[mslk]

i'm newbie when it comes to active\day\swing\trend-trading but i've been trading options (primarily for income) for a little bit. i'm starting this thread to share some of my option trades and to record how i'm doing on them. hopefully this will help me cover the cost of learning how to day-trade!

most of my trades are *selling* put options on big safe companies with dividends, with the intent the option expires worthless and i collect the premium. if it doesn't expire then i get to buy the stock at a discount.

Disclaimer: i am not an investment professional and this is NOT investment advice!

first trade abbott labs (ABT)
- sell, to open, abbott labs (ABT) august $50 puts for at least $0.9.
- if options expire worthless, i get 9% return on my 20% margin requirement for 2 months work
- if it i'm obligated to buy the stock at $50, and taking into account the $0.9 premium, i'm buying the stock at 4.7% discount
- ABT pays a 3.7% dividend, has a strong balance sheet, and is a large diversified health care company just ready for the onslaught of baby-boomers

-mslk

[optiontimer]

Originally Posted by mslk »

...
- if it i'm obligated to buy the stock at $50, and taking into account the $0.9 premium, i'm buying the stock at 4.7% discount...

Unless the stock declines to $45, and it is put to you at $50 - then you will be paying an 9.1% premium, and that doesn't take into account commissions and fees.

Its a matter of perspective.

Good luck with your trading.

-optiontimer

[SIUYA]

Originally Posted by mslk »

- if options expire worthless, i get 9% return on my 20% margin requirement for 2 months work

adding to optiontimers IMHO perfect analysis is that, you will get a

90 cents/5000 cents = 1.8% return for 2 months (still not too bad)

This is because your actual exposure is $50.
While this is a conservative view, it will also accurately reflects reality if things go bad.

(while not anti selling options, it never really features in my trading but often people underestimate the risks of selling them, verses the perceived returns)

[Pony]

I really wish I knew something/anything about options, because that sounds like a very plausible strategy.

[reset.no.regret]

Originally Posted by optiontimer »

Unless the stock declines to $45, and it is put to you at $50 - then you will be paying an 9.1% premium, and that doesn't take into account commissions and fees.

Its a matter of perspective.

Good luck with your trading.

-optiontimer

There is always the option of buying back the put if the stock go against him.

[optiontimer]

Originally Posted by reset.no.regret »

There is always the option of buying back the put if the stock go against him.

Of course, but he sold it for $0.90, which means he collected $90 less commissions and fees.

If the stock declines to $49, how much will it cost him to buy it back? Even on opex he'll pay a dime above intrinsic, plus commission and fees, or $110 + costs.

How much will he pay if the stock is at $48? $45? $30?

The risk, even on a "safe" company like ABT, is very real. ABT traded as high as $57.36 the week ending 2/13/09. During the week ending 3/13/09, ABT traded as low as $44.10. Had he sold the April $55 for $0.90, he'd have either been buying the stock for $55 while it was $11 lower at the market, or he'd have bought back his $90 put for a cool $1100. That's risk!

I know one trader who had sold AMSC April 22.50 puts for $1.25, and with two weeks to expiration the stock closed just below $25. The next day it opened at $13. He hoped the sell-off was over done, and by the time the margin clerk came a calling, he was forced to close them at $11. So he sold them and "collected" $125 less commissions and fees. He bought them back paying $1100, plus commissions and fees. The stock is now $8.62.

As SIUYA said, when it comes to being short options, "often people underestimate the risks of selling them."

I wish him good luck with his trading, but I think he could benefit from another perspective.

-OT

[SIUYA]

the other problem with buying back the put is that often if the stock is in a bit of trouble volatility goes up and liquidity can dry up in the market (depends on the stock). The other rule which must be adhered if adopting a short volatility strategy is always buy the options back when they are a few cents - who cares if they are theoretically worth zero, you did not sell them because of their theoretical values.....buy them back when you have made most of the money. It will only take one day to wipe out lots of gains.

Selling options IS a valid strategy - but you need to know the risks and what your real exposure is.....additionally it generally helps to approach it in a portfolio insurance company like manner, knowing that the ''law'' of large numbers (if there really is such a thing ) then works partially in your favour.

Think about this, and many people dont, or when they do it makes them think more about the risk retruns - the most you will make when selling options (or most things) is the price you sell it for. There is no possibility to compound returns from the original trade.

[reset.no.regret]

I was suggesting buying back the put as a risk management technique opposed to letting the option expire and being assigned - that was the only point I was trying to make. Depending on the critera used to exit he could/would still lose money buying it back; but not nearly as much as being assigned a dropping stock.

I'm not trying to argue the points being made, I think all the things mentioned are valid in this case; however, they are also valid is most cases: underlying instrument moves against you, gapping down hard overnight, profit rapidly eroding, etc. Ultimately, I think we are saying the same thing - know your risk before entering the trade and have an exit strategy in case things turn against you.