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Selling Puts

Recs

17

October 28, 2013 – Comments (29) | RELATED TICKERS: P , UTSI

I started a thread showing real life put plays I have made in real life and mentioned here.  I am carrying over that link to here.

http://caps.fool.com/Blogs/tech-put-play/876989

I honestly do try to be helpful by giving what I think are money making suggestions.  While I don't mind people ignoring my politics, I truly hope some are considering my suggestions.  I will continue to post suggestions if there is real interest.

Accordingly if people do want me to continue please REC this thread.  If there is no interest then I will stop.

Here are 3 new trades I made today:

1)  Sold 20 June 2014 $9 puts in FIG for $1.30.  It is a stock I owned for awhile ago having bought at $4.  I recently sold it for $8.35.  I always hated their K1s since they always sent them to me after April 15. I wouldn't mind actually being put into the stock since it would be less than what I sold them for ($7.70 after subtracting the premium).

2)  Sold 20 January 2016 $17 puts in ACAS for $4.20.  I have put positions in 2014 and 2015 at $15 strike.  I like this stock because they are committed to buying shares back when stock is under NAV which it is about $19.

3)  Sold 20 January 2016 $7 puts in MTL for $4.30.  This stock is risky because it violates a rule I have about selling puts in debt heavy companies.  However they are selling assets off to bring debt down and it is too important a company for Russia to see go under. Should you get put the stock your basis would be only $2.70.  It actually can make you good money with lower costs.

Next comment is an investing strategy for young long term investors.

29 Comments – Post Your Own

#1) On October 28, 2013 at 1:16 PM, awallejr (81.56) wrote:

One way to build up a portfolio is through selling puts, stringing them out and using the proceeds to buy the common.  This does require a margin account.  I have 2 major rules.  First, NEVER use more than half your margin.  Corrections do happen and a margin call is not a pleasant event.  Second, generally avoid heavy debt companies or companies with BK prospects, a lesson I learned with ATPG. 

Pick a stock you really like that also pays a dividend.  Avoid momentum plays.  You want slowly growing boring stocks.  Personally I suggest using XRX.  Yeah I know I mention it a lot but that is because  it is low priced, it is assigned a ridiculously low PE, it is grinding up, has transformed its business, spins off a tremendous amount of FCF and is devoting that to massive stock buybacks.

Sell 10 Jan $10 2015 puts (should get about 1.52) and 10 Jan $12 puts (should get abvout $3.35).  Take the proceeds and buy the common (about 480 shares).  Now every time the next January option opens up you want to sell them and use the proceeds to buy more common shares (you want to look for prices at or near where the stock is currently selling for).

As the years go by you are building up a nice position.

There are a few things that can happen to force you to side track. 

First the thesis for the stock might change in which case you would want to wind down the play.  That happened to me with ATPG.  I have a bunch of January 2014 puts sold and with company in BK I will get put the stock.  The way I unwound the damage was sellling further out puts in other stocks and setting aside the cash to cover the forced purchase.

Second you may not want to get put the stock should it be trading at or below the strike price.  Then you sell the next January put and close out the current one with the proceeds.

Third, you don't have to use the put proceeds to buy the common.  You can use it to buy other stocks.  I used the proceeds from the 3 put plays above and bought 10 shares of Aapl and 300 shares of GE.

Well good luck and hope this was a useful read.

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#2) On October 28, 2013 at 1:19 PM, awallejr (81.56) wrote:

Correction the 10 January $12 ones are for 2016.

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#3) On October 28, 2013 at 1:22 PM, drgroup (69.10) wrote:

Awal.... your politics leave a lot to be desired to those of us who are fiscal conseratives; but do not let this deture you from posting your thoughts on selling puts. It provides a realtime road map to the ability to make/loose money. Keep on chuggin'....

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#4) On October 28, 2013 at 1:25 PM, drgroup (69.10) wrote:

Also, again I commend you on the related tickers: P-UTS...

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#5) On October 28, 2013 at 4:16 PM, Mega (99.96) wrote:

"[MTL] is too important a company for Russia to see go under."

You could say the same about GM and Chrysler going bankrupt in 2008, or Russia defaulting on its sovereign debt in 1998. http://en.wikipedia.org/wiki/1998_Russian_financial_crisis

It's a mistake to make the assumption that the Russian government is going to bail out shareholders if Mechel's financial condition gets worse.

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#6) On October 28, 2013 at 4:40 PM, awallejr (81.56) wrote:

#5 You could be right tis why I said it was a risky one and does violate one of my rules.  But I got $8,600 today with possible loss of $5,700 (should stock go to zero) more than 2 years from now or a gain of $8,600.

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#7) On October 28, 2013 at 4:44 PM, awallejr (81.56) wrote:

And bought in AH 10 more shares of AAPL at $510 with the remaining proceeds from my 3 trades.  Paid $510 which I thought was an over reaction to some pretty good numbers.

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#8) On October 28, 2013 at 9:27 PM, awallejr (81.56) wrote:

Well according to recs it doesn't look like much interest.  I will just mention as I close the ones I suggested.  Ah well.

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#9) On October 29, 2013 at 9:08 AM, ryanalexanderson (< 20) wrote:

If you build it, the recs will come.

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#10) On October 29, 2013 at 9:43 PM, awallejr (81.56) wrote:

Well I dunno only 9 people cared and 1 was me heheh.  I'll close out positions as time goes by because in the end all that matters if one made money or not.

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#11) On October 29, 2013 at 10:24 PM, HarryCarysGhost (99.68) wrote:

I care, and am somewhat shocked that Caps still has ten people around;)

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#12) On October 30, 2013 at 11:11 AM, awallejr (81.56) wrote:

Profit took on QCOR.  Closed the 10 January 37 2014 puts for 1.54.  Had received 3.46 so profit of $1,920.  Keeping the other 2 positions open for now.  I need more clarity on the "promotional practice" investigation, otherwise their earnings and growh potential can be tremendous.  But this investigation will remain a cloud for now.

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#13) On October 30, 2013 at 2:09 PM, awallejr (81.56) wrote:

Closed 30 BX January 17, 2015 for .71 per.  Had sold them for $3 so a total profit of $6,870.

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#14) On October 30, 2013 at 5:08 PM, somrh (85.94) wrote:

@awallejr

And if you haven't seen this, the authors look at using put writing strategies to model hedge fund returns:

The Cost of Capital for Alternative Investments

Why pay 2/20% when you get similar risk/reward for much cheaper?

I've personally never done anything other than covered positions though (when does margin interest kick in?). Granted, I'm reluctant now considering how low VIX is. I'm guessing the strategy performs better with higher VIX (I may have to do a more detailed investigation.)

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#15) On October 30, 2013 at 8:04 PM, awallejr (81.56) wrote:

@14  There once was a time when I could understand that link (I actually did a paper in High School on Three Dimensional Euclidean Vector Space - don't ask me now about it, Scotch did me in there).

Margin doesn't kick in unless you get put the stock and don't have enough cash in the account.  It is bascially a lien against your assets when you sell puts.,  They generally sequester (had to use that word) 30% of the total cost if you had bought the stock at the strike price.

Say you have $100,000 margin availablity and you sold puts obligating you to buy at say $10,000.  They would deduct 3,000 from your available margin but there is no interest charge.

I always warn people not to over leverage.  I use a 50% tops rule that is why I closed out those 2 positions in #12 and #13 to free up margin plus I saw more downside than upside and wanted to lock in my profits.

You can do shorter duration plays I suppose but I like to go far out because if my thesis for the underlying stock is sound I can avoid those short term dips that can often happen at the wrong time.

The VIX is irrelevant unless you do a short duration play.  I say go out to January 2015 and January 2016 and let premium deterioration work for you.

Don't do this unless you are prepared to be put the stock.  So pick one that you like.  Actually pick a few to diversify the risk.

 

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#16) On October 31, 2013 at 3:28 PM, somrh (85.94) wrote:

@awallejr

Regarding the article, they basically look at 1 month put writing on the S&P 500. The portfolios are given two parameters: Strike price ("Z-score" - standard deviations from mean) and Leverage. They then compared volatility/risk measurements with hedge fund indices. 

The porfolio they found to be closest was (Z = -1, L = 2) which is 1 standard devation OTM put options with 50% capital contribution (like what you do). Figure 2 on page 35 shows how their strategy does in comparison with the HFRI. It's actually a little less volatilitle. 

That's kind of what I figured on the margin interest but wasn't sure. 

I only mention VIX because it should be correlated with option prices (higher implied volality = more expensive option prices = more income).  

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#17) On October 31, 2013 at 5:17 PM, awallejr (81.56) wrote:

Yeah thought about the increased premium effect it would have afterwards plus would mean some kind of pullback happened so you can sell lower priced puts too.  Since my goal really isn't to ever get put the stock that is why I sell puts near or under the stock's current price, with some exceptions (like MTL). 

In the end it really is about taking advantage of premium deterioration over time.  You can get some wild portfolio swings especally on those further out plays since the bid/ask can be wide. But you are talking to a guy who survived the wild swings of the last crash.  If that didn't harden you nothing will heheh.

I don't plan on writing any more puts until after January 2014 settlement since then I will have margin opened although I keep eyeing QCOR and might close a couple other plays I am deeply in the green on.

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#18) On November 01, 2013 at 10:49 AM, jiltin (29.09) wrote:

Awallejr,

I played calls three times,just or my learning purpose, one time made 450 positive,rest -80 and -185. 

Learning puts from your experience, thank you.

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#19) On November 06, 2013 at 1:51 PM, awallejr (81.56) wrote:

1) Closed out BBEP March 17.50 2014 puts at .65.  Profit is $1,900-$650 = $1,250.

2) Sold to open 10 WPZ June $50 2014 puts for $4.32.

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#20) On November 06, 2013 at 1:54 PM, awallejr (81.56) wrote:

Used part of the proceeds to buy 100 shares of KKR.

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#21) On November 06, 2013 at 8:51 PM, awallejr (81.56) wrote:

BBEP going monthly on distributions.  I think that a great move since it reduces stock volatility.

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#22) On November 14, 2013 at 2:33 PM, awallejr (81.56) wrote:

Sold 20 January 2016 17.50 puts at $4 per.  Annoyed I missed this yesterday since I could have gotten a much better price.  Glad they got that secondary headwind out of the way.

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#23) On November 14, 2013 at 2:33 PM, awallejr (81.56) wrote:

oops those are BBEP one's in #22.

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#24) On November 18, 2013 at 9:45 AM, awallejr (81.56) wrote:

Closed 10 ACAS January 2014 $15 puts.  Received $2 paid .66.  Profit $2000-$660 = $ 1,340.

Sold to open 10 January 2016 $15 ACAS puts for $2.68.

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#25) On November 22, 2013 at 3:31 PM, awallejr (81.56) wrote:

Sold 10 XON April 2014 $20 puts for $2.58.  This is speculation on an Einhorn play.  I am actually hoping to get put the stock.

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#26) On November 29, 2013 at 12:56 PM, awallejr (81.56) wrote:

Closed 20 CSX January 2015 $20 puts.  Received 2.90 paid .58.  Profit $5800-$1120= $4,680.  I could have held to expiration to collect that extra $1120 (since I seriously doubt stock would be trading under 20 by then) but I wanted to free up margin.

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#27) On December 14, 2013 at 4:38 PM, awallejr (81.56) wrote:

Sold 10 SDRL January 2016 $40 puts at $10.

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#28) On December 17, 2013 at 11:40 AM, awallejr (81.56) wrote:

Sold 10 BBEP January 2016 $20 puts at $5.20.

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#29) On April 07, 2014 at 11:30 AM, awallejr (81.56) wrote:

Bought to close 5 QCOR April 40 2014 puts for .05.  Had sold them for 6.45.   $3,225 - $24 = $3,200 profit.

Bought to close 10 INTC January 20 2016 puts for 1.10.  Sold them for 2,75.  $2,750 - $1,100 = $1,650 profit.

I could have held onto INTC since I am condifendt it would have expired worthless but I wanted to free up margin.

As for QCOR I still have 2 positions open.  The 10 Jan 45 2015 puts and the Jan 55 2015 puts.  In light of today's takeover bid on QCOR for about $86 I am looking at sizeable gains.

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