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Fascinating subject. I also just want to mention why it makes sense that people SELL put options, in addition to buying them. If you sell a put option, then yo

by AlanSE 5y ago

Fascinating subject. I also just want to mention why it makes sense that people SELL put options, in addition to buying them. If you sell a put option, then you have the obligation to sell in the future at the fixed price, regardless of the market price at the time. However, many of these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options. So if the stock goes above the strike price, they have the option of selling the shares the already own. Thus, the seller is not on the hook for infinite losses. They merely trade the potential for unlimited gains in return for a fee. I've always thought it would be fun to get into options by regular, automated, selling of covered put options. You get paid by speculators for underwriting their speculating. But... options pricing models are like real academic. It's like a real job.

arcticbull 5y ago
That's when you sell a covered call. When you sell a put, your obligation is to pay the strike to buy someone else's shares. For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts. A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.
mypalmike 5y ago
> these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options A covered call is where you sell options backed by long shares. A covered put is backed by short shares. A common way of selling puts without shorting the underlying stock is just having enough cash on hand to buy the underlying asset if the option is exercised. And yeah, some small investors do claim to make decent income primarily writing options. The basic idea is that if you can eke out like 0.5% a week on average, you can get around 25% annual returns. I've been looking into trying to automate some basic strategies, but it's rather daunting just getting started in automated trading. Figuring out how to just get the data you need for implementing a strategy is a pretty big hurdle, for instance.
- arcticbull 5y ago
  I've also long wanted to develop a low-frequency trading bot for automatic index futures options writing.

by AlanSE 5y ago

arcticbull 5y ago

That's when you sell a covered call. When you sell a put, your obligation is to pay the strike to buy someone else's shares. For instance, AMD is trading at $77. Let's say I'm long-term bullish on AMD, but don't want to pay more than $70 for it. I can sell $70 puts every week, collect the premium up front, and then if AMD closes below $70 on the expiration date of my short put, I'm obligated to pay $70 for the shares, even if they're trading much lower. I win because I get to collect the premium no matter what, and if I get assigned, I bought at a discount to the market price when I sold the puts. A covered call gives you the obligation to sell your shares to someone else if the option expires in the money. This is a great way to exit a position, for the same reason. You can sell calls repeatedly at the lowest price you'd accept for your shares, and if it moves down, you've hedged. If it moves up, and you get assigned, you sold for above market price as compared to when you sold the call.

mypalmike 5y ago

> these positions are "covered", meaning that someone can sell a put option while owning as many stocks as they sell in options A covered call is where you sell options backed by long shares. A covered put is backed by short shares. A common way of selling puts without shorting the underlying stock is just having enough cash on hand to buy the underlying asset if the option is exercised. And yeah, some small investors do claim to make decent income primarily writing options. The basic idea is that if you can eke out like 0.5% a week on average, you can get around 25% annual returns. I've been looking into trying to automate some basic strategies, but it's rather daunting just getting started in automated trading. Figuring out how to just get the data you need for implementing a strategy is a pretty big hurdle, for instance.

arcticbull 5y ago
I've also long wanted to develop a low-frequency trading bot for automatic index futures options writing.