familyfund2 (21.78)

10 Comments – Post Your Own

#1) On December 19, 2010 at 1:08 PM, juicevicki (64.08) wrote:

Hi Put seller,
We have been selling puts on stocks we want to own for over a year.  We actually do it to generate income as we feel that you usually make more as a seller than a buyer.

This is our    formula.  Fool stocks, hopefully down some.  Deep in the money, i.e. Ford (F)  now at $16.80.

We sold Jan, 21, 2012 , $15 puts for 1.78 per contract (multiply by 100 to get $178 less about $11 in commissions) on 12/9 when Ford was $16.74.

These puts have gained $4 per contract, as we could now buy them back at 1.74, even though Ford hasn't moved much.  This is called theta or time value.  
 
As a seller, your put option becomes less valuable every day even if Ford does not move.

 
Conversely, if Ford goes down, your puts become more valuable and if you wanted to buy them back you would have to pay more than you sold them for and would lose money.

If you like Ford and want to own it at a discount.  Look for puts you can sell for at least $1 as any less is just not worth it with commissions and other costs.

Look for stocks and options that are widely traded and for options that do not have a big gap between the ask price and the bid price.

If you do place a stop order to protect yourself, it will be triggered by the ask price which will always be more than the bid price.

Now for the fun part.  We like to keep the put options we have sold until they are 60 to 70% of their maximum value.  We then sell them and take out another contract to replace them if we still like the underlying stock.

Know that you need to have enough money in your account at all time to exercise these put options as the owner of the option can "put" the stock to you at any time!  You need enough cash in your account to buy 100 shares of stock at the put strike price you sold.

In our example, Ford (F), you would need $1,500 in cash in your account for each put contract  you have sold!!!

To sum it up.
1. Only sell puts on a stock that you would like to own.
2.  Always have enough cash in your account to purchase the 100 shares of stock at the strike price of the put you have sold.

3. If the underlying stock goes way up, the put you have sold will lose value, but you will not be able to purchase the stock.

4. If  the underlying stock  goes way down in value you may have to purchase the stock at a higher price than you could purchase it on the open market.

5. If you do have to purchase  the underlying stock, remember, you have already been paid at least $1.  In our example, you have to purchase Ford for $15, and Ford is trading at $14, you still have $178 in premium you have been paid and you are really paying $13.22 for your $100 shares of stock (less $22 in commissions).

This is not a recommendation to sell puts on Ford or any other stock.  You have to figure out for yourself it selling puts is a prudent way for you to trade.

Vicki

 

 

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#2) On December 19, 2010 at 1:43 PM, MegaEurope (< 20) wrote:

FF, I suggest you download OptionsOracle (a great free program) and try out the options screener.  You can enter in a list of stocks you are interested in and it will help you figure out the best strikes and dates for your strategy.

I've tried selling puts before and didn't like it much.  It tied up too much cash that I had other good ideas for. These days the only options strategy I use is buying puts and calls.

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#3) On December 19, 2010 at 2:13 PM, familyfund2 (21.78) wrote:

juicevicki

Thanks so much for your detail. I actually thought about F even though it's above my prefered price range. Your example illustrates my question = F for 14%? less than todays price. My hope is to do so with a company similar to ford that i would then feel comfortable writing more puts from there.

And 1.78 is >10% in a little over a year? right?

MegaEurope

I'll put that on my list of things to do. That, and take a peek at your picks ; )

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#4) On December 19, 2010 at 2:23 PM, MegaEurope (< 20) wrote:

TGB looks like a promising candidate for selling puts though.

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#5) On December 19, 2010 at 3:35 PM, rd80 (99.32) wrote:

+1 rec for  juicevicki's comment

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#6) On December 19, 2010 at 5:10 PM, juicevicki (64.08) wrote:

Hi,
Another way to get stocks at a discount is to buy deep in the money calls for no more than .50 in extrinsic (premium) value, and to further reduce your costs by selling one or more deep in the money puts.

 THIS IS A VERY BEARISH PLAY!

Here is an example.  
BAC (Bank of America) $12.57 has been on a downward trend since April, 2010.  but seems to be moving kind of sideways right now. 

If you think that BAC is going to move up in the next couple of months, you could purchase a March 11, $11 call for $1.94 ($194+ commissions).  That gives you the right, but not the obligation to purchase 100 shares of BAC at $11 a share for the next 89 days.

The intrinsic value of this option is  1.57, ($12.57 stock price less $11 option price)  the extrinsic value or premium is .37 ($37).  but you still have to pay almost $200 for the call.

How can you lower your cost?  Sell one or more BAC  puts.

If you read my prior blog you can see that I like to be deep in the money and far out and collect at least $1 in premium.

The earliest BAC put option you could sell that meets that criteria is the August 11, $12 put for $1.23 (all premium or extrinsic value).

Since I like to have lots of room for stocks to fall, I would personally go out to the Jan 2012, $10 put for .99 ($99/contract).  

If you sold two  Jan 2012, $10 puts for each March 11, $11 call you would actually have a push after commissions.

Remember, you need $2000 in cash in your account to cover those two  Jan 2012, $10 puts.

If BAC goes up by the third Friday in March you can either sell your $11 call or exercise it and own 100 shares of BAC for $1,100.

If it goes down you will get stopped out.  We like to risk no more than 24 to 30% on any option play. 

What happens to the puts you sold?  Hopefully BAC does not drop below $10 and your puts expire worthless the third Friday of January ,2012.

If your puts drop in value to 60 or 70% of  what you sold them for be sure to BUY THEM BACK.

Good luck,
Vicki

 

 

 

 

 

 

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#7) On December 19, 2010 at 9:15 PM, familyfund2 (21.78) wrote:

juicevicki

You are doing a great job of presenting pertinent information. Thanks so much for your extra time.

Having studied these particular option plays a dozen times or more, i am really getting comfortable with the mechanics of it. Your tutorial was very tidy and concise. Great.

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#8) On December 20, 2010 at 11:30 AM, drgroup (66.46) wrote:

juicevicki.... great job, even I can understand the mechanics.

Thx

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