (meaning day and time) that I will trade, simply given the work involved I check the premium yeild around the typical time I'd sell to open new positions.

The standard ToS columns Front Volatility and Front Expected Move are both fine and well to gauge opportunity. I prefer this metric of front expiration put yield because it allows me to "monetize" the expectation as expected, or better stated...annual percent return. I can get 2.78% "riskless" on the ten year. I can use lots of cash in concentrated positions buying stocks (which I certainly do). This put selling idea allows me (most of the time) stellar returns while I build the basket of stocks.

IDK about what you say for JPM because I dont know how many days to expiration you are using. Friday is 2 days, there will not be a great deal of premium there. Next Friday is 9 days. If I was looking at JPM, which I do. I'd use: 104.17 last, the 8 Feb 19 102 Put, Marked at 61.5 cents.

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So in the formula: (.615 divided by 102) times (365 divided by 9)

.0060294 times 40.55 equals .24

That is a 24% ROE

Where the assumption gets tough as a projection is will/can the trader actually sell the front ex 30-ish delta put at these levels every nine days for a year. The answer is not likely. Sometimes you will get more. Sometimes you will lose efficiency on a necessary roll. Sometimes you will buy stock.

I hope that helps.

Dan

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Elite Member
San Francisco CA
 
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Pugged View Post
It's more a psychic thing I would have to say, you have to have the cash (or other securities, margin) in your account in case you are assigned (contracts times strike). So, sometimes it seems like a poor return, except that the company (or etf) would have to go bankrupt to really harm you.

I used to scan for minimum ROR, but now I just look for decent premium and low probability of ITM. Premium of less than .15 is not really worthwhile, except in times of low volatility you take what you can get there. Premium at .15, as you probably know, means $150 on 10 contracts. And I have to be really careful when the strike is above $100. You can't sell too many with my portfolio without maxing out.

I check again thursday for the price activity and make preparations to roll if I need to. Easier to roll out and down for net credit on Thursday instead of expiration Friday. Net credit keeps you making money, net debit takes you away from making money.


Do you also use any price action/chart analysis/technical in your trade?

 
 
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wldman View Post
I made a spreadsheet that has my current list. Usually I only do the calculations once or twice a week. Thursday after the open and Friday afternoon. I don't limit when (meaning day and time) that I will trade, simply given the work involved I check the premium yeild around the typical time I'd sell to open new positions.

The standard ToS columns Front Volatility and Front Expected Move are both fine and well to gauge opportunity. I prefer this metric of front expiration put yield because it allows me to "monetize" the expectation as expected, or better stated...annual percent return. I can get 2.78% "riskless" on the ten year. I can use lots of cash in concentrated positions buying stocks (which I certainly do). This put selling idea allows me (most of the time) stellar returns while I build the basket of stocks.

IDK about what you say for JPM because I dont know how many days to expiration you are using. Friday is 2 days, there will not be a great deal of premium there. Next Friday is 9 days. If I was looking at JPM, which I do. I'd use: 104.17 last, the 8 Feb 19 102 Put, Marked at 61.5 cents.

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


So in the formula: (.615 divided by 102) times (365 divided by 9)

.0060294 times 40.55 equals .24

That is a 24% ROE

Where the assumption gets tough as a projection is will/can the trader actually sell the front ex 30-ish delta put at these levels every nine days for a year. The answer is not likely. Sometimes you will get more. Sometimes you will lose efficiency on a necessary roll. Sometimes you will buy stock.

I hope that helps.

Dan

Sorry for the JPM confusion. It was for this week, which was 3 DTE.

Thanks again for sharing. I am going to look more into this concept.

Also, I am wondering do you use any price actions for trend/direction to perhaps sell a closer put/call for higher premium?

Thanks

Rich

 
 
Elite Member
Chicago Illinois USA
 
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wldman's Avatar
 
Posts: 2,472 since Aug 2011
Thanks: 1,216 given, 3,713 received

Hey Man.

Yes, of course there is some type of metric to everything. I talk about and generally target the 30 delta strike as a generalization, not a "rule". In a significantly up trending market I want to own the stocks AND write puts.

I formulating your own approach I'd encourage you to be more general than specific until you get a great handle on the strategy and the stock you like to trade/own. Where I started when I began to explore this idea was with the 200 day and 50 day simple moving averages. Declining stock price below a 50 day below a 200 day all with negative accelerating slope is not the best situation to collect put premium and create an obligation to buy stock. So with those two lines I considered the change in their relationship...you call that a customized MACD. I don't have "rules" any more because Im not trying to automate and because rules are good until they are not...shit changes, and it changes pretty fast. The best advice is to spend the time getting good at what you do and develop your acuity and trading skills. Start as broad as possible and dial things in as it suits your style and personality. In hard up trends I would sell 40 delta or even ATM puts. In Nov and Dec of 2018, I bought a lot of stock because I was too aggressive with my short puts. I remember one day late Dec where I was getting exercise notices and felt really dumb taking on a bunch of stock. Howyadoin now folks that panicked at the bottom...Uncle Wldman says thank you. Of course it doesn't always work like that. But I NEVER sell a strike that I would not pay to own the stock...well almost never.

When you have a full tool box you will notice changes in volume and volatility. Of course that does not make you perfect, but the harder you work at it the better you will get. Things that you struggled to understand or were oblivious too will be second nature. Oh, you will still get the hands free proctology exam from time to time, but if you pay attention and mind the necessary roll you can almost always trade out of it...or at least apply lots of lube.

So, the next basic suggestion I'd say is spend a lot...a real lot of time creating your own little trading pit. Make a watch list of 10-20 companies that fit your stock ownership parameters AND your skate with a bunch of put premium parameters. Each week make appropriate well reasoned trades and always always begin with risk in mind.

Now, if i am an arrogant F^@K, of just out of touch with your specific reality I have two things to say. Don't effing give up. You can get it and you will if you work. If I can do it, anyone can do it. Second and corollary to that if you don't have the capital to own a couple hundred shares of a dozen stocks...dont worry. Everyone still trading started somewhere with less capital and less experience than they have now.

I was typing with @davethetrade and I'm looping him in here. It is totally viable to start a put selling strategy like this using SPY or a single stock that is #1 on your list of criteria. Keep in mind though that the SPY crowd is full of professionals...meaning when you think you might its too late.

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Elite Member
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wldman's Avatar
 
Posts: 2,472 since Aug 2011
Thanks: 1,216 given, 3,713 received

Rich...

I'm going to be hunting some, probably a bunch, of puts tomorrow. It's sell/roll day and its the first day of a new month. The threads where I'd normally post about that are behind the premium wall. I'd say that bucking up on the platform to upgrade your participation here would almost certainly be worth the investment. @Big Mike and his admins do a spectacular job and there is a shit ton of content that you can learn from.

So, if you are going to be around I'd post near real time how I'm thinking about new put sales...but I dont need practice typing or more distractions. Let me know I'll be staring at my screen all morning.

Dan

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Trading Apprentice
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Charts/Trends/Other


TraderRich View Post
Do you also use any price action/chart analysis/technical in your trade?

Yes, I look for visual entry/exit points to some extent, especially for buying calls. If I scan for puts, before I trade any of the results I check a regression chart to verify the trend. If the trend is downward I don't sell puts on the security.

Premiums seem to have been unusually high the last couple of weeks, to the point where I was scared enough to be more conservative - too conservative! But hindsight is often 20-20 as they say. I sold 5 contracts (cutting in half what i would normally do) of antm 250 which expire today. My scan indicated around 269 or so for the strike paying 1.40-ish. I thought, after "3rd degree burns" from October to take it easy & go down to the 250 strike at .62, and to be more conservative do 5 contracts. And then I worried about it for a day and a half or so. I should have bought itm calls on this one instead on monday (and a lot of contracts at that)! {Tried to paste snip from tos monitor page but won't work, need a url}

Certainly what I did is a slam dunk, but I could not have predicted it. antm went down briefly to 268 or so, sitting at 302 right now.


Last edited by Pugged; February 1st, 2019 at 12:10 PM. Reason: clarity
 
 
Elite Member
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wldman View Post
Yes, of course there is some type of metric to everything. I talk about and generally target the 30 delta strike as a generalization, not a "rule". In a significantly up trending market I want to own the stocks AND write puts.

I formulating your own approach I'd encourage you to be more general than specific until you get a great handle on the strategy and the stock you like to trade/own. Where I started when I began to explore this idea was with the 200 day and 50 day simple moving averages. Declining stock price below a 50 day below a 200 day all with negative accelerating slope is not the best situation to collect put premium and create an obligation to buy stock. So with those two lines I considered the change in their relationship...you call that a customized MACD. I don't have "rules" any more because Im not trying to automate and because rules are good until they are not...shit changes, and it changes pretty fast. The best advice is to spend the time getting good at what you do and develop your acuity and trading skills. Start as broad as possible and dial things in as it suits your style and personality. In hard up trends I would sell 40 delta or even ATM puts. In Nov and Dec of 2018, I bought a lot of stock because I was too aggressive with my short puts. I remember one day late Dec where I was getting exercise notices and felt really dumb taking on a bunch of stock. Howyadoin now folks that panicked at the bottom...Uncle Wldman says thank you. Of course it doesn't always work like that. But I NEVER sell a strike that I would not pay to own the stock...well almost never.

When you have a full tool box you will notice changes in volume and volatility. Of course that does not make you perfect, but the harder you work at it the better you will get. Things that you struggled to understand or were oblivious too will be second nature. Oh, you will still get the hands free proctology exam from time to time, but if you pay attention and mind the necessary roll you can almost always trade out of it...or at least apply lots of lube.

So, the next basic suggestion I'd say is spend a lot...a real lot of time creating your own little trading pit. Make a watch list of 10-20 companies that fit your stock ownership parameters AND your skate with a bunch of put premium parameters. Each week make appropriate well reasoned trades and always always begin with risk in mind.

Now, if i am an arrogant F^@K, of just out of touch with your specific reality I have two things to say. Don't effing give up. You can get it and you will if you work. If I can do it, anyone can do it. Second and corollary to that if you don't have the capital to own a couple hundred shares of a dozen stocks...dont worry. Everyone still trading started somewhere with less capital and less experience than they have now.

I was typing with @davethetrade and I'm looping him in here. It is totally viable to start a put selling strategy like this using SPY or a single stock that is #1 on your list of criteria. Keep in mind though that the SPY crowd is full of professionals...meaning when you think you might its too late.

Hey Dan,

Thank you very much for sharing your thoughts and for the encouragement! I started this trading journey when I got my first job right out of college with a Mechanical Engineering degree 5 years ago. My initial objective was just to invest in stock and hope for the best. But just few months after that, I found stock/trading to be much more intriguing than I ever expected.
Your comment of " Start as broad as possible and dial things in as it suits your style and personality" and "I don't have "rules" any more because Im not trying to automate and because rules are good until they are not...shit changes, and it changes pretty fast. " are really on point. Within the past 5 years, I traded penny stocks for about year and realized it wasn't for me (luckily, I didn't loose any money of it). I went on to do swing trading on stocks but don't have big capital to hold multiple stocks. I then went into options in early 2016 and have been in it since. When I review myself and my thought process shortly I got into option, I realized one of my biggest problem/flaw was my expectation to seek that perfect "holy grail" rule or 99.99% reliability setup like an engineers are required to do, which in the world of trading/finance is it impossible. Even though I realized that, i am still having trouble to fully pound it into my head because after I had few losing trades in a row, I start to doubt my strategy and back to the mindset of seeking that perfect rule again.

Also, I do have a list of stocks I go through every week for potential weekly option plays. I look at PA for chart patterns/setup and option pricings and IVs. A lot to learn and refinement to improve the strategy.

Now that you pointed them all out, I feel I see a dot of light on the other end of the tunnel because I feel what I am doing now is actually steering at the right direction. Thanks!!

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