Selling puts for noobs

[jbih]

I have $23,000 now and instead of buying stock directly I want to sell puts. Here is what I consider doing:

• Sell puts 4-8 weeks out if we are below the midpoint of the Bollinger Band, otherwise wait
  
• If the value of the sold puts sinks to 1/3 of the sell price, buy back and go back to step 1
  
• If the expiry date comes close and the value had risen, buy back and sell longer dated puts for the buy price. If the price is terrible, get the stock and give up on options.

Does that sound reasonable?

It is similar to what I started earlier, except I was selling weekly, and except that I was too nervous and gave up and bought 2021 calls. This time I want to try again.

I think I'll time the puts such that they'll expire after the earnings call since I believe the stock will rise before the call.

 

[LN1_Casey]

Following thread, because I have no idea how puts or calls work.

 

[Johann Koeber]

Selling puts has the potential to get exposure to a stock without investing in the stock itself.

When selling a put you are selling
a) time value
b) exposure to the movement of the underlying stock

The amount of time value you are selling depends on several factors, among them
- the volatility of the underlying security
- how far away the strike price is from the current price of the stock

When selling puts you can do it rather conservative or very aggressiv. You did not make clear, which way you are considering and what your ultimate goals are.

Example: TSLA at $221.50

TSLA Oct18 200 Put is valued at $8; it carries only time value (it is out of the money); the probability you will be put is about 25%. In that case you acquire TSLA for $200 - $8 = $192

More aggressive strategy:

TSLA Oct18 250 Put is valued at $33; it carries a time value of (33 - 250 + 221.50 =) $4.50, an intrinsic value of $28.50 an a probability of being put of about 75%, in which case you acquire TSLA stock for 250 - 33 = $217

Selling puts has a unique risk reward scheme: If the underlying appreciates quickly, you are locking yourself out of the upside beyond the strike price (the maximum you can make is the premium). If the underlying goes down quickly (beyond your strike price) you start losing serious money, limited only by the strike price (minus premium).

A lot of things can happen between now and maturity. The most important ones to watch are
- time decay
- changes in volatility
- change of the price of the underlying

A good understanding of these and many other facts is very important for trading short put strategies. Be sure you understand what you are doing and look not only at expiry, but also what happens in the meantime. Make sure the puts are cash secured and you are not working with margin. Be sure to have a plan for all contingencies.

Trading is not as simple as the easy to use trading platforms make you want to believe. Trading is a business. A smart business owner plans ahead.

To learn more study the educational sites like investopedia.com and others.

 

[Yonki]

In 2016, I lost a breathtaking amount of money by selling puts when the stock was at some ridiculously low price (low $200s? I forget the details), only to have the stock then go to an impossibly low $140. Then through a combination of margin calls and assignments, I lost an s-ton of $$$. Was very lucky to get out with as much as I did.

So be very, very careful selling puts (in TSLA or anything). Make sure you can handle the consequences if the bottom falls out of the stock (or the stock market).

 

[cwerdna]

In 2016, I lost a breathtaking amount of money by selling puts when the stock was at some ridiculously low price (low $200s? I forget the details), only to have the stock then go to an impossibly low $140. Then through a combination of margin calls and assignments, I lost an s-ton of $$$. Was very lucky to get out with as much as I did.

So be very, very careful selling puts (in TSLA or anything). Make sure you can handle the consequences if the bottom falls out of the stock (or the stock market).

Yeah... one has to be careful not to be too over-extended in margin when selling puts.

I'm an options amateur but I normally almost never sell puts on anything where the stock is below the 200 day SMA (indicates a downtrend). TSLA is currently well below its 200 day SMA. There are plenty of other optionable stocks that are above their 200 day SMA (e.g. GOOGL, CMG, AAPL, MSFT)

I don't go out further (in expiration) than a week or two. I normally sell them way out of the money and draw where the support levels appear to be and sell at least below 1 or 2 support levels. I also almost never sell puts that expire after an earnings event as the stock could gap big time, in the wrong direction. If for some reason I sell puts that expire after earnings, I close them out before the earnings event: gain or loss.

I once did fix a trade with CMG (I think) that moved against me. (e.g. sold a put for say $1 but then became worth $6). I was able to roll to later strikes a few times and finally, I was able to close it out at a modest profit instead of a big loss. The numbers I picked out the air as I don't recall the exact figures. I'd have to go back and dig up my records. It was quite bad though. What was originally going to be to collect small dollars (say $100) turned into what could've been a multi-kilobuck obligation.

I also close out short put positions when I've locked in "enough" profit (via limit buys I place immediately) rather than holding them until expiration. For Thinkorswim and TD Ameritrade, you can close out short positions that are a nickel or less commission free. For ones where I didn't collect much premium, I set the limit buy to $0.05 or lower. For more aggressive ones or where I need to free up buying power more quickly or where I see risks coming, I don't bother w/that and pay the commission. (I negotiated them down to $1.25 per contract long ago. I have no ticket fee.)

 

[Chickenlittle]

In 2016, I lost a breathtaking amount of money by selling puts when the stock was at some ridiculously low price (low $200s? I forget the details), only to have the stock then go to an impossibly low $140. Then through a combination of margin calls and assignments, I lost an s-ton of $$$. Was very lucky to get out with as much as I did.

So be very, very careful selling puts (in TSLA or anything). Make sure you can handle the consequences if the bottom falls out of the stock (or the stock market).

Thank you for posting this. Many are reluctant to post negative investing experience. I have a lot of experience in options and would advise:
1. NEVER trade options on margin. If you are selling puts be sure to have cash to buy the stock. The use of options gives you leverage that is further magnified by the use of margins. Having money in other stocks is not like having the cash. In general market downturn you will be screwed.
2. If you have urge to ask advise on options trading, you should not be trading options

 

[cwerdna]

I have $23,000 now and instead of buying stock directly I want to sell puts. Here is what I consider doing:

• Sell puts 4-8 weeks out if we are below the midpoint of the Bollinger Band, otherwise wait

...
I think I'll time the puts such that they'll expire after the earnings call since I believe the stock will rise before the call.

If you want to strictly stick w/cash secured puts and not go into margin, you'll only be able to sell 1 put.

If you still have open short put positions, are you planning to hold them thru the earnings event?

Personally, 4 to 8 weeks out is way too long for me, at least for my style of what I do w/short puts. And, I would never want to hold thru earnings. It's not worth the risk.

 

[darkestb4dawn]

Hi jbih,

As alluded to in previous post, trading options is risky. But if you’re willing to keep up with tesla on a daily basis it could be more lucrative than only buying the stock along. First thing I must reinforce is something already mentioned: never trade options on margin. It is the quickest way to lose a lot of money. Outside of that here are a couple of pointers.

Because you are new to options, I recommend trading options that are in the money or at most one (no more than two) options out of the money. For example if the current stock price is $225, you should buy an option than has a strike price of $225. If you get some experience and want to get fancy you can buy at put with a strike price of $222.5 or $220. Or you can buy a call at $227.5 or $230. Again, get some experience under night your belt before you venture too far out. The expiration time to start at is the Friday 1 to 4 weeks out.
On the day you are going to buy the option wait until after 10:30am to buy the option. From 9:30-10:30 is commonly known as “Armature hour”. It is the hour where newbie’s lose their money quick due to quick rises and falls.

At 10:30 look to see if that day tesla has a higher high and a higher low or a lower high and lower low, than the previous day. If the high of the day at 10:30am is higher than the previous day high and the low of the day is also higher than the previous day low, chances are the stock price is going up. If the high of the day is lower than the previous day high and the low of the day is also lower than the previous day low, chances are the stock is going down. If it’s a mix of the two, it could go either way and it is best to wait for a day with clearer data.

First review the high and low of the current day compared to the previous day at 10:30am. Then watch to see if tesla goings higher than the high of the day at or lower than the low of the day. If tesla is making higher highs, chances are it will continue to go up throughout the day. If tesla is making lower lows, chances are it will continue to go lower throughout the day.

As a beginner, the best time to buy a tesla option is following a reversal candlestick. This is safer. It protects you from buying a put at the low of the day or a call at the high of the day. Finding a reversal candled stick involves look at the candlestick chart with 10 minute candles sticks or longer. To make it simple I will use colors. A green candlestick is a candlestick where the price goes up and a red candlestick is a candlestick where the price goes up. A reversal candlestick is a long green or red candlestick that breaks lower than the previous long candlestick of the opposite color. This is also known as an "inside bar break". Let’s say from 10:30 -10:40am you get a green candles stick were the price goes from $225 at 10:30 to $227 at 10:40am. A reversal candle stick is a red candle stick that ends at less than $225. So if from 10:40-10:50 there is a red candle that starts at 227 and ends at 226.5. Or there is a red candle that from 10:50-11:00 that starts at 226.5 and ends at 225.75. These are not reversal candles. Do not trade off these. It is a rookie mistake and you will most likely lose money. I don’t want to get into technical analysis but the chart is most likely forming what a bull or bear flag.

Once you see a reversal candle stick buy the option that matches the current direction. i.e. If it’s after 10:30am and you see green reversal candlestick buy a call or if you see a red reversal candlestick buy a put. You are going to be buying these calls or puts as the price is going up. This important and hard for beginners to wrap their head around. The typical “consumer” mentality is to buy something when the price is going lower not higher. Even in investing the old adage is “buy low, sell high”. This is not true with options. Due to the time decay, you want to buy as it is going up or going down. You don’t want to try and time the bottom/top or anticipate a move. Even if you are “right”, your option will lose value as you are “waiting” for the move. So let’s say you buy a 225 put at 11:23am for $5.65 after you see a reversal candlestick. At 11:10 the price of that same option should have been lower, maybe $5. And At 11:15 it should have been $5.30 and at 11:20 it should have been $5.50. And finally when you buy it at 11:23 it is $5.65. Buy as the option is going up in price.
If you are day trading, hold these calls or puts until you see two candlesticks back to back in the opposite direction (i.e. of the opposite color). Let’s say you bought that 225 put at 11:23am at $5.65 after you see a reversal candlestick. If the 10:20-10:30 candle is red, then hold. And if 10:30-10:40 candle stick is red then hold. You are going with hold until you see two consecutive green candle sticks. If you are holding overnight or over consecutive nights follow the same game plan. Wait for multiple candles sticks in the opposite direction and avoid selling during “amateur hour”.

That’s all strategy wise. Here are couple of other bullet points to keep in mind.

• At 10:30, look at the high of the day and low of the day in compared to the previous day. And see how far away the high of the day and low of the day are from each other. If the spread is greater than 5, the stock may trade sideways that same high of day and low of day range. There may not be much opportunity that day due to time decay and you may be better off waiting to trade on another day.

• As a beginner, once you’ve made a successful trade, it best to regroup and not make another trade for a few hours. Traders judgement is often cloudiest in the moments of victory. It is easy to make decisions that give back all the gains they’ve made.

• As a beginner, try to stay away from buying before close with the intentions of selling the following morning. It can be tempting when you are watching gap ups or gaps down each day. But trust me this is one of the quickest ways to lose a lot of money. Tesla stock can gap up or gap down for no good reasoning at all.

• As a beginner, try not to trade options during P&D announcements and earnings. as above, these seem tempting but trading options is risky enough. There is no need to make it more risky than it is. If you are in the risky mood and it’s an itch that you have to scratch, try buying a call or put during “amateur hour” (9:30 and 10:30). Try this following a big gap up/down on open. It's risky but you will scratch that itch.

• It’s obvious, but pay attention to tesla news, fed news, trade news and news of the overall market. If you sense a lot of volatility it may be a day/week that you need to sit out.

• Try to focus less on price of the option or the pattern of tesla as a underlying stock. Paying over-attention to option price can lead to a psychological phenomenon called Anchoring. Anchoring is where the price of the option looks attractive based on a previous lower price. It looks like a good time to buy. But it is not. The purchase is not based of value or opportunity. This goes back to not being a “consumer” and actually waiting until the option price is trending up (not down) to buy. The pattern of the ups and downs of tesla stock can also be misleading. You may think you’ve seen the current pattern before and by over-anticipating the movement of the stock, you end up buying at the wrong time and losing money. Try to focus less on price of the option or the pattern of and more on Spread, Highs of the Day/Lows of the Day, Moving Averages/Bollinger Bands & Colors.

• As you get more experience, start to look at 10-day, 20-day, 30-day, 50-day, 100-day or 200-day Moving averages and the Low/Mid/Up Bollinger Band. Tesla has a habit of bouncing off these levels. An example of a good strategy would be: If gap up open rises to hit 10-day, 20-day, 30-day, 50-day, 100-day or 200-day Moving Averages or Lower/Middle/Upper Bollinger Bands wait until downward trend x 13 mins. (0 min mark, 5 min mark + 13 min mark). Then buy put 2 put away from current price. If upward trend x 20 minutes (2 red 10 min bars) occur. Then sell put. Or, if gap down open falls to MA or BB wait until downward trend x 13 mins. Then buy call 2 call away from current price. If upward trend x 20 minutes (2 red 10 min bars) occur. Then sell call.

Hope that helps!