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XMFConnor (97.31)

Options Question

Recs

3

February 07, 2012 – Comments (2)

Fools,

I am a long-time stockpicker, but relative noob in the options world. I am hoping some more experienced options Fools can give me a bit of advice on this one..

 When selling out of the money puts, how do you determine how many puts to sell (how to size the position)?

I am looking at a stock I really like right now with puts that have a breakeven price 15% below current price with two months left until expiration. I am wondering how to size the position though.

Is the best way to think about it to take how much stock I would normally buy, and divide by the strike price *100? Then, short that many number of puts?

The only problem I see with that is the overall impact on my portfolio would be small. even though the annualized return on the trade is very attractive. Seems like there might be a better way to think about this? 

 I would very much appreciate any help Option Fools can give me!

 Fool On!

 XMFConnor

 

2 Comments – Post Your Own

#1) On February 07, 2012 at 3:38 PM, awallejr (80.13) wrote:

1 contract equals 100 shares for both puts and calls.  It all depends on how many shares you can afford to buy should the stock in question fall below the put strike price come expiration day.

I love selling puts on companies I like.  I tend to play with the January ones and string them out over all the January years.  Further out you go the greater the premium you can make.  Also if the stock didn't do what you expected and come January it is now selling below the strike price you can simply sell the next January's put and use the proceeds to close out the current one.

It is also a nice way to jump into a rally that you missed. 

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#2) On February 07, 2012 at 9:22 PM, TMFTypeoh (79.22) wrote:

Yup, awallejr nailed it.

 

Lets say you want to own $5000 of a company, and its stock is trading at $10/share.

If you wanted to get into it by selling puts, you would sell 5 contracts at the $10 strike (5 X 100 X $10).

 If your selling puts, try to only go 3-6 months out, and make sure your getting paid well for writing the put.  If the put doesn't hit, you can always re-write for more profit.

If your trying to get into the stock, write higher strike puts.  If you just think the stock is cheap and want the income, write at-the-money or out-of-the-money puts.

Brian 

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