the logic may very well be screwed up
You have a portfolio of stocks. You hold each stock for one or both of the following reasons:
1) The stock has an appropriate dividend yield to justify committing capital to it, and you do not see that the price is likely to fall enough that you take a loss
2) The stock has good potential to increase in price over your holding period, sufficient to justify your committing capital
In other words you expect the market to move either sideways, but be compensated by the dividend yield, or up. Selling a call against your holdings achieves the following:
-if a stock you hold for dividends is called away from you, you lose the right to receive that income and will need to pay to repurchase the stock
-if a stock you hold for appreciation purposes is called away, you were correct on holding the stock but have now sold it on "too cheap". You either repurchase at a dearer price to resume your initial position, or you lose your position entirely.
If you don't mind losing your long position in a stock, why do you own it?
Selling calls against your stock will outperform not doing so when the stock goes down. It will not outperform when the stock goes up. You own stock. Do you own stock that is going up, or down? Why would you entertain strategies which only benefit when the market moves against your long stock positions, but causes you losses when you are correct on long stock positions? Is this not harebrained?
There is no "selling the reward in advance". You are selling the right to receive good profits if the stocks you own appreciate considerably. In exchange you earn a few pennies which may or may not be sufficient to compensate you for the risk of holding a stock which could go down. This is a losing strategy on stocks which will appreciate, and on garbage stocks it will only lessen your losses slightly.
Sure, you could do the maths and sell a bunch of options, but there is no such thing as guaranteed to make you more money. I think you are wrong, your strategy is flawed, and you don't have much of a clue. This isn't a crime as we were all born ignorant, but it is folly to risk your hard earned until you do know. You've just fallen for some marketing. Remember that everyone is out to seperate you from your money. Would you consider selling naked puts to be a good strategy?
Hi there
When doing options you need a DIFFERENT mindset.
For example today at around 17.30 U.K time You could have SOLD a PUT contract on PCX Expiry on 24 June Strike at 19.00 USD for 0.39 USD so a profit of 39 USD per contract (US market -- I don't bother with european markets). That IMMEDIATELY shoves 20 * 100 * 39 USD into your account -- without even having to buy the shares -- so 780 USD.
A few hours later the option for this had DROPPED to 0.07 USD per contract
So to CLOSE your position you BUY BACK the option at strike USD 19 cost 0.07.
So for this you PAY 7 USD per contact -- 140 USD for 20 contracts.
So net profit with 2 mouse clicks
AND NO MONEY DOWN is 780 - 140 = 640 USD which is immediately available in your trading account.
No MONEY DOWN either.
So you've got on the whole trade a profit of 32 USD per contract
(39 - 7 = 32 ) We've ignored dealing costs but these are usually only between 8 and 18 USD so for a decent nr of contracts you can ignore for calculating approx gain and profit (or hopefully you don't have any -- loss).
But for say 20 contracts you've made a nice 640 USD profit
WITH NO MONEY DOWN just with two mouse clicks.
I've been at the receiving end of a lot of vitriol on options since I made a statement that since 80 % of people BUYING options LOSE -- therefore the it MUST be true that 80 % of people SELLING options must WIN.
However it's a relatively EASY way of making money if you just go for gradual top ups of your capital rather than the "Mega Gain" stuff which usually doesn't work.
Of course you need to pick relatively stable shares -- but also don't think of absolute profit -- just look at the % gain -- remember that even a 0.5 % gain OVER ONE WEEK is compounded around 27% a year.
Most investment brokers would give their eye teeth to gain even 5% a year in the current market conditions.
DO please look at WEEKLY options "The weeklys" from the CBOE --
For OPTION SELLERS Time delay is YOUR FRIEND and a lot of trading possibilities present themselves on the THURSDAY and the expiration FRIDAY -- "Weeklys" expiry every Friday but you can trade the following weeks options on the Thursday night and a lot of activity happens at this time too. But as today's trade shows it always pays to keep an eye on the weeklys.
Remember that "Naked puts" can only lose you in the worst scenario the cost of your strike price (the cost the shares are "Put to You" - the premium you received for selling the put) * the nr of contracts -- and if you pick a reasonable share this won't normally be a problem.
Naked calls are totally different -- you sell a CALL option at say 19 USD a share --- the share rises to 5000 USD a share - well you have to supply shares you don''t have at 5000 USD -- you might have got a premium of say 0.30 USD a share -- so you are still out of pocket BIG TIME. -- Will see you on the Streets of London selling "The Big Issue".
If the shares are PUT to you then you can of course sell a CALL against these -- but another strategy is if you think you will be "PUT" is to do a "Rollover" -- buy back your position to close and then sell another put / call for another expiration -- the following week for example. OptionsXpress and some other online brokers only charge this as ONE trade.
Cheers
jimbo
