Anybody here write puts at their buy price for a stock as opposed to using limit orders? Was talking to some people about this and was surprised that they just use limit orders. Why would you use limit orders and forgo the premium?
A lot of people with equity strategies cannot write options per their sub docs. A lot of investors get nervous if you start writing options that theorhetically have unlimited exposure, particularly if you are mainly an equity person and not a derivatives person.
What do you mean by write puts at their buy price?
I have a buy on XYZ at $5 and it’s currently trading at $7. So, I write a put on XYZ with a strike of $5 and collect the premium since I would buy at that price anyway.
writing puts is the obvious winner, if you can. you can operate as if you have a much larger portfolio by writing puts beyond your actual account balance (i.e. develop a portfolio income that is say 2-3x larger than the income of a typical portfolio but risk having to sell stock you’re excercised on most of your puts). it’s better to start a strategy like this just following a 20%+ market decline, for obvious reasons.
“Writing puts”? Man, this terminology is so cute.
Anyway, this doesn’t sound at all the same as just buying the stock. If you sell the puts, you earn the (fixed) option premium as long as the stock price remains above the strike price. If you just buy the stock, you have unlimited upside, but have less of a “buffer area” before you start losing money. Both strategies are long the stock, but the payoffs are different under most circumstances.
Loss is not really unlimited if you sell puts. Unless you use leverage, the maximum loss is less than the maximum loss from buying the stock.
As bromion said, shorting puts in discretionary portfolios is difficult. Even if they client´s are legally able to do options, many of them are too anxious.
We infrequently use written puts in our equity fund for purchase prep if the stock seems currently overpriced.
writing/selling puts is a smart idea. much better than limit orders for value investors.
bottomline at least that in my opinion. always better to sell a put. ppl dont like it cuz they hate being associated with derivatives. but its prolly the best way to build a position. since you collect a premium while u wait for a stock to get cheap. if it goes higher then fuq it, you missed a crayz move up, but at least you collect your premium. so upside favors limit orders, downside favors selling puts. but because individual stockcs are so volatile. imo it makes sense to just sell puts. prices can go down enough, and you build your position and you benefit from the upside.
Thinking about this more from a rebalancing perspective. If I know that I am going to rebalance my portfolio following a 15% decline in the S&P 500, for example, I will just write SPY puts in my brokerage and collect the premium in the meantime. I keep 50% of my liquid, non-tax deferred assets in a pretty simple mix of investments and 50% in more opportunistic investments, and this would be perfect for the half in a passive, broadly diversified portfolio.
It seems that as part of a rules based rebalancing protocol selling puts is a no-brainer. Not sure why I didn’t do it earlier.
For value investors, the put-as-entry method can make sense, provided the dividends are not important to you. You’ll pick it up if it reaches your target value, and won’t if it doesnt.
If you are a momentum person, it doesn’t work very well. Either you never take possession of the stock as it rockets up and the put expires worthless, or it goes down and gets assigned when the world sucks for it. You do get a bit of premium, but that’s about it You might as well sell butterflies or straddles.
Also, it gets difficult to figure this out in a portfolio context. Your portfolio generally makes sense with a certain combination of stocks. If a stock isn’t in there, the ideal portfolio for you might look different. So this method works fine if you are doing something like “five best value ideas” or something, but if you are trying to run a diversified portfolio, it can be problematic not knowing whether this thing your research says should be in there is in fact in there or not.
^ this certainly is a major issue. this is why i think this strategy is best suited for adding leverage to your portfolio. you own your top picks, and add extra return by selling OTM puts. it’s pretty cheap leverage considering borrowing costs are typically 4-5%.
atm puts are prolly your best bet though. best premium. otm, you gotta factor trading costs sicne premium aint shit. itm, be prepared to purchase crap.
perfect tme to do this. say you have 25% in cash. but want to go to 20%. so you want to build a 10% position. make sure strike priceXcontracts is equivalent to that 10%. as a value investor you are never in a hurry. premiums from atm puts are also more likely better than dividends.
selling puts is not really a substitute for owning stock. risk reward always better for stocks in general. but if u got cash, and its doing nothing. you might as well be paid to wait for a more appropirate entry point b yselling puts.
Why would I sell an ATM (or even an OTM) put versus doing a covered call? It’s the same deal, and I imagine far more portfolios don’t have constraints around covered calls vs short puts (I don’t know if this is true not being in that business)? Am I just saving one commission on one leg of the trade?
Put selling as opposed to buying the stock, hmm okay. Since I’m derivatives-retarded I need to walk thru an example…
So AAPL announces earnings Oct19. I’ve already got all the shares I want and expect it to go higher pre-earnings, currently $114. But sure, I’d buy more at $105, I just doubt we’ll see that before earnings. So, you would sell say qty10 Oct16 puts with a strike of $105. My screen says that’s a $860 premium collected. If sometime before close on Oct19 it goes lower than $105, some chump puts you around $105K of AAPL stock (you take physical delivery with these equity options right?). If it goes lower than $104 you receive the stock at a loss position, but whatever, you intended to buy and hold at that price anyhow.
Is that correct? Well, that seems pretty smart in certain situations.
^ Yes. It’s also the same as buying 1000 AAPL and selling the $105 call. You get the premium, and only take the position if it closes below 105. You’d actually earn more with the covered call than the short put looking at today’s #'s.
It’s essentially like setting a limit order and collecting a premium if it stay above that breakeven you wanted. i would let the put just expire though. if it becomes worthless, then you collected premium. if price does go down. you take ownership of the stock and build up your position.
if it falls below the breakeven, yea you lost a ton of money. but u would have lost more with a limit order since its the same price without the premium. the problem is the upside. if it goes up, then you will never have built a position, but u at least collect the premium.
i agree it doesn’t make much sense ATM. OTM, you limit your loss on the downside.
scenario 1: buy AAPL @ $112, sell Dec $120 call for $3.70. you get a $0.50 dividend as well. nothing happens you get $4.20. stock falls to $105, you lose $2.8. stock falls to $100, you lose $7.8. stock goes to $120, you gain $12.2.
scenario 2: sell Dec AAPL put at $105, get $4.05. nothing happens you get $4.05. stock falls to $105, you get $4.05. stock falls to $100, you lose $0.95. stock goes to $120, you gain $4.05.
as you can see, scenario 1 is much much much more bullish than scenario 2. your odds of winning in scenario 2 are higher but the potential gain is much higher in dollar terms in scenario 1.
it’s fair to remember that your return in scenario 2 is infinity, whether it is a gain or loss, whereas your return in scenario 1 is dependent on your cost base.
using puts when you have idle cash doesn’t really make much sense unless that cash/bonds is paying you more than inflation. selling puts is cheap leverage for the savvy and imo should only be used to add leverage to a portfolio.
Explain please.
^ Matt: Those are two different trades! Buy AAPL sell $105 call is the same as sell $105 put. If nothing happens, you get premium + dividend. If it falls below $105, your losses are the same as having written the put. The only difference is you get dividends, which should be priced into the put-call parity. There should be no arbitrage between the two trades. One difference though is you’ll pay interest on your margined stock in the covered call, while you won’t in your short put. I imagine this too is priced into the no arbitrage pricing assumption, but some options markets aren’t that liquid so maybe there is something there. I find a lot of those who sell puts think they’re pretty badass, but when they see it as just a covered call its a bit less exciting.
they’re not really that different as they both involve buying stock and both have similar returns assuming no change, which is the most likely scenario. and we’re selling a $120 call so the put call parity is mostly irrelevant.