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If any of you noticed, I have recently sold 2 Put Options in my recent transactions for Axos Financial.

Figured I pen down what I read up on.

I recently was interested again in Options after starting to dip my toes into the US markets, particularly by TTI's post here. Not to mention Warren Buffett sells long term European Puts.

I remember a long time back, there's quite a few trainers who teach them, Sean Seah VIOS, Clement Chiang Live Freely, etc, but I didn't have much time to do much reading up except tiny bits here and there.

Note that I'm new to Options and this post is just about what I understand and what makes sense to me.

And do be very CAREFUL when implementing as it could be rather risky

Options kinda work as an insurance contract where it is the right, not the obligation to buy or sell shares if it meets a price (called the Strike Price).

Thinking of it from this perspective, I do notice insurance companies earn a fair bit by SELLING insurance, not trading such contracts. That leads me to WRITING Options than trading them.


Also, I would like to point out that my approach would be to find something sensible that complements the investment strategy rather than going around churning/hedging.

Kinda like a Continuous Education for myself as an investor.

I read some materials I could find namely:
These might not be the right materials to go about learning it frankly; I'm still piecing everything together. I have heard recommendations for these books that I might read one day (not sure how applicable they are for a straightforward usage):
  • Generate Thousands in Cash On Your Stocks Before Buying Or Selling Them by Dr Samir Elias
  • Get Rich with Options by Lee Lowell
  • Option Volatility & Pricing by Sheldon Natenberg
  • Options for Volatile Markets by Richard Lehman and Lawrence McMillan

Here are my findings:
  • Sell Options on companies you wish to own (very important)
    • You may get assigned shares
  • Sell only covered calls and cash secured puts
  • No margin
  • Use limit orders to get a better price when you write the option
  • Use support and resistance zones to choose your strike prices (helps to earn a bit of premium)
    • Premiums are higher when prices are falling or rising, not bottomed or topped
  • Premium is about 1% usually
  • Avoid Selling Options when the contract expiry timeframe has monthly reports/earnings reports release
  • Use Puts as fanciful buy orders while you get paid to wait
    • Still figuring out how to use a Call, only one I would probably be a short/mid term play. And you have a target exit price (maybe discounted to fair value) in mind
  • Ensure as prices reach your strike price, the long term fundamentals are intact

Other suggestions that I have yet to try:
  • Delta of -0.16 to -0.31 for Puts 
  • Delta go above 0.3 to 0.4 for Calls, below -0.3 to -0.4 for Puts, close the position (?)
  • Trend IV and see how it affects performance
  • If Bid Ask of the spread is more than $0.10, can queue at a price slightly below the midpoint
  • For liquidity
    • Share average volume is >250k per day
    • Options minimum Open Interest of 100 contracts
    • Ideally, a tight spread of $0.30 or less for the options
  • If the shares drop significantly or gap down for Puts, and you wish to get it lower
    • Buy back the Put
    • Consider the cost of buying back with the further drop
    • Queue a limit order for the share or Sell another Put
  • If the shares rise significantly or gap up for Calls but you do not wish to
    • Buy back the Call
    • Consider the cost of buying back with upside
    • Sell another Call or just let the share price run
  • During First or Second half of the contract prior to the Expiration
    • Buy back option if option is 20% of the initial sale in the first half of the contract 
    • Buy back option if option is 10% of the initial sale in the first half of the contract 
    • Sell the next month Option to roll over

Not sure if I have missed anything.

Hope this post makes sense.

I made a flowchart with most of these information in a post here.

20 comments:

  1. Hi Azrael
    Kenny here. I think it's good to sell a deep out of the money cash secured put on ETFs though I admit the cash outlay to prepare for assignment of ETF shares like SPY, QQQ or IWM are pricey. My strategy is selling about 60 days expiration Delta -0.05 deep out of the money (OTM) on SPY shares. Note you don't earn a lot of premium income with this strategy but what I feel is more important is that when the shares are assigned, it is done so at a deep discount, meaning your chances of selling the index fund shares when they eventually rise is significantly higher even as you write the covered call options to generate premium income on top of dividend income. Feel free to comment on this strategy. Thanks!

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    Replies
    1. Hi Kenny,

      Thanks for dropping by!

      I haven't been really successful at selling options (cash levels is one issue frankly as well as my watchlist have very high priced counters that I can't afford the lot size cash outlay). I tried selling a Call but it doesn't seem to be a good idea unless you wish to exit the shares.

      So far, what I feel is most successful is selling cash secured puts as a fancy buy order.

      I am trending my Delta for my own trades. From what I have read, a Delta of 0.15 or less is good, 0.05 to 0.1 is ideal. But the problem is the premium is less than 1%.

      How are your yields for the option premiums? I haven't tried one with a 2 month timeframe, so far all I tried was 1 month or a few weeks.

      I am compiling a PDF of ideas for options, might write a post on it soon.

      Oh right, so far it seems that using Technical Analysis (at least Support and Resistance zones) works somewhat for me (some ideas are in the post here: https://az-ra-el.blogspot.com/2019/02/tibits-i-learnt-from-generate-thousands.html)

      Azrael

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    2. I also tried 1 month or less writing put options but I have read online, they say that timeframe is too risky as a Delta -0.05 for a 2 week put option is different from a Delta -0.05 1 mth option. The reason why I choose 2 month is because strike price wise you get a safer deal than 1 mth put option.
      I am also not sure if the 1% is calculated based on margin or the total cash secured which is very different results. Like I can sell a 2 mth put option on 260 SPY share. If my share is assigned, I have to cough out USD 26,000. But my margin is only USD 2,600. So I am not sure if the percentage yield on capital is based on margin or total cash secured. I can safely say that the yield is low. But don't forget, if ur shares are assigned, u get them at a very good deal. You can increase the Delta of the put option if u feel yields are unsatisfactory. But remember in the investment world, there is no free lunch. Every basis point of price has risk priced in.

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    3. Ah, for me I normally queue the put below a support zone and only for shares I am willing to own at the price I am interested in. So if I get assigned, it would be a valuation I wish to own, else I get premiums for waiting.

      I calculate the premium by premium per share divided by the strike price.

      Ah, yes. I forgot to mention that I sell options with pure cash, no margin account.

      I do tend to prefer to sell options (if I can) when price are surging or crashing but not bottoming yet, I notice that premiums tend to be higher due to higher IV (you will expect some bouncing off the support or resistance before breaking).

      Yup, thus I think we are all trying to find inefficiencies that would help us squeeze more out of what is priced in.

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    4. Hey Azrael
      Just to clarify, when I say margin, it doesn't mean that I borrow money to make the trade happen. It simply means the buying power of the trade. To repeat, when I sell a 2 mth put option of a 260 SPY share, I need to put USD 26,000 into my brokerage account. But the buying power of the trade is seldom this full price I am supposed to lock in. It can be like USD 2,600.

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    5. "Ah, for me, I normally queue a put below a support zone..."

      Haha, I also do that as well.

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    6. I am actually confused here though.

      Do you put in USD26,000 prior to selling the Call? Or do you put in lesser?

      Most option trading accounts are leveraged/margins account, unless in my instance where my margin is zero.

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    7. I am not sure Azrael. My thinkorswim paper money account shows for the cash secured put option that I write USD 3,026.60 for the buying power effect of my trade. But I understand that when the shares get assigned, I have to pay USD 26,000 for my trade. If I am doing live trading, all my trades will be in cash, same as you bro.

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    8. Ah okay.

      But say for that contract, what is the price of the contract you sold?

      That's the option premium you are getting per share.

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    9. 100 (Qtr) 30 Sep 19 263 Put option (1 contract) sold for USD 63.

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    10. I just checked my own platform:
      https://imgur.com/StNuD2h
      https://imgur.com/M01y58j

      It is now 1.51 per share for 263, so it is about 0.57% yield for about 2 months.

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    11. I see.

      Actually, last time I read an article on options trading, the writer invested his premium income into T-bills and derive interest income from it. Maybe for us, we can invest our premium income into Singapore Savings Bonds?

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    12. I guess if you are deriving cashflow from options only, bonds would make sense. As you have a more safe asset to balance out the risk.

      For me, I use it to lower price or create "dividends", so these cash generated would be reinvested into equities and while waiting for opportunities, used to sell puts I guess.

      I am like a stamp collector except I collect shares of companies I am interested in. :)

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    13. I also note that those OTM Puts do have a higher premium as well.

      I wonder is it because ETFs are more actively traded resulting in higher IV, if I look at a counter I own, Axos Financial, selling such a put would not yield me much.

      Unless like previously when it was close to my target entry price, I sold a put at my target entry price for a high premium and waited for the order to fill, managed to squeeze 2.2% thereabouts for 2 months prior to filling the order.

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    14. Hmm, i think its because the ETFs are more popularly traded, thats why the premiums are higher when markets fall or rise...

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    15. Yea, but seems mostly for SPY. My inverse NASDAQ ETF doesn't have such benefits it seems.

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  2. Also don't forget when u write a 1 mth put option, u incur more commission fees compared to writing a 2 mth put option. Again to be fair, I am not very familiar with commission fees per brokerage firms but it seems to me that if u write a 1 mth option for a year, u had to pay commission 12 times a year but when u write a put option for 2 mths, u only pay 6 times a year. If u write a 2 mth put option with Delta -0.05, u are also statistically less probable to be assigned the shares compared to 1 mth put option because the strike price for a 1 mth Delta -0.05 put option is slightly higher than a 2 mth Delta -0.05 put option. Net premium collected will be low as the risk of assigned is low but don't forget, in the conventional setting of setting a limit order of ur preferred price, u don't get paid at all. My suggestion is to use the collected premium as coffee money. The aim of this strategy is to minimise the chance of being assigned, and when it happens, get the best possible chance of making a profit. After all, we want all outcomes of our option strategy to be favourable right? ;)

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    Replies
    1. True true, could try and play around. I am quite new to this too.

      In my own practice, I do not get to sell Puts or Calls often as I would like (quite a few of my shares are less than 100 in number).

      Perhaps my contract size is too small as there are a few times due to the lower premium, it doesn't cover the brokerage fee of mine.

      Yup yup, though my main objective is still first as a fancy buy order, than purely avoiding of getting assigned I guess. But for Calls, I would love to sell them without getting assigned though.

      Hmm, perhaps I could try your suggestion for Calls instead of Puts :P

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  3. "Hmm, perhaps I could try your suggestion for Calls instead of Puts :P"

    Sure, as long as you make passive income, I am happy for you. I think Interactive Brokers offers the cheapest option commission fees, not sure about the rest of SG options brokerage firms...

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    Replies
    1. Thanks haha.

      I'm using TD Ameritrade (Thinkorswim) as IB has account inactivity fees (I don't churn very often) as well as a large account size requirement (which I do not fulfill yet).

      I'm considering Charles Schwab for slightly cheaper fees though, but a little lazy to switch.

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