Put option writing

[drwriter]

Hi ananths,
Both naked put writing and covered call are equivalent in their profit potential.But they are different as covered call requires establishment of two legs of transaction, one in cash and other in options plus transaction costs in cash and options market. Regarding your questions..

1) In India even stock options are settled in cash at expiry (European) and don't need to get worried at assignment of stock by the broker or exchange. You simply close the option on expiry day and rollover by selling the option of next series at/below the strike you got stuck . If we got stuck in very deep ITM option by expiry and unable to find proper options strikes in next series to rollover we can now accept the loss and buy the stock either in cash or in futures and start writing calls.

2) Your margins are always similar to margin requirement of futures at the corresponding strike. Lets say you sold RELIANCE 860 put you have to keep margin equivalent to RELIANCE futures at 860 price.

 

[SaravananKS]

hello,
Selling Put options is almost similar Strategy like covered Call.

These Strategies works well in Mild Bull Market.....

incidentally last few months nifty and most of Stocks were in mild bull market.. at the same time implied volatility in options were also very high.....

that is the reason drwriter got some reasonable profit...

it will not work for fast falling market... since drwriter ready to rollover options in Strong Bear Market the options he sold become almost deep in the money so trader will not get any time values for next month series(or very very little for the risk taken)

at the same time it will not also very good even in very fast bull market also.....

Eg
I remember in 2009 Mar I sold 3300 Put Option for 120/- in at expiry the market gave 1100 Points where I had to satisfy with only 120/- Points

OK some body claim covered call or naked put writing as regular monthly income from market... I would say it will work in most of months one bad month would eat up all your profits ( since here risk is bigger compare to reward)

at the same time I will not claim this as bad strategy.... since it gave reasonable returns over the periods in Bull market

Coming to the main part

will this Strategy work in coming months???


I expect this strategy would give profit then loss but profit would very limited then buying future ( since Nifty about to end it's 5 Year bear cycle)

Normally Vix would be low in bull market so The Premium would be less

IMO when the Premium is very low For Technical Traders instead Put writing simply buying calls at support levels and Book profit at resistance level would give better return than naked Put Writing with less draw down

:thumb:

 

[Satish Kaur]

I made decent profit by writing put on L&T... But now I think the stock will take a beating...

The fundamentals of L&T are weak and based on the rosy Q2 results and the Order book promises market has pumped the stock over the last two sessions.

I exited at end of day today, because I am suspecting a trap coming for the script.

 

[gkpc]

Drwriter is suggesting the use of Selling Put for something like this : Chk the link for an article : How to Buy Cheap Stocks Cheaper : http://www.fool.com/investing/options/2011/12/07/how-to-buy-cheap-stocks-even-cheaper.aspx

 

[gkpc]

This is another good write up :

In the world of the small speculator, options are used, customarily, in an attempt to capture large gains with little capital investment. One way to use derivatives in an investment operation, however, is to write put options for an issue in which you want to build a position.
Writing Put Options

You want to buy shares of a fictional company, Acme Pharmaceuticals. After reading the annual report and analyzing the financial statements, you have come to the conclusion that, in order to earn your required rate of return, you can pay no more than 25 per share. Today, the stock trades at 30 per share.

Instead of sitting around and waiting for the stock to fall to your desired price, you could write put options for the shares at 25. In essence, you would sell a “promise” to another party (it could be a bank, mutual fund, corporation, or individual investor) that if the shares of Acme fall below the threshold during the life of the option, the purchaser will have the right to require you to purchase those shares at 25.

Why would you agree to do this? In exchange for this promise, the buyer of your put options will pay you an “insurance” premium. The amount of this premium depends on a number of factors but for our purposes, assume you are paid 1.12 per share to take on this risk. If you wrote ten puts (remember in USA options are for round lots of 100 shares), you would receive 1,120 (10 puts x 100 shares = 1,000 shares x 1.12 premium = 1,120). If the option expires and is never exercised, you keep this money free and clear.

If the option is exercised, it serves to effectively lower your cost basis. If, for example, the price of Acme fell to 22 per share, the buyer of your put options is going to exercise their right to require you to purchase the shares at 25. (In India it is cash settled) Your actual cost, however, would only be 23.88 ($25 cost of shares - 1.12 premium = 23.88 net cost.)

The Bottom Line

For the value-investor, it is a win-win situation: if the stock doesn’t fall to your desired price, you keep the premium payment. If it falls significantly, you don’t mind paying for the shares at a higher-than-market price because you had originally planned on purchasing them at that price, regardless.

 

[SaravananKS]

This is another good write up :

In the world of the small speculator, options are used, customarily, in an attempt to capture large gains with little capital investment. One way to use derivatives in an investment operation, however, is to write put options for an issue in which you want to build a position.
Writing Put Options

You want to buy shares of a fictional company, Acme Pharmaceuticals. After reading the annual report and analyzing the financial statements, you have come to the conclusion that, in order to earn your required rate of return, you can pay no more than 25 per share. Today, the stock trades at 30 per share.

Instead of sitting around and waiting for the stock to fall to your desired price, you could write put options for the shares at 25. In essence, you would sell a “promise” to another party (it could be a bank, mutual fund, corporation, or individual investor) that if the shares of Acme fall below the threshold during the life of the option, the purchaser will have the right to require you to purchase those shares at 25.

Why would you agree to do this? In exchange for this promise, the buyer of your put options will pay you an “insurance” premium. The amount of this premium depends on a number of factors but for our purposes, assume you are paid 1.12 per share to take on this risk. If you wrote ten puts (remember in USA options are for round lots of 100 shares), you would receive 1,120 (10 puts x 100 shares = 1,000 shares x 1.12 premium = 1,120). If the option expires and is never exercised, you keep this money free and clear.

If the option is exercised, it serves to effectively lower your cost basis. If, for example, the price of Acme fell to 22 per share, the buyer of your put options is going to exercise their right to require you to purchase the shares at 25. (In India it is cash settled) Your actual cost, however, would only be 23.88 ($25 cost of shares - 1.12 premium = 23.88 net cost.)

The Bottom Line

For the value-investor, it is a win-win situation: if the stock doesn’t fall to your desired price, you keep the premium payment. If it falls significantly, you don’t mind paying for the shares at a higher-than-market price because you had originally planned on purchasing them at that price, regardless.

Good Write up GKPC,

But it is Very rare event when a good quality stock Trade's Below it's intrinsic value. Even if falls below it , It will quickly bounce. if it Stay's more than one month then we can surely assume there is some Problem on that company


Here I would like to give Two Examples

First Reliance

if you watch this chart Put writer would have benefited mostly in time value
No money in Price Appreciation

in these Period several stock ( even in nifty gave very good return)

Next Look at another chart

Tata Steel

Even an invester write Put @ 200 levels hardly may have got some 10-15 Pts But the Stock gave almost 130 Pts

So it is very rare to see a stock which trades below it's intrinsic value


moreover finding intrinsic value of a company is more difficult then finding technical levels
:thumb:

 

[drwriter]

Hi saravananKS,

" I expect this strategy would give profit then loss but profit would very limited then buying future ( since Nifty about to end it's 5 Year bear cycle) "

You mentioned Profit is limited..how about a consistent 100% + returns for the past 6 years including the 2008 bear attack !..The key to consistent returns is writing puts (mostly ITM and OTM Index puts) only in up trending market/during short covering process and keeping quiet on other days and without any prediction of where the index is headed.

Buying futures may give abnormal returns in bull /bear markets but lack consistency, peace of mind for my personality.I prefer to buy ITM calls/puts in bull/bear markets rather than futures as they provide leverage, risk management and reduced turnover charges.

Simply buying calls at support and selling calls at resistance may or may not work as we are expecting new buyers to come in to push up the price.But for put writing supports come after long selling process and any extra selling is ripe for short covering.Most importantly selling is a very calculated slow process and it never happens instantly.If it happens due to unforeseen event there will be short covering and then slow selling process starts.I prefer index put writing as only performing stocks will be included to index over time!

 

[Mr.G]

Hi Mr.G,

When we clearly know we are in a up trending market it is not worth to sell calls.You should either buy deep ITM calls or sell OTM/ITM puts if using options. I do sell mostly PUT options because i knew where the support is in a uptrending market. It takes time to break supports in a up trending market whereas resistances are broken either through exhuberance or by short covering. Volatility is low in current slow uptrending market and any selling of puts below 6100 are not worth the risk premium.

But isn't it true that calls are more pricey when market is in uptrend?

 

[drwriter]

But isn't it true that calls are more pricey when market is in uptrend?

Calls are definitely pricey in up trending market as most writers are doing covered calls.As more people write covered calls they will be buying in cash which creates supports for the stock and later they have to dump the stock to make their sold calls lose in value .So new buyers have to come in to absorb the selling of covered call writers which in essence create strong support for the stock. If no covered call writing is happening then a slow selling process will be initiated in the cash market.


But i write puts with a dual intention of getting premium and buying that stock it it falls below my strike and i write puts at strong supports and willing to buy the stock it if falls below my strike. In case of covered calls one need to go only for premium and can write covered calls on every stock which is in uptrend.

 

[umeshmandal]

Trust rkkarnani wont mind my sharing this here. This is a link for a doc he sent to me.

https://docs.google.com/file/d/0B_2ZpsxffrxTWDFCY2RBSEdXM2s/edit?usp=sharing