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Idea on an Option Trade
Posted on 7/27/22 at 11:53 pm
Posted on 7/27/22 at 11:53 pm
I’m no options expert, and I have only recently studied options and just last week made my first options trade. However, I have something I’m thinking about.
1) Sell a Put option on your favorite stock that you own at least 100 shares of. It should be a stock you absolutely love, want to hold for a very long time and would be glad to buy another 100 shares if the price went down. Let’s say you use Microsoft that’s currently at $268 and sell the put with a strike price of $215, a 20% drop. Use a expiration date that pays a several hundred dollar dividend. You collect the dividend and hopefully the strike price is never met and the option expires. If it does go down to the strike price, you would be very happy to pick up another 100 shares at a great price.
At the same time
2) Use the dividend proceeds from the above to Buy a Call option on SPY with a 20% upside strike price and adjust the expiration date to get the price of the Call as close as you can the the money you got from the Microsoft Put/sell dividend.
Then sit and wait, as this is a longer term play...
The trade costs you really nothing. You may have to buy the Microsoft shares or close out that option before the strike price hits, or you may be able to control 100 SPY shares for a big upside.
Thoughts??
1) Sell a Put option on your favorite stock that you own at least 100 shares of. It should be a stock you absolutely love, want to hold for a very long time and would be glad to buy another 100 shares if the price went down. Let’s say you use Microsoft that’s currently at $268 and sell the put with a strike price of $215, a 20% drop. Use a expiration date that pays a several hundred dollar dividend. You collect the dividend and hopefully the strike price is never met and the option expires. If it does go down to the strike price, you would be very happy to pick up another 100 shares at a great price.
At the same time
2) Use the dividend proceeds from the above to Buy a Call option on SPY with a 20% upside strike price and adjust the expiration date to get the price of the Call as close as you can the the money you got from the Microsoft Put/sell dividend.
Then sit and wait, as this is a longer term play...
The trade costs you really nothing. You may have to buy the Microsoft shares or close out that option before the strike price hits, or you may be able to control 100 SPY shares for a big upside.
Thoughts??
This post was edited on 7/28/22 at 8:49 am
4
Posted on 7/28/22 at 12:42 am to Skippy1013
The logic of the trade makes sense, but 99.5/100 times you are going to break even. Spy doesn’t move +20% in a time frame that you would be likely to buy calls pretty much ever.
I’m not a financial advisor (anymore) but if it was me I would take the premium for selling the puts and buy MSFT calls or whichever stock you want to do this with.
A better strategy with the same idea would be to sell:
MSFT 9/16 240 P for 2.93 premium
And buy
MSFT 9-16 290 C for 2.72 premium
If MSFT goes down <10% you break even, but if it goes up >10% you win. Most likely you break evenish.
For me personally, I would sell the MSFT puts and hold them. I’m the case I got assigned, I would flip to covered calls. Less potential gains but I like making money
I’m not a financial advisor (anymore) but if it was me I would take the premium for selling the puts and buy MSFT calls or whichever stock you want to do this with.
A better strategy with the same idea would be to sell:
MSFT 9/16 240 P for 2.93 premium
And buy
MSFT 9-16 290 C for 2.72 premium
If MSFT goes down <10% you break even, but if it goes up >10% you win. Most likely you break evenish.
For me personally, I would sell the MSFT puts and hold them. I’m the case I got assigned, I would flip to covered calls. Less potential gains but I like making money
Posted on 7/28/22 at 6:13 pm to Skippy1013
Any other opinions?
Posted on 7/28/22 at 6:48 pm to Skippy1013
Pretty sure you’ve got it wrong, also if the price goes up you’re screwed. Basically, if you’re new to options it’s a bad idea.
quote:
The covered put strategy is a neutral to bearish strategy because the investor is expecting the stock to go down or stay neutral. When the stock drops, the investor will have the stock put to them at the short put strike price. This covers the obligation of the shares of stock that were shorted. The investor keeps the initial premium received from selling the covered put.
If the stock rises the investor keeps the premium, but they are still holding the short stock obligation and could sustain a loss to close the short.
If the short put does expire worthless without assignment, the investor could look to sell another covered put at a different strike for the next expiration month.
Covered Put StrategyCovered Put Strategy Example:
Short Stock XYZ @ $24.67 Selling Covered Puts
Write (Sell) the OCT 25 (ATM) Put at $1.90
Break Even = Short Stock Price + Option Bid = $26.57
Maximum Profit = [(Short Stock Price - Strike Price) + Option Bid = $1.57 %
Downside Protection = Option Bid ÷ Short Stock Price = 7.7%
% if Assigned = Max Profit ÷ (Short Stock Price - Net Credit) = 6.9% (If stock below $25 at exp.)
Cautions with the selling covered puts strategy:
The Maximum Risk of selling covered puts is infinite, as the stock can rise infinitely.
Most conservative investors shy away from shorting stock.
If good news comes out, the stock could rise suddenly, faster than the investor can roll the put. Most investors looking to collect premium trading puts will simply sell a Naked Put or trade a Bull Put Credit Spread.
This post was edited on 7/28/22 at 6:51 pm
Posted on 7/28/22 at 7:15 pm to Chucktown_Badger
quote:
also if the price goes up you’re screwed.
In the example he gave, he’s got a short put and a long call. There is no shorting of stock or calls. So ideally he would want the price to go up. Same thing with what Retrograde mentioned, and his is the better strategy IMO.
But like Retrograde, I would be more likely to just sell the put at a strike that I’d be comfortable taking on long shares. And if it was a trade and not an investment play, I’d then sell calls against the long shares until I was able to exit (simple “wheel strategy”).
Posted on 7/28/22 at 7:24 pm to Chucktown_Badger
quote:Ignoring the dividend and call strategy, he seems to be describing a cash-secured put, not a cash-covered put.
Pretty sure you’ve got it wrong, also if the price goes up you’re screwed. Basically, if you’re new to options it’s a bad idea.
At least as I’m interpreting it, he’s selling an OTM put below the current market price, but collects the premium (as income) but has the cash (or margin) available to buy at the strike price it if it expires ITM below the strike price.
But since it’s a stock he wouldn’t mind owning or even would like to own, then he is essentially setting a limit order at the expiration date at a price lower than the current price. So he either gets the stock he wants or wouldn’t mind owning at a price lower than the current price, plus the premium, or he’s just getting the premium.
A lot of people use this strategy, but often on a shorter time frame (weekly is common), to collect income, and if it’s exercised then either own the stock they might have already bought (at a lower price than if they executed a market order when they wrote the option) or they could then flip it and write a covered call (collect income and set it at a price they wouldn’t mind selling it at).
This strategy has a lot less risk than what you’re describing (a cash-covered put) which seems more complicated and appears to involve both selling puts and shorting the stock.
Posted on 7/28/22 at 7:54 pm to buckeye_vol
Buckeye
Yes, you are right on in interpreting my strategy. If this uptrend we are seeing continues, this trade would give a great profit with the SPY Call as I described.
My post is just an example of a strategy I am thinking about.
Yes, you are right on in interpreting my strategy. If this uptrend we are seeing continues, this trade would give a great profit with the SPY Call as I described.
My post is just an example of a strategy I am thinking about.
Posted on 7/28/22 at 8:31 pm to Chucktown_Badger
quote:
Pretty sure you’ve got it wrong, also if the price goes up you’re screwed. Basically, if you’re new to options it’s a bad idea.
This is all wrong, and if you don’t understand options (or short sales) you probably shouldn’t give advice to other people that don’t understand options.
Posted on 7/28/22 at 9:04 pm to Skippy1013
This is basically a bull risk reversal. The shares you already own don't matter. It is done all of the time, but typically the long call is closer to an ATM strike.
Personally if I were to do a trade like this I would sell a put and buy a put at a lower strike with the same expiration to have a defined risk. I don't ever let options exercise though, on purpose at least.
With what you are describing you may just be spinning your wheels the majority of the time bc you are proposing a strike on the long call pretty far OTM.
But basically what you're talking about is done frequently and generally when a stock is at a very strong support level.
When watching the flow of options you like to see big money execute a trade like this, if you are bullish of course.
Keep researching. There are endless strategies with options.
ETA: An example from today- $XBI Sold 20k Jan 75 puts to buy 20k of Jan 85/105 vert call spreads for even money. A slightly diff trade than you described. A huge trade that is something I love to see bc I have long calls on XBI.
Personally if I were to do a trade like this I would sell a put and buy a put at a lower strike with the same expiration to have a defined risk. I don't ever let options exercise though, on purpose at least.
With what you are describing you may just be spinning your wheels the majority of the time bc you are proposing a strike on the long call pretty far OTM.
But basically what you're talking about is done frequently and generally when a stock is at a very strong support level.
When watching the flow of options you like to see big money execute a trade like this, if you are bullish of course.
Keep researching. There are endless strategies with options.
ETA: An example from today- $XBI Sold 20k Jan 75 puts to buy 20k of Jan 85/105 vert call spreads for even money. A slightly diff trade than you described. A huge trade that is something I love to see bc I have long calls on XBI.
This post was edited on 7/28/22 at 9:56 pm
Posted on 7/29/22 at 2:37 pm to Skippy1013
I sell cash secured puts several times a year.
Sometimes I get put shares, but most of the time the pric stays above strike and I just repeat the process.
Sometimes I get put shares, but most of the time the pric stays above strike and I just repeat the process.
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