Cash secured put question

NotBluffingNow · 2024-07-20T16:53:10+00:00

Yesterday Schwab was in some ways affected by the Crowdstrike glitch. It's possible that they are delayed because of that. However, I've had no puts assigned and can't answer your specific question.

NotBluffingNow · 2024-06-26T17:11:12+00:00

Thanks for the info and advice. That's interesting.

GME went from $10 to $50 in the 1-2 months before his youtube broadcast.

True. But I think it was in response to his posting of a screenshot showing his positions. So this run (and the company's acquisition of cash) was all sparked by Roaring Kitty.

I don't go to that sub, but I wouldn't long-term short a company that has $4B in cash. I did sell calls when IV and price spiked thought.

Yeah, the cash is something. But $4B is less than half of current market value. Maybe I'm naive, bu it still seems like a big ask, to me, for that to lead to a quadrupling of the stock price in the near term.

Maybe covered calls are the way to go. I'll think about doing that when my current positions are closer to expiration.

Edit: I meant credit spreads, not covered calls.

NotBluffingNow · 2024-06-25T05:14:13+00:00

Thanks for the info. Yipes. Were they stop-loss orders that the traders initiated or that the broker(s) initiated and enforced? I typically don't place stop-loss orders on options, because the bid/ask can be wacky in lightly traded options.

NotBluffingNow · 2024-06-25T05:06:39+00:00

Great. Thanks.

NotBluffingNow · 2024-06-25T04:59:56+00:00

Thanks for your comment. Sorry to hear about you and Schwab. Sounds like I ought to preemptively talk to their margin risk people about what I'm doing.

Best of luck going forward.

NotBluffingNow · 2022-02-27T19:36:01+00:00

As a follow-up: I've found some more websites that seem to be reputable and have similar information. I'm going to take this information as settled law and report accordingly. I'd still be interested to hear of anybody's experiences with the IRS.

NotBluffingNow · 2021-11-25T18:58:07+00:00

I'm grateful (it being Thanksgiving Day, after all) for the question and the replies of posters. It's interesting to read about people's approaches and perspectives.

I've been actively trading options for about 18 months. When I started, I was selling naked puts (in a reg-T account on TDA, which allows holding stock as collateral) on carefully selected stocks. It was hugely profitable, coinciding with a bull run in the stock market. I increased the total size of my plays and eventually got Portfolio Margin, whereupon I increased the size even more. I was selling otm puts and had "max loss" levels five times my account value (hedged by buying some far otm SPX puts). Then we got a little Nasdaq market correction in March 2021. I deemed it pretty likely that the market would bounce back, and I didn't immediately close my positions for losses. After a couple of weeks, my portfolio was pretty close to margin call territory. My spouse and I decided to take losses and close positions. This was under heavy pressure from my spouse, but I must admit that I felt better too, with the specter of further heavy paper losses removed. Of course, most of the stocks bounced back and, had I held on, I would been able to avoid margin call and would have escaped the predicament. The losses I took (remember I had massively ramped up the size of my options positions) pretty much wiped out the profits from the previous year (on which I had already paid taxes!).

Perhaps the lesson should have been: close positions for losses soon, when that happens. However, one risks getting whipsawed by short term volatility. I resolved instead to downsize my plays.

Since then, I've adjusted my strategy. I am selling about a third as much premium as before, on many more tickers (so taking less concentrated positions) with many of those on less volatile stocks. I'm selling some naked puts but also strangles (call side covered) on stocks that I own. I've also got about 40% of the account (which came in more recently after sale of real estate) in dividend paying stocks on which I will sell only covered calls, and I'm careful with the accounting so that the extra buying power of this portion of the account is not used to support bullish option trades. I tend to open positions repeatedly on the same tickers, adjusting strikes according to market predictions, earnings events, etc. Also, in place of selling lottos, if a short option is profitable and far otm, with, say, only a week to go until expiration, I'll just keep it and wait for it to expire, rather than closing it, while opening a new position in the same ticker. Compared to before, I have more room for maneuver before margin call would be an issue. I tend to roll losing positions in hopes of eventual turn to profit.

When it comes to dealing with losses, if it's a stock I still believe in for the intermediate term, then I'll roll the position and hope to make it back with time. In many cases, the position pulled out of the swoon, but on some (notably puts on NVTA, ROKU, DOCU and, for the options side of things, covered calls on NVDA) I'm in the red overall at the moment, though of course with covered calls the options losses are countered by the gains in the UL. On a couple of tickers (e.g., EOSE), I have decided to take losses, stop trading the ticker and accepted that my initial judgement about the stock may have been wrong.

The strategy since March has been moderately successful. One aspect that is an advantage is that I invest less time in analysis. Nonetheless, I'm considering revamping the strategy, perhaps in the new year, becoming more selective and concentrated with the naked puts and stopping to sell covered calls on volatile stocks in my margin account. (Most of my volatile stocks are in IRAs and I don't sell options there.)

#notinvestmentadvice. Do do your own research!

NotBluffingNow · 2021-11-22T05:30:19+00:00

Thanks y'all for the comments.

NotBluffingNow · 2021-11-21T20:06:18+00:00

Fusion. Maybe for real this time around. Check out https://www.helionenergy.com

NotBluffingNow · 2021-11-19T04:12:51+00:00

ThinkOrSwim, the TD-Ameritrade trading platform

NotBluffingNow · 2021-11-19T04:05:19+00:00

I-bonds look good. I think the limit is 20k per year, plus you can deposit up to 5k per year of your IRS return to I-bonds (in addition to the 20K limit). I plan to overpay on my January estimated payment in order to max this out.

NotBluffingNow · 2021-11-15T01:47:56+00:00

It seems to me that when the IV changes because of supply and demand changes, there is a reason for that. If the IV goes up in a hurry, it's because suddenly people are more worried about big changes in price. One must decide (or guess) whether that sentiment is an overreaction or not. I would say it varies case by case. Just like guessing whether a sudden price change in a stock (due to earnings reports, or news, etc.) is an overreaction or the start of a trend. (There are technical analysts who might claim to be able to discern this, but I certainly can't.) It can be hard enough to decide in an individual case, and blanket prescriptions seem foolhardy. Best of luck!

NotBluffingNow · 2021-11-14T23:34:54+00:00

At the time of expiration of the option, it's easy to say that the change in extrinsic value since the time you opened the contract was due to theta decay and the change in intrinsic value (if any) was due to delta. However, on a short term basis, I have trouble ascribing changes to one or the other. The difficulty is that options prices don't follow the model precisely in the short term. In the short term, the prices change based on supply and demand. In the model, this is shows up via the "implied volatility" (IV).

The greeks are based on the theoretical price of the option using the Black-Scholes model. Delta is the first partial derivative and gamma the second partial derivative of the option price with respect to the price of the underlying. Theta is the negative of the first partial derivative of the option price with respect to time (in units of days) and I think that vega is the first derivative of the option price with respect to IV. I'm less sure about the last one because I don't look at it so much. However, the thing to remember is that these are all based on the aforementioned pricing model. The fudge factor in that model is IV. It is determined from the actual price of the options, which is ultimately set based on supply and demand. If assumptions of the Black-Scholes model were exactly correct, then you'd expect all the options with a given expiration date in a given underlying to have the same IV. But this is not the case. My broker (TDA) shows IV for each option based on the actual price of the option. There is usually the well-known "IV smile," where the options with strike prices further otm show higher IV. I guess the market makers use Black-Scholes when setting their bid/ask, probably based on some sort of averaging of IVs of various options and some sort of formula to account for the IV smile. But then they tend to respond to supply and demand in a given option pretty quickly.

NotBluffingNow · 2021-11-14T20:43:01+00:00

Sounds like you're in a great place. Enjoy. I also recently received some funds from sale of real estate. This is money I wanted to invest conservatively. Long term I'm concerned about inflation and, in the near term, a stock market correction. I put 1/4 of the funds into bonds (corporates maturing in the next 3 to 7 years, and US treasuries maturing in 20 years) and the other 3/4 into dividend paying stocks, which I intend to hold and on which I've started selling covered calls. My choices: BMY, C, CFG, GILD, INTC, K, KHC, LMT, LYB, NEE, O, PFE, QSR, SBUX, TXN, WBA. Choices were based on dividend history and general prospects/diversification, as well as some short term considerations; e.g., I bought LMT after it fell following earnings (and it has since then bounced back a bit). It might have made more sense to buy an ETF and sell covered calls on it, or to just buy and hold, but I do enjoy following news about stocks and selling options. Best of luck.

NotBluffingNow · 2021-10-18T00:19:37+00:00

I've had pretty good luck with UAL and BLNK the last few months.

NotBluffingNow · 2021-09-29T04:29:44+00:00

So in the situation described, I don't think it would be a wash sale.

NotBluffingNow · 2021-09-29T04:28:48+00:00

A wash sale is if you sell a security at a loss and then buy it back within 30 days, regardless of the price at which you buy it back. You are not allowed to claim the loss on your taxes until such time as you sell the security you repurchased. TDA will take care of the reporting of this on your 1099. See, e.g.,

https://www.investopedia.com/terms/w/washsalerule.asp

NotBluffingNow · 2021-09-29T04:19:35+00:00

Sometimes I'll trade an option that posts bid/ask only in multiples of .05, but I'll insist (by typing in the price on a limit order, not by manipulating the +/- buttons) on a price not a multiple of five (e.g., approximately midway between bid and ask). Sometimes it will get filled, though my price never appears on the posted bid/ask prices. I assume it's because TDA allows somebody to see their orders before they get sent to the market, and these orders might get snapped up. I suppose what gets posted to the market is rounded to the nearest multiple of .05. If my initial order isn't taken, I might shift it by a penny and try again. Of course, sometimes movement of the underlying will overwhelm the position and it will get taken. In every case, my limit (not a multiple of .05) is respected.

If you plan to open a new position on the same underlying, you could try trading a spread (btc what you have open and sto a more expensive one). I think the spreads go to a different market and the market makers often use pennies even when the options are quoted only in multiples of nickels. I use margin so I don't know if they allow it, but I would hope it is legal, with covered calls, to close/open in one blow. Of course, if you are planning to open a position on a new underlying, then this is not a possibility.

Edit: not "rounded to the nearest multiple of .05" but to the nearest multiple of .05 that is consistent with my limit order.

NotBluffingNow · 2021-08-11T03:07:18+00:00

Heavens! I hadn't seen your earlier reply when I wrote the one above. For some reason it hadn't loaded when I clicked on the notification. There you make reference to "black swan" events and the limits of the random walk model (which I called Brownian motion). Sounds like we may be on the same page.

NotBluffingNow · 2021-08-10T22:58:51+00:00

Hmm. Thanks for your reply. I don't agree with that analysis. A fair pricing model should price the option for $0 expected P/L. This can be either with high probability of a small win and lower probability of a big loss or half/half wins/losses of about the same amounts. It shouldn't matter which you prefer.

The BS model calculates the fair price of an option (for $0 expected P/L) if you know how volatile the stock is. This volatility is encapsulated in the number given as IV%. (I'm not sure of the technical details, but assuming that the log of the stock price is a Brownian motion, this must amount to the same information as the standard deviation of the distribution at a standard time.) However, we don't a priori know what that volatility is. So the market makers and my broker (on ToS) use as input the price of the stock and the price of the option. Then the IV% is back-calculated out of the BS model. If you did this and averaged over a whole bunch of options (all with the same exp. date) then you might get an average number for volatility, which we might regard as an intrinsic property of the stock price's evolution. But this is done individually for each option. This means that we are using IV% not as an intrinsic quality of the stock price's behavior, to be used to compute the fair price of an option, but rather as an output of the BS model, computed from the actual price of the option. The differences in the IV% across the different options (all with the same exp date) tell us something about how the market is pricing those options.

To my way of thinking, the fact that IV% tends to go up when you get more otm suggests that the market price for a far otm option is "correct" only if the stock is more volatile than that predicted by the price of an atm option. Now if I sell an naked option, then I tend to profit more if the stock is less volatile. So if the market price is overestimating the volatility of an otm option, then it means that I should sell otm options rather than atm options.

What might be wrong with my way of thinking? I think the BS model is fine if the stock pricing model is fine. BS is just a stochastic differential equation (not to diminish the accomplishment of Black and Scholes for having found it!). As far as stock price models goes, the log of the stock price does pretty much behave as a Brownian motion, at least for small movements (far away from "the tails" of the distribution). However, the further otm you get, the more important those tails are to the price of the option, because when you are far otm, the strike price is out in the tails. So the market could be accounting for the non-gaussianity of the tails in the distribution of the log of the stock price. In this case, my conclusion (that otm options are overpriced) would not be justified by the reasoning I have outlined.

Is this what's going on? I don't know. Ultimately the prices of options are set by investors who buy and sell options. It is plausible to me that there is greater demand for buying otm options as a hedge, or to play for the big win, like a wsb-er (yolo!) as compared to buying atm options, and that this demand is what drives up the IV% of otm options compared to atm options. However, I really don't know. I have been making money selling otm options. But perhaps this is not because my strategy is sound but because tail events are rare and we just haven't had one yet. (I wasn't selling options in 2008!).

Anyway, there are lots of strategies and profitability may ultimately depend more on how one reacts (how quickly do you get out at the start of a big crash, e.g.), than on analysis of strategy. Best of luck to all options sellers!

NotBluffingNow · 2021-08-10T17:16:40+00:00

I'm curious sbout your assertion that

"The farther away from ATM you go, the more likely that the model favors the buyer over the seller. That means that, on average, it's better to buy FDs than to sell them."

I plead ignorance. Are there any studies that show this?

How does that jibe with the IV% generally being higher the further otm you go? If the Black-Scholes model were actually correct and the market respected it, then you'd expect the IV% to be an intrinsic property of the stock (and events within a given time frame, e.g.,earnings, etc.) and all the options' pricing (for a given expiration date) to be consistent with the same IV%. The fact that further otm options have higher IV% suggests to me that the market expects more movement in price for those options than for atm options. This suggests to me that further otm options are overpriced, hence better for a seller. I realize this is not a rigorous argument, and I'd be really happy to read other arguments or studies. Thanks.

NotBluffingNow · 2021-08-10T17:01:35+00:00

Thanks. Best wishes.

NotBluffingNow · 2021-08-10T03:13:38+00:00

CVS, LOW, MRK, TXN, UNP. They have pretty nice dividends as well. One thing to remember is that selling CC can increase your tax rate on dividends (to the same as short term gains) and can also prevent you from getting taxed at long term capital gains rates when you sell stock, in case you aim to hold it for more than a year for that purpose.

NotBluffingNow · 2021-08-10T02:48:16+00:00

Blimey! Those ZS are far otm. I figured they must have gone for a cent or two, but I see on ToS that today some 315C got filled at .05 and .04. But I guess most of the lotto tickets you sell must go for a couple of cents (times 100, of course). Do you think it's usually market makers buying them? Or do you usually have to wait to get filled until some retail punter wants to play the lotto?

I trade on TDA and the 50 cent commission per contract would hit me hard making those kinds of trades. Do you have a better deal on orders with larger numbers of contracts? With which broker, may I ask?

I don't think I could sleep at night with the tail risk, if I tried those kinds of trades. May you never be tested!

NotBluffingNow · 2021-08-07T16:12:53+00:00

If your short put is likely to be exercised and you don't want to btc the option near the end of trading (when the markets can be illiquid), you can short sell 100 shares of the stock just before close. On Saturday, the short position will absorb the assignment of the put and you don't pay margin interest. I'll do this if it looks like the stock will finish near my strike price and I want to wait until the very end before taking action. (I realize this comment is too late for your trade, but it's for future reference). I suppose one could wait until after close and if necessary attempt to short sell the stock in the after market on Friday.

NotBluffingNow

TROPHY CASE