3 ms·

Selling puts on a reputable stock is a great way to enter a position though. Anecdotally it has worked for me. But am I stupid or naive? Genuine question.

f430 6y ago
here's the thing you simply don't know when CNBC will start shitting on it and then cause a dip that would put you in the red. So you could be eating for 200 days and then blow up your account and this does seem to happen to traders. but I am thinking what if you were writing LEAPS. We've been in the longest bull run in history since 2009, so you could've made a lot of money selling LEAPS until maybe 2020 where you would blow up your account and end up owing more than your balance. Also another area that I could never find an answer on: i was told most traders never excersie their options. so if you sell puts and they never exercise you don't have to deliver the stocks right? you just end up paying what the options market price is on the day the reputable stock dips?
- sombremesa 6y ago
  > i was told most traders never excersie their options What you were actually told was probably that most options expire worthless.
glenngillen 6y ago
If the alternative was going to be buy and hold on the same underlying anyway it’s a perfectly ok strategy, certainly not a stupid one. Worst case is you get assigned a stock you wanted to own anyway, but at a discount to the original face value + you’re paid to do it. Actual worst case is the underlying pops and you “only” get the premium you collected and not the full upside. So definitely not a profit maximising strategy but still a reasonable one. Especially if the market/underlying are generally moving sideways.
- f430 6y ago
  but when you sell options you are betting that the stock won't move towards the direction described in the option because if it does you are going to be margin called by your broker. I don't know exactly how it happened but someone on wallstreetbets a while ago said he woke up to find he was -250% and asking what to do. I assume he wrote bunch of options which ran against him. It's disturbing because I talked to this kid literally a week before I told him I blew up my account buying far OTM puts (I was right about the price but SEC froze the stocks far past the expiry).
  - pliny 6y ago
    If you have enough cash + leverage to buy the underlying on the puts you won't get margin called, you'll get assigned.
  - glenngillen 6y ago
    This is an over simplification and generalization of what the underlying motivations might be. I will semi-regularly sell puts with a reasonable expectation of being assigned. It is in effect the same as putting a limit order in, with the upside of getting paid for doing it.
blabitty 6y ago
How do you feel about covered calls? From a risk perspective they are equivalent positions, limited upside and big downside risk.
- trianglem 6y ago
  They are not equivalent positions. Selling covered calls has unlimited loss potential.
  - hi_hello 6y ago
    Do you mean selling uncovered calls? With a covered call your potential profit is capped, but you aren't exposed to the infinite risk of buying the stock (since you already own it) at a bananas price if it exceeds your strike. Selling covered calls can be a fine substitute for limit sells if used carefully. Assuming one is comfortable selling at the strike price, the covered call trickles a little profit in the meantime.
jrehor 6y ago
There are two failure modes of this strategy. 1. New information comes to light, the stock crashes, and you realize you were wrong and the stock is a dog. You no longer want to own it at the strike price. Oops. You effectively bought it above your updated estimate of its worth. 2. The stock keeps rising and rising, you collect the option premium but you could have made a lot more money if you just bought the damn thing outright. These are more subtle failures than the usual "Oh my God, I blew up my account!" but they're real. It's perfectly fine to keep doing what you're doing if you're comfortable with this risk. There is no strategy without a downside.

f430 6y ago

here's the thing you simply don't know when CNBC will start shitting on it and then cause a dip that would put you in the red. So you could be eating for 200 days and then blow up your account and this does seem to happen to traders. but I am thinking what if you were writing LEAPS. We've been in the longest bull run in history since 2009, so you could've made a lot of money selling LEAPS until maybe 2020 where you would blow up your account and end up owing more than your balance. Also another area that I could never find an answer on: i was told most traders never excersie their options. so if you sell puts and they never exercise you don't have to deliver the stocks right? you just end up paying what the options market price is on the day the reputable stock dips?

sombremesa 6y ago
> i was told most traders never excersie their options What you were actually told was probably that most options expire worthless.

glenngillen 6y ago

If the alternative was going to be buy and hold on the same underlying anyway it’s a perfectly ok strategy, certainly not a stupid one. Worst case is you get assigned a stock you wanted to own anyway, but at a discount to the original face value + you’re paid to do it. Actual worst case is the underlying pops and you “only” get the premium you collected and not the full upside. So definitely not a profit maximising strategy but still a reasonable one. Especially if the market/underlying are generally moving sideways.

f430 6y ago
but when you sell options you are betting that the stock won't move towards the direction described in the option because if it does you are going to be margin called by your broker. I don't know exactly how it happened but someone on wallstreetbets a while ago said he woke up to find he was -250% and asking what to do. I assume he wrote bunch of options which ran against him. It's disturbing because I talked to this kid literally a week before I told him I blew up my account buying far OTM puts (I was right about the price but SEC froze the stocks far past the expiry).
- pliny 6y ago
  If you have enough cash + leverage to buy the underlying on the puts you won't get margin called, you'll get assigned.
- glenngillen 6y ago
  This is an over simplification and generalization of what the underlying motivations might be. I will semi-regularly sell puts with a reasonable expectation of being assigned. It is in effect the same as putting a limit order in, with the upside of getting paid for doing it.

blabitty 6y ago

How do you feel about covered calls? From a risk perspective they are equivalent positions, limited upside and big downside risk.

trianglem 6y ago
They are not equivalent positions. Selling covered calls has unlimited loss potential.
- hi_hello 6y ago
  Do you mean selling uncovered calls? With a covered call your potential profit is capped, but you aren't exposed to the infinite risk of buying the stock (since you already own it) at a bananas price if it exceeds your strike. Selling covered calls can be a fine substitute for limit sells if used carefully. Assuming one is comfortable selling at the strike price, the covered call trickles a little profit in the meantime.

jrehor 6y ago

There are two failure modes of this strategy. 1. New information comes to light, the stock crashes, and you realize you were wrong and the stock is a dog. You no longer want to own it at the strike price. Oops. You effectively bought it above your updated estimate of its worth. 2. The stock keeps rising and rising, you collect the option premium but you could have made a lot more money if you just bought the damn thing outright. These are more subtle failures than the usual "Oh my God, I blew up my account!" but they're real. It's perfectly fine to keep doing what you're doing if you're comfortable with this risk. There is no strategy without a downside.