To your final question - yes.
This is something
@BornToFly and I have gone back and forth a bit about. All friendly of course. You have two great examples here. The 850/650 will go ITM sooner and have a wider range of management choices available. The 800/700 will go ITM later (more straight up wins with no management needed), but will have a more constrained range of management choices when you're there. To keep the income similar you'll double up on the $100 wide spreads, so the way I see it - you're all in either way, but one of those has fewer management choices and needs them less often.
I think that both are completely reasonable ways to approach this. I like having the better range of management choices that I won't need most of the time. This allows me a little bit better earnings most of the time. So my personal choice (that I've been actively using) is the 850/650 (I just increased this week from doing $100 wide spreads, and I don't see my going back).
The logic of not needing the management choices in the first place is also compelling
@BornToFly and I are in complete agreement on being far enough OTM that management is rarely needed regardless. And this week is a great example of why we all plan ahead.
The way I arrived at my view on wider spreads comes from that exercise I did earlier (yesterday? day before?) where I just made up some different circumstances and using the share price at that moment, as well as the option chain, and went through them to see what I would see.
So my suggestion (ADVICE!) is to do the same thing yourself. Shares are 1077 right now, so if you're awake you could do this right now before the market opens. Or just pick a random time during the day tomorrow, or do this over the weekend.
It really doesn't matter what the share price is - just grab the option chain at that moment and start building around that share price. Here are the different tests / situations I would setup. Stick with put spreads as they're most popular / profitable, and it keeps your brain from going crazy trying things out. Let's pretend the share price is 1100 when you do this, so we can do specifics instead of something more general (lower price is the long / insurance put, higher (second) price is the short put).
- 1100/1150 (smallish spread and it's all ITM). Start with the 11/5 position and roll it out to 11/12, 11/19, and 12/17. It'll be ugly
- 1100/1120 (a really small spread and it's all ITM). As above - start with the 11/5 position and roll it out to 11/12, 11/19, 12/17. You're looking for the strikes you can roll to sticking to a net credit, the debit you'll pay to keep the strikes the same, and then crazy management stuff like cutting the spread in half and doubling the contracts.
- 1100/1300 (big spread, all ITM). Manage as above.
- 1100/1200
- 1100/1400 ($300 wide spread - I think I'll be doing these as the share price is getting towards 1400
These will all be bad and are based on being all the way ITM. Think of these as what our BPS holdings would look like if we were holding the BPS I currently have open - 750/950s and the share price drops to 750 (wouldn't that just be fun).
Then split the difference.
- 1075 / 1125. Halfway point of the spread.
- 1090/1110. Halfway point of the small spread
- 1000/1200. Halfway on a $200 wide spread
- 1050/1150. Halfway on a $100 wide spread
- 950/1250. Go crazy with a $300 wide spread
And then the short put touching the share price.
-1050/1100
- 1080/1100
- 900/1100 (the $200 wide spread)
-1000/1100. a $100 wide spread
- 800/1100
I don't know how to mimic this one, but also consider what a short put by itself will look like. Here I'm thinking of taxable accounts where the margin reservation can be significantly less than for a cash secured put. Something like $200 per share, or $20k for each contract. That's the same reservation as a $200 wide spread, and as long as the margin holds, you can keep rolling the put forever, where that won't be true for a BPS.
The spread gains access to this kind of leverage in retirement accounts, where only cash secured puts or put spreads are available. So with the wide spreads, we might be better off (safer - maybe more profitable, but I'm guessing not) using margin backed short puts in the brokerage accounts (that's NOT-ADVICE).
I'll be playing around with this - if I can get similar income generated using cash and margin in my brokerage rather than spreads, then I'll probably do that. I think I'll have better management choices relative to the spreads (no insurance put that also needs managing). But I haven't actually done this so you'll want to listen to people that HAVE been using their margin to do this sort of thing.
The way i see it, the wide spread accomplishes these objectives:
- the obvious and easy to measure one is the flexibility it provides for management. With a wide spread you can better see the swan coming and react to it. It won't be perfect but it'll be better.
- it enables this sort of leverage in a retirement account
- the wider the spread, the more that the short put behaves like a cash or margin backed put, and less like a spread. There's a range of share price in which that is true - probably the first 1/4th of the spread ITM, with diminishing behavior as you approach the 1/2 way point. I like short put behavior as its what I know the best.
-
maybe most important for me personally, it's an imposed constraint for me emotionally that keeps me from getting too crazy with the leverage. My personal problem is that I see a stack of cash and it's hard to just leave it sitting there. I want to put it to work, so I'll sell 13 $100 wide spread with $135k (gotta have a few bucks left over for whatever
). If I make 'em $200 wide spreads then I only sell 6 of them, and just like that, I've cut my rate of loss in half. I still have it all at risk and can still experience a complete wipeout, but at least it'll be slower arriving.
I could get there by selling 6 of the $100 wide spreads and leave the rest of that money unused - but I don't. Yes - I do realize the danger inherent which is why I consider this an emotional thing and is definitely NOT-ADVICE to follow in my footsteps.
So I can use the wide spread as a starting point. When the short put is heading for OTM then the wide spread lowered the cost on my insurance put, increasing my earnings. Or at least it does assuming that I'd sell the same number of contracts
The resource is all the way committed, but I've got the big management hammer of doubling contracts/ halving spread size. And if I really want I can do it twice ($50 wide spread with 4x the contracts). That makes for a big window to save an ITM put.
Which doesn't mean that I can't get wiped out - only that using all of the big share drops I've experience in 10 years of following TSLA closely, I believe that I could have weathered all of them. Especially if I'm starting fairly far OTM in the first place (say the .16 delta / 85% prob OTM range for the short put, or further).
