# Tracking my naked put-writing strategy



## Nerd Investor

Hi all, 

Long time reader here who finally registered. Part of my motivation was a desire to track and share some investing strategies which will hopefully keep me disciplined and help me track my progress. What I'd like to do in this thread is focus specifically on my naked put writing strategy. I haven't seen a whole of options threads (I really enjoyed GOB's) so hopefully this is a welcome addition to the excellent content the rest of you have posted. To keep this first post to a reasonable length, I'll sum up my strategy assuming the reader has some knowledge about options, but will be happy to reply to any questions and go into further detail.

*Strategy goal:* I'm seeking to profit on the increase in implied volatility that generally occurs within a few days before earnings are out. 

*Process:* 
1) I run a value screen on S&P 500 stocks, and pull the top 15 stocks ranked by cheapness. The idea here is simply to generate a short list of stocks that I feel are cheap and would be comfortable owning at their current price. 
2) I look up each of the 15 stocks and note when the next earnings date is. 
3) A few days before earnings are announced (usually 2-3), I write near-the money naked puts for the nearest Friday _after_ the earnings announcement date. I then buy to close after earnings, or let the option expire depending on what the stock does. 

Hopefully this will become clearer as I record a few transactions. The first to be recorded took place today: 

Sold to open: 10 $16 Nov 6 put contracts of RIG for $0.61: *$567.62 proceeds* (this was filled in 3 different lots, so I may be due a little commission credit here). EDIT: I was correct, actual net proceeds after the commission was adjusted are *$587.52.*


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## Jaberwock

What you are doing is taking the option buyers risk. That is the risk that the earnings will be worse than expected and the share price will plummet. For accepting that risk you get the proceeds of the option sale, which cost you nothing if the share price stays above your strike price.

The strategy will work sometimes, and will fail sometimes. The rewards are limited, all you can make is the selling price of the option. The risk is higher than the reward, the stock price could plummet if the earnings are bad.


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## humble_pie

Nerd Investor said:


> *Strategy goal:* I'm seeking to profit on the increase in implied volatility that generally occurs within a few days before earnings are out.




the puts do sound nice
however
drillers are up the crick in these hard times

norway's statoil is shedding floating rig contracts as fast as it can. Some of those north sea rigs that will likely have to be scrapped belong to RIG.

up to 100 north sea rigs still need to be scrapped, say oslo energy consultant Nordea Rystad & bloomberg analyst Andrew Cosgrove.

analysts don't see the sitation for drillers improving before 2017. Bref, this is a negative outlook with high risk for close-to-the-money put sellers who have no intention of owning the stock but merely want to scalp gamma.

suppose the scenario turns bad in the short term, suppose earnings go against you tomorrow & stock drops into the $15 range or lower. It will cost more than the $0.61 premium you received to wriggle out of that one & you will have perhaps only 36 hours. Does it really make sense to take on a $16 risk in return for a reward of only 61 pennies?

this isn't my original view btw. I first read it from mark wolfinger, excellent options author & former pit trader. Don't sell puts for a few pennies when the risk of assignment means big dollars & big margin impairment, wolfinger said. Ever since i've avoided close-to-the-money options with low premium.

ps your 16 puts of 6 nov appear to have doubled on the day yesterday, you must have sold them early yesterday morning? you could buy to close, even today, i'd be looking to buy to close anywhere in the .12-.31 range ... best of luck with the put plays & indeed RIG options are appealing, even call options.


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## Nerd Investor

Jaberwock said:


> What you are doing is taking the option buyers risk. That is the risk that the earnings will be worse than expected and the share price will plummet. For accepting that risk you get the proceeds of the option sale, which cost you nothing if the share price stays above your strike price.
> 
> The strategy will work sometimes, and will fail sometimes. The rewards are limited, all you can make is the selling price of the option. The risk is higher than the reward, the stock price could plummet if the earnings are bad.


That pretty well sums it up, yes. 

The key to my comfort level with this inherent risk is my stock selection process. These are stocks I consider cheap at their current price and am willing to own (I actually often will be owning them in my RRSP; it's the same value screen I use for stock selection there). Right now, I'm keeping the positions small enough that I can comfortably be assigned the shares, even if the price plummets after earnings (likely after rolling down and out a month to give the stock a chance to rebound in the event of an overreaction to bad news). 

If and when I start taking bigger positions with this strategy (ie: I get to the point where I know I don't want to be assigned the stock), I may add a leg and make it a credit spread to cap the downside risk a bit more.


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## Nerd Investor

*Edit:* Bah, this was meant to be a reply to humble_pie

Excellent post. I have read Wolfinger before, and will likely seek out more now . My reply to Jaberwock touches on some of what you've brought up in terms of the risk. 
You are correct, I did write the options yesterday morning, not sure of the exact time. 

As for closing before earnings, I think I'd need a hard and fast rule to do it (a certain % of profits on the transaction for example), or simply never do it. I try as much as possible in all my investing strategy to make them rule based and take my poor behavioral biases out of the equation. Easier said then done in the wonderful world of options .


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## lost in space

*1607*

You may want to check out http://www.fullyinformed.com

The author has written extensively and I mean extensively about options trading. There is also a great yahoo group as well


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## Nerd Investor

lost in space said:


> You may want to check out http://www.fullyinformed.com
> 
> The author has written extensively and I mean extensively about options trading. There is also a great yahoo group as well


Ah, I remember coming across this site before but had forgotten about it. Thanks a lot for sharing!


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## humble_pie

lost in space said:


> You may want to check out http://www.fullyinformed.com
> 
> The author has written extensively and I mean extensively about options trading. There is also a great yahoo group as well




you were forgetting to mention that it costs $350 a year to get "fully informed" though.

didn't stay long enough to check out whether this is CAD or USD. I did glance at the freebie text, there didn't seem to be much insight re options trading. Mostly the posts were teasers to read more ... for a price ...


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## OptsyEagle

Nerd Investor said:


> 3) A few days before earnings are announced (usually 2-3), I write near-the money naked puts for the nearest Friday _after_ the earnings announcement date. I then buy to close after earnings, or let the option expire depending on what the stock does.
> 
> Hopefully this will become clearer as I record a few transactions. The first to be recorded took place today:
> 
> Sold to open: 10 $16 Nov 6 put contracts of RIG for $0.61: *$567.62 proceeds* (this was filled in 3 different lots, so I may be due a little commission credit here). EDIT: I was correct, actual net proceeds after the commission was adjusted are *$587.52.*


Now I am far from an expert with options but don't they tend to expire on the 3rd Friday of the month as opposed to the nearest Friday. You have November 6 above and I am not sure what that is. Perhaps I am wrong but in case you are I just wanted to point it out, since a mistake with expiry dates can become costly with options.


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## Nerd Investor

OptsyEagle said:


> Now I am far from an expert with options but don't they tend to expire on the 3rd Friday of the month as opposed to the nearest Friday. You have November 6 above and I am not sure what that is. Perhaps I am wrong but in case you are I just wanted to point it out, since a mistake with expiry dates can become costly with options.


You are correct that stocks which trade options monthly expire on the 3rd Friday of the month. 
However, these days a growing number of larger stocks actually trade weekly options, meaning there are strike dates available _every_ Friday. This particular contract's expiry date is in fact November 6th, this coming Friday. 

You are also right that a mistake with expiry dates can become very costly, so I appreciate the heads up!


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## humble_pie

Nerd Investor said:


> ... Right now, I'm keeping the positions small enough that I can comfortably be assigned the shares, even if the price plummets after earnings



right now you're short 10 puts, which if assigned this friday would lead to being long 1000 shares. which in turn would cost $16,000 USD, which is well north of $20,800 CAD ... this is only a "small" position for you ? each:

me i would tend to worry about $16k USD, but fortunately for diversity on this planet, other people might not give 16k a passing thought.


(aside to optsy) those nov 6s are weeklies, there are also nov 13s, nov 20s which are the regular date in the cycle plus nov 27s.

US weeklies have proven to be very popular, stateside. All the highly liquid stocks have weeklies. In response, the montreal exchange introduced options with weekly expiry dates a year or so ago. 

when GOB used to whack away at his options in his diary thread, he was mostly doing weeklies.


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## OptsyEagle

Nerd Investor said:


> You are correct that stocks which trade options monthly expire on the 3rd Friday of the month.
> However, these days a growing number of larger stocks actually trade weekly options, meaning there are strike dates available _every_ Friday. This particular contract's expiry date is in fact November 6th, this coming Friday.
> 
> You are also right that a mistake with expiry dates can become very costly, so I appreciate the heads up!




No problem. I didn't know they added more expiring Fridays. If I ever dabbled here, that could have been costly, so thank you for the heads up. Good luck.


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## Nerd Investor

humble_pie said:


> right now you're short 10 puts, which if assigned this friday would lead to being long 1000 shares. which in turn would cost $16,000 USD, which is well north of $20,800 CAD ... this is only a "small" position for you ? each:
> 
> me i would tend to worry about $16k USD, but fortunately for diversity on this planet, other people might not give 16k a passing thought.
> 
> 
> (aside to optsy) those nov 6s are weeklies, there are also nov 13s, nov 20s which are the regular date in the cycle plus nov 27s.
> 
> US weeklies have proven to be very popular, stateside. All the highly liquid stocks have weeklies. In response, the montreal exchange introduced options with weekly expiry dates a year or so ago.
> 
> when GOB used to whack away at his options in his diary thread, he was mostly doing weeklies.


Oh, I'd certainly give losing $16K more than a passing thought! Maybe a better way to frame it is this: Taking a $16K position in a stock I feel is undervalued is a worst case scenario I can live with. In any case, the plan would generally be to roll out before getting assigned, but one has be prepared for any outcome.


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## humble_pie

Nerd Investor said:


> Oh, I'd certainly give losing $16K more than a passing thought! Maybe a better way to frame it is this: Taking a $16K position in a stock I feel is undervalued is a worst case scenario I can live with. In any case, the plan would generally be to roll out before getting assigned, but one has be prepared for any outcome.




you wouldn't be "losing" 16k, though. If assigned, you'd merely be paying $16,000 for a stock that would, by definition, be worth less, no?

in the case of RIG, if you don't already have other oil or driller exposure, the above scenario might not be bad at all. Drillers are at record lows. If you're sure RIG is not going to go bankrupt, being long the stock this early in the cycle would not be the end of the world, especially when one is able to improve the situation with a judicious use of options, as you can do.

you'd be the proud owner of 1000 shares & you could promptly start selling calls. I'm assuming here that even a bad earnings report today wouldn't crash the stock much below $14.

the other negative scenario, as you say, is to scramble around the next 2 days, rolling those puts out to a lower strike & an expiration date that's farther out in time. I assume you've been looking at the choices & you probably have a good idea of where you'd like to go.

very best of luck, no matter what.


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## Nerd Investor

humble_pie said:


> you wouldn't be "losing" 16k, though. If assigned, you'd merely be paying $16,000 for a stock that would, by definition, be worth less, no?
> 
> in the case of RIG, if you don't already have other oil or driller exposure, the above scenario might not be bad at all. Drillers are at record lows. If you're sure RIG is not going to go bankrupt, being long the stock this early in the cycle would not be the end of the world, especially when one is able to improve the situation with a judicious use of options, as you can do.
> 
> you'd be the proud owner of 1000 shares & you could promptly start selling calls. I'm assuming here that even a bad earnings report today wouldn't crash the stock much below $14.
> 
> the other negative scenario, as you say, is to scramble around the next 2 days, rolling those puts out to a lower strike & an expiration date that's farther out in time. I assume you've been looking at the choices & you probably have a good idea of where you'd like to go.
> 
> very best of luck, no matter what.


Yes, this sums up my mindset nicely. The point I was trying to make (which you've done a better job of ) is that I do not view it as "risking" $16,000 since my risk profile is no worse than if I had simply held a similar position in the stock (you could actually argue the downside risk is lower since the premium collected lowers my cost base). As you point out, if the price drops below my strike, I can roll out, let the shares be assigned and write additional options against them, or simply close for a small gain/loss.


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## humble_pie

Nerd Investor said:


> ... or simply close for a small gain/loss.




you do a fine job explaining. You've already shown that you've done a fine job coming to grips with options trading.

one more detailette: you might close for a technical loss on the 6 nov 16 puts, as you say above, but this is just a tax loss.

dollar-wise, if RIG drops & the puts turn ITM, you should be rolling them forward in time plus down a strike for a nice credit spread. ie your cash flow will be up. This is what Gob used to do.

i don't have the figs at the mo but if i get time i'll take a look & see what looks tempting in RIG.

only a few brokers can handle rollover spreads right, btw. Your broker might give you grief on this issue but it'll be the broker's fault, many of them in canada are option dinosaurs ...


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## humble_pie

RIG is 15.54 post-earnings this am

those puts are now ITM
it's time to roll out & roll down

the 6nov15 16 puts are .37-.42, last .40
the 18dec15 15 puts are 1.01-1.09, last 1.06

the natural is a .59 credit spread
one could look for +.63 or +.64


Edit: updated figs


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## OptsyEagle

The weird thing about this trade is it is still a positive gain even though the events seem to have gone against the Nerd. 

I find it hard to fathom that someone would pay $0.61, plus be willing to give up around $0.80 to protect themselves for a move below $16 for only 5 days. I mean that is one heck of an insurance premium, in my opinion. I can see why he wanted to sell it.


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## Nerd Investor

OptsyEagle said:


> The weird thing about this trade is it is still a positive gain even though the events seem to have gone against the Nerd.
> 
> I find it hard to fathom that someone would pay $0.61, plus be willing to give up around $0.80 to protect themselves for a move below $16 for only 5 days. I mean that is one heck of an insurance premium, in my opinion. I can see why he wanted to sell it.


That's what the uncertainty surrounding earnings release does, and it's that "over-valuation of the insurance premium" that I hope to take advantage of long-term. 
Anyway, this morning I placed a limit order to close at 0.35 and a limit order to sell the 18dec15 $15 at $1.10. The sell has since been filled.


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## humble_pie

OptsyEagle said:


> I find it hard to fathom that someone would pay $0.61, plus be willing to give up around $0.80 to protect themselves for a move below $16 for only 5 days. I mean that is one heck of an insurance premium, in my opinion. I can see why he wanted to sell it.



i take it you mean investor's original sale? the buyer was probably one of those last minute traders doing those fancy 4-legged iron strategies. Iron flies, iron condors.

they set em up in the days before earnings announcements. The 4 legs are long & short at the same time, so the idea is to scalp premium from pre-earnings volatility, then close any of the losing positions - often 2 out of the 4 might end up as losing positions - once the air comes out of options pricing after the earnings announcement.

you remember metatheta? alas he's gone, i miss him. Theta was an expert in iron condors. Often he had no idea what the underlying stock was all about.

i don't do iron strategies myself. My poor dough brain doesn't grasp the essence of a 4th leg. I can add up the numbers for 3 legs but the brioche tends to burn on the 4th.


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## Nerd Investor

OptsyEagle said:


> The weird thing about this trade is it is still a positive gain even though the events seem to have gone against the Nerd.
> 
> I find it hard to fathom that someone would pay $0.61, plus be willing to give up around $0.80 to protect themselves for a move below $16 for only 5 days. I mean that is one heck of an insurance premium, in my opinion. I can see why he wanted to sell it.


I should add, the only downside when you deal with such relatively low share prices are how quickly the commissions can eat up your profits. When I made this move with Apple prior to their most recent earnings I only needed 2 contracts for a very nice premium. In turn it makes the spreads less significant, so easier to get filled quickly at a price you like. (It also helped that AAPL moved the right way for me )


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## humble_pie

Nerd Investor said:


> Anyway, this morning I placed a limit order to close at 0.35 and a limit order to sell the 18dec15 $15 at $1.10. The sell has since been filled.



wondering why you don't do these as a spread order? ie both trades for a net credit or debit

if your buy side is still unfilled, better hurry & close it ...


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## Nerd Investor

humble_pie said:


> wondering why you don't do these as a spread order? ie both trades for a net credit or debit
> 
> if your buy side is still unfilled, better hurry & close it ...


The limit order just got filled at $0.35. 

Premium on the sale - $587.52
Total cost to close - $372.45
Net profit = *$215.07*

Not perfect, but still in the black. 

To answer your question about why not make it a credit spread; I like the fundamentals, so in the event it turns against me would prefer to chase it lower and ultimately take a position in it if necessary. 
That should usually be the case with the stocks I plan to use this strategy on.


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## humble_pie

pretty dam perfect if you ask me.

still, the commish is excessively costly on 2 separate trades, unless you're at IB


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## Nerd Investor

humble_pie said:


> pretty dam perfect if you ask me.
> 
> still, the commish is excessively costly on 2 separate trades, unless you're at IB


I see what you meant now, why didn't I place the order as a spread order instead of 2 separate trades. 
Unfortunately, I'm unable to do that at my discount broker, I need a transaction for each leg. 

It's certainly annoying but I try to make the best of it.


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## humble_pie

we're coming close to the nitty of the gritty.

as gladys karam - director of option trading at the montreal exchange - said a few months ago, canada is unlucky compared to the US when it comes to a choice among options brokers. We don't have nearly enough competitive brokers here in canada.

in the US there are easily 20 or 30 competent firms who could do your spread online for a low commish.

but here in canada we only have 3 with the software. No, please correct that, we only have 2.5, since the 3rd one only does US options. It's TD's think or swim, btw.

the other 2 firms that wash pairs of windows are IB & - i believe - questrade. I've never been a questrade client but their dummy account worked like magic for me. I entered a customized option spread trade & the virtual account accepted the order without a blink.

to the best of my knowledge, TD is working hard on bringing option spread trading to their dual-currency webBroker platform. Scheduled for 2016, one hears.

in the meantime, something nifty is going on at the big green. For clients doing canadian options or arbitraged pairs of any currency, TD is accepting phone orders to fill these at web commish. Moreover, they are charging the base charge once, plus $1.25 for the aggregate of contracts involved.

but wait, it gets even better. The TD reps taking spread phone orders are, sometimes, very junior reps. One can tell when they go to look for the option quotes, their voices waver just a tiny tad ... nevertheless they are all awesomely well-trained, they are all highly professional, they are always accurate (no small accomplishment, given the complexity of some option orders) & they are all obviously working their utmost.

not long ago, a TD resource manager let the cat out of the bag. As soon as they receive their option licenses, the new reps are put on the option queue, he said. 

why, since it will be so difficult for them?

that's precisely the reason why, he said. The big green wants these new reps to concretize & experience all their recent theoretical training as soon as possible. 

he pointed out that the phone option spread orders also give the newly hatched reps excellent experience in rapid margin calculation.

the glue holding all this together is the fact that the representatives have been superbly trained. They understand perfectly what the client wants to do. Not necessarily *why* the client wants to do something, but flawlessly they understand how to set up a spread order for the *what.* Followed by an attractively low commission.

it's very smart of the TD. Under their new leader calvin macInnis, they're not overlooking anything these days.


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## Nerd Investor

humble_pie said:


> we're coming close to the nitty of the gritty.
> 
> as gladys karam - director of option trading at the montreal exchange - said a few months ago, canada is unlucky compared to the US when it comes to a choice among options brokers. We don't have nearly enough competitive brokers here in canada.
> 
> in the US there are easily 20 or 30 competent firms who could do your spread online for a low commish.
> 
> but here in canada we only have 3 with the software. No, please correct that, we only have 2.5, since the 3rd one only does US options. It's TD's think or swim, btw.
> 
> the other 2 firms that wash pairs of windows are IB & - i believe - questrade. I've never been a questrade client but their dummy account worked like magic for me. I entered a customized option spread trade & the virtual account accepted the order without a blink.
> 
> to the best of my knowledge, TD is working hard on bringing option spread trading to their dual-currency webBroker platform. Scheduled for 2016, one hears.
> 
> in the meantime, something nifty is going on at the big green. For clients doing canadian options or arbitraged pairs of any currency, TD is accepting phone orders to fill these at web commish. Moreover, they are charging the base charge once, plus $1.25 for the aggregate of contracts involved.
> 
> but wait, it gets even better. The TD reps taking spread phone orders are, sometimes, very junior reps. One can tell when they go to look for the option quotes, their voices waver just a tiny tad ... nevertheless they are all awesomely well-trained, they are all highly professional, they are always accurate (no small accomplishment, given the complexity of some option orders) & they are all obviously working their utmost.
> 
> not long ago, a TD resource manager let the cat out of the bag. As soon as they receive their option licenses, the new reps are put on the option queue, he said.
> 
> why, since it will be so difficult for them?
> 
> that's precisely the reason why, he said. The big green wants these new reps to concretize & experience all their recent theoretical training as soon as possible.
> 
> he pointed out that the phone option spread orders also give the newly hatched reps excellent experience in rapid margin calculation.
> 
> the glue holding all this together is the fact that the representatives have been superbly trained. They understand perfectly what the client wants to do. Not necessarily *why* the client wants to do something, but flawlessly they understand how to set up a spread order for the *what.* Followed by an attractively low commission.
> 
> it's very smart of the TD. Under their new leader calvin macInnis, they're not overlooking anything these days.


Interesting. Hopefully this is a sign of things to come and other brokers follow suit. One thing about our big banks, when one does something, the others typically do their best not to fall too far behind (though it can take quite a while sometimes).


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## humble_pie

^^

i can pretty much guarantee that bmo & roybank are not following. Plus i totally doubt that scotia or commerce have anything like this up their sleeve.

i'll sell you a 2017 DITM LEAPs call on the above 4 banks, if you like.


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## Nerd Investor

humble_pie said:


> ^^
> 
> i can pretty much guarantee that bmo & roybank are not following. Plus i totally doubt that scotia or commerce have anything like this up their sleeve.
> 
> i'll sell you a 2017 DITM LEAPs call on the above 4 banks, if you like.


Heh, thanks but I think I'll pass. ^^


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## humble_pie

Nerd Investor said:


> One thing about our big banks, when one does something, the others typically do their best not to fall too far behind (though it can take quite a while sometimes).



you're not standing behind your own prediction? perhaps i didn't explain it well enough, i'm so sorry.

i meant a call option on a fictional new series, one based on the probability of your suggestion coming true. Namely, that the 4 other brokers, despite their clunky option capabilities rooted in the 1970s, would follow the TD lead & they would compete to work up nifty new online spread order systems.

i'm doubtful about this. I don't see anything happening at bmo for several years, if ever.


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## Nerd Investor

humble_pie said:


> you're not standing behind your own prediction? perhaps i didn't explain it well enough, i'm so sorry.
> 
> i meant a call option on a fictional new series, one based on the probability of your suggestion coming true. Namely, that the 4 other brokers, despite their clunky option capabilities rooted in the 1970s, would follow the TD lead & they would compete to work up nifty new online spread order systems.
> 
> i'm doubtful about this. I don't see anything happening at bmo for several years, if ever.


Oh, I understand. 2017 just seems far too soon for the other banks to catch up ^^


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## Nerd Investor

Next two stocks on my list with earnings coming up are BBY (earnings on the 18th) and GPS (earnings on the 19th). 
I'll like be writing the puts on these next Friday (the 13th) or the following Monday. 

Shouldn't really be anything in terms of updates until then.


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## humble_pie

plus you'll be nursemaiding your RIG puts, rolling again in december, hopefully plucking out capital gains for many long years to come

there's nothing like a collection of profitably aging short puts. Beats wine bottles any day.


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## Nerd Investor

humble_pie said:


> plus you'll be nursemaiding your RIG puts, rolling again in december, hopefully plucking out capital gains for many long years to come
> 
> there's nothing like a collection of profitably aging short puts. *Beats wine bottles any day*.


Absolutely. There is no temptation to drink my puts. ^^


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## Nerd Investor

Took the next position in my strategy today, *BBY. *

Wrote 5 Nov 20th $31.50 strike puts at $1.65, for proceeds of *$808.76.* 
Edit: updated to actual proceeds after the commissions were adjusted.


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## Jaberwock

I am curious as to why you choose the period just before earnings release to implement this strategy. The strategy works best if the stock price does not fluctuate by much. You have chosen a time when the stock is at its most volatile, which is the worst time to sell put options.


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## humble_pie

Jaberwock said:


> I am curious as to why you choose the period just before earnings release to implement this strategy. The strategy works best if the stock price does not fluctuate by much. You have chosen a time when the stock is at its most volatile, which is the worst time to sell put options.




no, not the worst of times. On the contrary, the days before earnings announcements are the best of times to sell options.

nerd investor is practicing the first stage of a classic iron options strategy. It's been used in millions - perhaps billions - of option trades ever since the CBOE was founded, certainly ever since black/scholes.

the classic strategy is four-legged. It could be an iron condor or an iron butterfly. It consists of pairs or sequences of puts & calls with tiered strikes, ie four separate option positions, all put on at the same time, nearly always just before a popular & highly liquid stock announces earnings that are not discernible in advance.

in other words, earnings news could be good or bad.

during pre-announcement days, IV in the options reaches its peak. Premiums rise along with the higher implied volatility. The IV trader sets up his iron legs & collects premium.

as soon as earnings are announced, volatility exits the option premiums. Their prices drop. The four-legged trader typically will have 2 winning positions plus 2 losing positions. He will have to close the latter. But overall, because all of the premiums will be net lower in the post-earnings days, he will end up with a net gain on the foursome.

risk for an iron trader is far, far less than risk for one who putters along selling naked puts, which is what jabberwock is describing.

nerd investor isn't doing iron flies or iron condors yet, but it's clear that he's a quick learner & a good trader. He says he's new to option trading. I imagine he'll reach iron levels easily, as soon as he sees there's a way to control the high levels of risk that are present in selling naked RIG puts. each:


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## Nerd Investor

Jaberwock said:


> I am curious as to why you choose the period just before earnings release to implement this strategy. The strategy works best if the stock price does not fluctuate by much. You have chosen a time when the stock is at its most volatile, which is the worst time to sell put options.


Humble more or less covered it off, but yes, the high implied volatility (present just before earnings) is what drives the profits. The stocks I choose to write the puts on are from my value screener ie: stocks I feel are undervalued at their current price which I'd be happy to own, which for the time being is how I manage the downside "risk". I may eventually add another leg as a credit spread to limit the downside risk, but for the time being I'm happy to chase and eventually be assigned these stocks as reasonable prices if need be.


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## Nerd Investor

Wrote 4 Nov 27 37.50 puts of GME for a net premium of *$785.03.*

That brings me to around the maximum capital I plan to commit to this strategy for the time being. So there won't be any new transactions until one of the three positions I have on the go is closed, rolled out, or expires.


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## humble_pie

^^

having seen quite a few, you clearly have a strong feel for doing options right, if i may say so. I call it the Knack.

quite often in a particular stock, i never sell puts even though they are tempting. i don't sell them because i already own enough of the actual shares, or else i already own enough shares in the sector. I might have enough $$ to cover, but still the Knack keeps me on the straight & narrow.

the Knack saves a lot of time. I mean, the Knack knows when it's useful to bother working up an order & when it's not.


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## Nerd Investor

Why thank you!


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## The_Tosser

humble_pie said:


> quite often in a particular stock, i never sell puts even though they are tempting. i don't sell them because i already own enough of the actual shares, or else i already own enough shares in the sector. I might have enough $$ to cover, but still the Knack keeps me on the straight & narrow.


Wait, what?

I just read this today... (underlining is mine)



humble_pie said:


> precision drilling is among the strongest of the strong, so not to worry there as long as we're somewhat over the hump.
> 
> i've been selling US puts in PDS for some time now.


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## humble_pie

^^

So?


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## The_Tosser

humble_pie said:


> ^^
> 
> So?


lmao 'the underlined' ? Is your world flat AND round?

So? LMAO Too funny.


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## The_Tosser

The_Tosser said:


> lmao 'the underlined' ? Is your world flat AND round?
> 
> So? LMAO Too funny.


wait wait wait, I think I've got it now. Let me think out loud and reason it out.

So there are SOME stocks you'll NEVER sell puts on for the above reasons......... then there's PDS where evidently you were under-weight it AND the Sector AND it was on the list of stocks that you will sell puts on.

OK Got it now.

I guess,.....in thinking a tad more, PDS is now OFF your list of stock you will sell puts on. Maybe, maybe not, I am not sure. Either you've taken an ***-kicking selling puts over the last several months OR you've loaded up handsomely on PDS shares well above current prices, thereby removing PDS and anything else in the sector for put-selling for the foreseeable future.

Pheeew. Glad i finally squared that Globe. It does indeed make sense now.

I knew i could do it if i just 'thinked' hard enuf aboot it.


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## humble_pie

The_Tosser said:


> So there are SOME stocks you'll NEVER sell puts on for the above reasons......... then there's PDS where evidently you were under-weight it AND the Sector AND it was on the list of stocks that you will sell puts on.


no each:




> in thinking a tad more, PDS is now OFF your list of stock you will sell puts on. Maybe, maybe not, I am not sure. Either you've taken an ***-kicking selling puts over the last several months


no each:





> OR you've loaded up handsomely on PDS shares well above current prices, thereby removing PDS and anything else in the sector for put-selling for the foreseeable future


no each:



Toss i'm picky about who i'll discuss investments with. I love to share with folks when there's good communication. Or occasionally when they're entertainingly naughty, like Melicot.

but you & i don't hit it off, do we? so if i may, i'll leave you now. here's a little bone that might make you happy. PDS puts are one position i've sold & rolled for years. i haven't made one sou, not even a farthing. but then, they never cost me a sou or a farthing either.

some options are like that. They're losers. Other options are winners. Everything gets netted out. Say lah vee. Say mah vee.


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## Nerd Investor

*Best Buy update: * I have a limit order in good until tomorrow to buy to close at $1.40. This would be a tiny profit on the transaction. If it hits and I close, I intend to roll out and down as I still feel the stock is undervalued. 

If it doesn't hit, I've decided to let the shares be assigned. Effectively, when you factor in my premium, it would be the equivalent of purchasing the shares just below $30 which is about the current price as I write this post.

*Update:* Well now, that order was filled very quickly as the stock continued to recover. A little more patience on my part would have netted me quite a bit more profit. Live and learn. 
Here's the result: Original premium of $808.76 - cost to close of $716.20 = *net profit of $92.56.* Better than a kick in the teeth, but I left a good $400 more on the table by not waiting until this afternoon. 

In any case, I've also rolled out:
5 Dec 18th $31 strike puts of BBY for a net premium of *$608.78*


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## humble_pie

all those weird strikes are suggesting to me that best buy must have undergone a reorg recently

i know nothing about BBY but even in jan 2017 the atypical strike price pattern persists
usually i stay away from those markets, if i have a choice
atypical option series & classes tend to become inactive


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## Nerd Investor

humble_pie said:


> all those weird strikes are suggesting to me that best buy must have undergone a reorg recently
> 
> i know nothing about BBY but even in jan 2017 the atypical strike price pattern persists
> usually i stay away from those markets, if i have a choice
> atypical option series & classes tend to become inactive


You mean the leaps with XX.49$ strike prices? 
No reorg, but back in March they had a special one time higher dividend in addition to their regular quarterly dividend which caused slight adjustments in the strikes on the option chains available at the time.

So you see it in the leaps but any options that weren't yet available at that time (ie: most of the weekly/monthlies I've been trading lately) just have the normal $0.50 increments.


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## humble_pie

yea i do understand all that! 

i meant "reorg" in the broadest sense, ie any legal change in the precise nature of the underlying stock upon which an option contract is drawn. Issuance of a special dividend - one that likely affects the capital base - falls within the meaning of "reorg." 

in my experience, reorgs always produce series of atypical options as the new series & classes that are based on the reorganized underlying stock get gradually phased in. It can take years for all the old options to vanish.

the old options have different deliverables, are often plus or minus cash, sometimes plus or minus a piece of a different stock. They all become what are called "atypical" options. Meanwhile the new options deliver nothing but 100 post-reorged shares, as per the classic profile.

often, markets in the atypical options turn wonky. They get thin. Nobody trades them. The market makers widen their spreads.

one stunning exception was the reorg of GOOG into GOOG & GOOGL, with GOOGL being the older shares having at least some voting power. Surprisingly, the market eschewed new GOOG options & stuck to its good old GOOGL.

me i tend to avoid atypical options, because they are quirky & there are so many other choices.


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## Nerd Investor

humble_pie said:


> yea i do understand all that!
> 
> i meant "reorg" in the broadest sense, ie any legal change in the precise nature of the underlying stock upon which an option contract is drawn. Issuance of a special dividend - one that likely affects the capital base - falls within the meaning of "reorg."
> 
> in my experience, reorgs always produce series of atypical options as the new series & classes that are based on the reorganized underlying stock get gradually phased in. It can take years for all the old options to vanish.
> 
> the old options have different deliverables, are often plus or minus cash, sometimes plus or minus a piece of a different stock. They all become what are called "atypical" options. Meanwhile the new options deliver nothing but 100 post-reorged shares, as per the classic profile.
> 
> often, markets in the atypical options turn wonky. They get thin. Nobody trades them. The market makers widen their spreads.
> 
> one stunning exception was the reorg of GOOG into GOOG & GOOGL, with GOOGL being the older shares having at least some voting power. Surprisingly, the market eschewed new GOOG options & stuck to its good old GOOGL.
> 
> me i tend to avoid atypical options, because they are quirky & there are so many other choices.


Agreed, 
I was holding some of the wonky ones at the time it occurred originally, have stuck to the normal ones sense (although in this case it doesn't seem to have adversely affected the liquidity of the stock.


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## humble_pie

N Investor, how you doing in the RIG dec 15 puts? they look good to me. Stk is 14.48, up on the day, your put's intrinsic value is .52.

meanwhile the market is 1.11 bid - 1.20 ask for the 15 puts of 18 december. This bid is comfortably buffering the position & it is preventing any early assignment. If all goes according to hoyle, its premium should start to decay at an ever-increasing speed.

on the other hand, a 15P bid of less than .52 would have been putting the position at risk of early assignment. The formula goes something like this: When (put strike minus stock) > option bid, there is risk of early assignment (it's true that dividend X-dates complicate this picture, i'm just offering the bare bones.)

the opposite (stock minus strike) works to identify ITM call options that are at risk of early assignment.


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## Nerd Investor

humble_pie said:


> N Investor, how you doing in the RIG dec 15 puts? they look good to me. Stk is 14.48, up on the day, your put's intrinsic value is .52.
> 
> meanwhile the market is 1.11 bid - 1.20 ask for the 15 puts of 18 december. This bid is comfortably buffering the position & it is preventing any early assignment. If all goes according to hoyle, its premium should start to decay at an ever-increasing speed.
> 
> on the other hand, a 15P bid of less than .52 would have been putting the position at risk of early assignment. The formula goes something like this: When (put strike minus stock) > option bid, there is risk of early assignment (it's true that dividend X-dates complicate this picture, i'm just offering the bare bones.)
> 
> the opposite (stock minus strike) works to identify ITM call options that are at risk of early assignment.


Yup, I'm pretty content with where it's at; standing pat right now and looking forward to some good old time decay in the coming weeks. 

On a pleasant note, I put in a limit order to close my GME positions for 0.25 yesterday and it hit some time this morning. 
Original net premium on GME= $785.03 less cost to close of $114.95 = *net profit of $670.08 *

I also wrote 4 additional $37.50 Dec 18 put contracts (of GME) for a net premium of *$737.03. *


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## humble_pie

^^


pretty amazing how quickly you figured it all out


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## Nerd Investor

humble_pie said:


> ^^
> 
> 
> pretty amazing how quickly you figured it all out


Well, before you think too highly of me, I should note I've been fiddling around with options for the better part of two years. The current strategy I'm employing and began tracking in this thread has resulted from a little trial and error over time.


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## Nerd Investor

Started the repair of the first of my underwater positions today: GME - closed the 4 Dec 18th $37.50 puts for $3,014.95. That's a loss of $2,277.92 on the close. 
Rolled out and down as follows: 4 Jan 15 $36 puts for $2,661.00.


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## Jaberwock

Nerd Investor said:


> Started the repair of the first of my underwater positions today: GME - closed the 4 Dec 18th $37.50 puts for $3,014.95. That's a loss of $2,277.92 on the close.
> Rolled out and down as follows: 4 Jan 15 $36 puts for $2,661.00.


Can you give us a summary of your gains and losses to date?


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## Nerd Investor

Jaberwock said:


> Can you give us a summary of your gains and losses to date?


Sure. This is the table I use. Not sure how well it will work but I will try to paste from excel. Hopefully it comes out OK as this would be a much easier way to post the profit/loss updates:

Edit: Nope, it's a mess. I've deleted I will try to find a better way.


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## Nerd Investor

Let's try it this way:










Hmmm was hoping to show the actual table right in the post, but I suppose this will do for now. This is my actual table, so it includes the AAPL trades where I first attempted this strategy (before live tracking in this thread). Also you'll notice any outstanding contracts show as profits until they are closed. This almost always temporarily overstates the profit on those contracts (since it would have to expire worthless to be accurate). That's why I made the cumulative profit column so I can see actual profit to date at different points in time (ie: I can exclude outstanding contracts that haven't closed yet).


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## humble_pie

Nerd i usually have such a different approach from yourself!

when it comes to options that are going seriously wrong, i usually say to myself, OK the only $$ i am ever going to collect from these mothers will be the original $$ received from the very first put sales. Those initial $$ were indeed positive capital gains.

then i get busy on a strategy that's aimed at escaping trouble, keeping cash flow positive & keeping the margin healthy. I don't look for any more profits from the mothers.

i roll forward to a lower put strike. Also - here's the wrinkle - i often look to reduce the number of put contracts. Finally, i'd be looking to earn enough cash from the new sale to offset the cost of the closing buyback.

those 3 - lower strike, reduce number of contracts, capture net cash - always mean going farther out in time than a few months. Often i'll look to the next LEAP because LEAPs tend to be more liquid. In the case of your GME i'd likely go out all the way to jan/17.

i didn't look for any prices today. But i'd have been looking for a pair something like Close the 4 december 37.50 puts (capital at risk 400 x 37.50, or 15,000) & Sell to open 3 jan/17 35 puts (capital at risk 300 x 35, or 10,500) for a small net rollover cash credit. On monday this week it was doable.

it's a bit like putting a problem bear into its winter hibernation.


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## Nerd Investor

humble_pie said:


> Nerd i usually have such a different approach from yourself!
> 
> when it comes to options that are going seriously wrong, i usually say to myself, OK the only $$ i am ever going to collect from these mothers will be the original $$ received from the very first put sales. Those initial $$ were indeed positive capital gains.
> 
> then i get busy on a strategy that's aimed at escaping trouble, keeping cash flow positive & keeping the margin healthy. I don't look for any more profits from the mothers.
> 
> i roll forward to a lower put strike. Also - here's the wrinkle - i often look to reduce the number of put contracts. Finally, i'd be looking to earn enough cash from the new sale to offset the cost of the closing buyback.
> 
> those 3 - lower strike, reduce number of contracts, capture net cash - always mean going farther out in time than a few months. Often i'll look to the next LEAP because LEAPs tend to be more liquid. In the case of your GME i'd likely go out all the way to jan/17.
> 
> i didn't look for any prices today. But i'd have been looking for a pair something like Close the 4 december 37.50 puts (capital at risk 400 x 37.50, or 15,000) & Sell to open 3 jan/17 35 puts (capital at risk 300 x 35, or 10,500) for a small net rollover cash credit. On monday this week it was doable.
> 
> it's a bit like putting a problem bear into its winter hibernation.


I do have a couple of LEAPS on the books currently where I've done what your describing (roll way out and down, potentially drop a contract in the process). 
Fort his strategy, if the stock still shows up on my screen as undervalued, I'm more likely to roll straight out (or out and down a single step) 1-2 months. For simplicity and accuracy of tax reporting, if I'm rolling to a new calendar year, I try to make it January (so either next month, or a LEAP). This way, I have figured out my correct gain losses to report well before I prepare my tax return, and closing my LEAPs at the same time (if necessary) will be my trigger to amend the gain in a prior year return.


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## Nerd Investor

Yesterday, closed Best Buy for $266.20 making profit on that $342.58. Rolled out 5 new contracts of of BBY $31 Jan 15 puts for approx $870 (will update the spreadsheet wit the exact figure once available, one of my commissions will get refunded/adjusted). 
Also yesterday, wrote a single $110 Jan 15 AAPL contract for $398. 

Today, closed RIG for $2,022.45, net loss on that one of $944.93. 
I have a limit order to roll new 10 new RIG $15 Jan 15 puts at $2.25 a piece. 

That will be the last transaction for 2015. When I close out these January 15 puts, I will post the updated spreadsheet that shows the net profit/loss for 2015.


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## humble_pie

you're right about the GME details, good points!

a key concept is reducing the number of put contracts, i believe, on occasions when one sees that one's original forecast has not worked out & in fact the new probability is a lowish somewhat dismal looking market for some time.

i have a few DITM put bears in hibernation already. It's only necessary to check now & then to make sure the creatures are still breathing in their frozen caves; ie there still has to be enough premium in the put bid price that the counterparty will not be tempted to assign.

even when the put bid price drops into danger territory, ie it goes below (strike minus stock), i have a technique for preventing, or at least trying to prevent, any counterparty from assigning. So far this technique is working, i'm about to set it up one more time for my miserable precision drilling US march 5 puts, which are fairly far DITM.


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## Nerd Investor

humble_pie said:


> you're right about the GME details, good points!
> 
> a key concept is reducing the number of put contracts, i believe, on occasions when one sees that one's original forecast has not worked out & in fact the new probability is a lowish somewhat dismal looking market for some time.
> 
> i have a few DITM put bears in hibernation already. It's only necessary to check now & then to make sure the creatures are still breathing in their frozen caves; ie there still has to be enough premium in the put bid price that the counterparty will not be tempted to assign.
> 
> even when the put bid price drops into danger territory, ie it goes below (strike minus stock), i have a technique for preventing, or at least trying to prevent, any counterparty from assigning. So far this technique is working, i'm about to set it up one more time for my miserable precision drilling US march 5 puts, which are fairly far DITM.


Love the bears in hibernation analogy :biggrin:


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## humble_pie

Nerd Investor said:


> Love the bears in hibernation analogy :biggrin:



today being last options expiration friday in the year, i ran around to all my caves where my DITM bears are sleeping in hibernation, to check how they were doing.

they all looked snug as bugs in rugs, but still. End-of-year is a turbulent time in options markets, in my experience, because the market makers are clearing their books. All kinds of weird & unexpected assignments can & do occur. 

to be honest i did notice one of the bears twitching slightly & grumbling while he slept. I believe he was the one with the looming dividend X date, near the end of the calendar year. From now until december 30th i'm going to patrol my bear caves at least a couple times a day, ready to jump in with emergency cash transfusions if one of the creatures develops breathing trouble.

once we're safely into the new year, those heaping new snowfalls are going to blot out all sound & light from the bear caves. The hibernating occupants will relapse back into deepest REM sleep.


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## Nerd Investor

Well, it's been a tumultuous time in the market lately. 
Yesterday I closed my 4 GME Jan 15 $37 puts for $3,254.95 (*loss of $593.95*) and rolled out and down, writing 4 July 15th $35 puts for $3,284.97. 
My Jan 15 $110 AAPL put contract was also assigned to me for a total cost + commissions of $11,043. My intent is to hold this and write covered calls until I get rid of it. I will likely wait until a bit closer to earnings to write my first covered call for a juicier premium. 

I'll post the updated profit loss summary after this week (still a few outstanding contracts to deal with before expiration Friday).


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## humble_pie

Nerd Investor said:


> Yesterday I closed my 4 GME Jan 15 $37 puts for $3,254.95 (*loss of $593.95*) and rolled out and down, writing 4 July 15th $35 puts for $3,284.97.
> 
> My Jan 15 $110 AAPL put contract was also assigned to me for a total cost + commissions of $11,043. My intent is to hold this and write covered calls until I get rid of it. I will likely wait until a bit closer to earnings to write my first covered call for a juicier premium.



this illustrates what happens to the seller of naked puts when the market plunges. Alas the only money to be made from those short mothers were the original $$ from the first or early sales of the options.

once a Plunge happens, the put short seller has to keep dancing down but usually makes little or no money.

re AAPL, that must have been an early assignment? your message is dated jan 13th, days prior to expiration, so i'm left wondering what happened to the formula that shows risk of early assigment.

the formula is easy to use. When (strike minus stock) is less than the put option bid, this put seller is at risk of early assignment. This configuration was probably visible in your AAPL put sometime during the day the counterparty decided to exercise. It's true that an intervening dividend X date will throw the calculation off, i'm not familiar with AAPL dividend dates to know if the stock went X around expiration date.

when i see the above formula at work in my own accounts, i employ the following strategy to prevent early assignment. In these DITM cases, there's usually a big spread between the bid & the ask. What works is to enter a closing order to buy the put at a price that's something like 5 pennies above intrinsic value, ie this price will be above the existing market bid.

this new order to buy is unlikely to be filled. In the remote chance it would be filled, this would be an advantage, since its price is uncongruously low. The trader can immediately turn around & sell (roll) to a put with a lower strike price that's farther out in time.

the order will continue to be displayed throughout the day. Its effect on the market - at a nickel higher than intrinsic value - will be to prevent one's counterparty from exercising. Not guaranteed of course, but this has worked to prevent early assignments in my account on several occasions.


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## Nerd Investor

humble_pie said:


> this illustrates what happens to the seller of naked puts when the market plunges. Alas the only money to be made from those short mothers were the original $$ from the first or early sales of the options.
> 
> once a Plunge happens, the put short seller has to keep dancing down but usually makes little or no money.
> 
> re AAPL, that must have been an early assignment? your message is dated jan 13th, days prior to expiration, so i'm left wondering what happened to the formula that shows risk of early assigment.
> 
> the formula is easy to use. When (strike minus stock) is less than the put option bid, this put seller is at risk of early assignment. This configuration was probably visible in your AAPL put sometime during the day the counterparty decided to exercise. It's true that an intervening dividend X date will throw the calculation off, i'm not familiar with AAPL dividend dates to know if the stock went X around expiration date.
> 
> when i see the above formula at work in my own accounts, i employ the following strategy to prevent early assignment. In these DITM cases, there's usually a big spread between the bid & the ask. What works is to enter a closing order to buy the put at a price that's something like 5 pennies above intrinsic value, ie this price will be above the existing market bid.
> 
> this new order to buy is unlikely to be filled. In the remote chance it would be filled, this would be an advantage, since its price is uncongruously low. The trader can immediately turn around & sell (roll) to a put with a lower strike price that's farther out in time.
> 
> the order will continue to be displayed throughout the day. Its effect on the market - at a nickel higher than intrinsic value - will be to prevent one's counterparty from exercising. Not guaranteed of course, but this has worked to prevent early assignments in my account on several occasions.


Correct, AAPL was an early assignment. After earnings I'll be deciding whether to sell it at that point, or keep a little longer and write a call against it. 
Not really any other activity to report. I will eventually start rolling out again, but in the New Year I wanted the cash to max out the TFSA and make some RRSP contributions. That combined with the market drop reduced margin below my comfort level for writing additional contracts.


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## Rusty O'Toole

I'm a little late with this but possibly relevant to earlier discussion. I use the Think or Swim platform at TD Waterhouse which makes it very easy to search and price option spreads and see them in graphic form on the Analyse page, and to do any kind of spread as a single order. I can recommend them if you want a good option trading platform.

I consider it very dangerous to leg out of an earnings spread when markets may be going wild - have been caught that way before.

Last week I made some good money on earnings plays in CREE GS IBM and NFLX. Since I was overall bearish at the time I just sold some calls and call spreads outside the expected move (the TOS platform tells you the expected move).

The only one that gave me trouble was CREE. I sold the 26.5 calls for .30 and CREE went as high as28.65 so I had to roll out to the Feb 26.5 for an additional .55 credit. Now it is coming in nicely.

Just my luck the only trade where I didn't back myself up by buying a farther out option I got stuck lol. The others I let expire worthless.


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## Nerd Investor

Rusty O'Toole said:


> I'm a little late with this but possibly relevant to earlier discussion. I use the Think or Swim platform at TD Waterhouse which makes it very easy to search and price option spreads and see them in graphic form on the Analyse page, and to do any kind of spread as a single order. I can recommend them if you want a good option trading platform.
> 
> I consider it very dangerous to leg out of an earnings spread when markets may be going wild - have been caught that way before.
> 
> Last week I made some good money on earnings plays in CREE GS IBM and NFLX. Since I was overall bearish at the time I just sold some calls and call spreads outside the expected move (the TOS platform tells you the expected move).
> 
> The only one that gave me trouble was CREE. I sold the 26.5 calls for .30 and CREE went as high as28.65 so I had to roll out to the Feb 26.5 for an additional .55 credit. Now it is coming in nicely.
> 
> Just my luck the only trade where I didn't back myself up by buying a farther out option I got stuck lol. The others I let expire worthless.


Very nice! Yes, it's been a crazy couple months for just about anyone in equities. I wish I had a little more free cash/margin to have kept rolling out but wanted to pause for a bit to pump up the tax sheltered accounts and with the way everything was dropping to start the year, I really didn't want to risk a margin call. I'm at cumulative loss since inception of this strategy right now, but I'd be fine if I was still rolling out the same number of positions. A nice little AAPL bounce with earnings would help


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## Nerd Investor

Scooped $94 writing a $98 strike 2 weeks out on my AAPL position. Just trying for a little pocket change while waiting things out


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## Nerd Investor

Update to say they'll be no updates for a while. 

We purchased a piece of land that closes next week so I had to close my puts and sell the AAPL position. 
Won't have much in excess margin for a while for more puts unfortunately.


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