Selling put options 2014

At the heart of all the spreads and strategies discussed about options is the call and put. Puts for sale and too few buyers of Calls to maintain the status quo. How are Put sellers going to find buyers for all of those extra Puts for sale, especially considering that the current Bull market is not one that makes stock owners feel an urgent need to insure their portfolios by buying Puts? While it is true that, for the specific options presented above, Put sellers are currently earning more profits than Call buyers, the Put sellers are also taking on a much larger risk of loss of money. It just means prices are currently likely to be more influenced by news events and less by recent market performance. VIX to record lows. So, a savvy trader, believing the stock price will rise, can actually sell a Put option and collect the premium. STEP 2: How Strong are the Bulls?

Who gets the bigger profit; Put sellers or Call buyers? In other words, a lack of euphoria in the stock market is contributing to a less attractive environment for Call buyers, luring them into selling Puts instead, despite the increased risk, since selling Puts has had a stellar track record with virtually no losses since late 2011. Call buyers may be willing to pay higher premiums during Stage 1 than they would during Stage 2, because the euphoria gives them a good chance of earning a relatively large profit with limited risk. While the implications of a lack of euphoria are fairly straightforward for stock traders, it is not quite so simple for option traders. Losses for Long Calls are a sign of weakness for a Bull market. As can be seen in the chart below, Put sellers can and do experience significant losses at times, the most notable recent losses being in 2011.

If stock prices have been falling long enough to have caused extremely high implied volatility, as measured by indicators such as the VIX, and I can collect enough of a premium on a Covered Call or Naked Put to earn a profit even when stock prices fall drastically, the Bears have lost control. Naked Put trading is currently much more profitable than Long Call trading. Thus, if you are not feeling euphoria at the moment, remember that you are likely not alone, so trade accordingly. As with any type of insurance policy, a premium is required in order to purchase it. Positive values for the LSSI represent profits for Long Straddle option trades. So, it makes sense that Call buyers, as well as Put sellers, make money when stock prices rise. Although fear tends to have a greater effect than greed, when levels of fear are extremely low the effect of greed becomes apparent, which is why the VIX can never go to zero. All traders need to be aware that the VIX, which commonly functions as a fear index, can be misleading when Bull Market Stage 2 is underway. The recent low levels of the VIX, which are some of the lowest on record, can therefore be attributed, at least in part, to the presence of Bull Market Stage 2 and its lack of euphoria. SPY are concerned, seems to have lost its edge.

It turns out the answer is as important for stock traders as it is for option traders. Covered Calls and Naked Puts will not be profitable, and since such trades only produce losses in a Bear market, it would suggest the Bears were in control. Below 1913, Long Calls and Married Puts will not be profitable, which would suggest a significant shift in sentiment, notably a loss of money of confidence by the Bulls. Not all strike prices and expiration dates may be available for trading, so actual returns may differ slightly from those calculated above. In a roaring Bull Market Stage 1, under the influence of lottery fever, stock prices often rise simply because they have recently risen. Absent euphoria, lower demand helps drive Call premiums down; higher supply helps push Put premiums lower. Higher premiums result in a higher level of the VIX, since option premiums are used to calculate the VIX. Call buying more profitable than Put selling, which would increase Call demand and decrease Put supply, leading to higher premiums for both types of options and thus a higher VIX, despite the decrease in fear. If implied volatility increases, as measured by indicators such as the VIX, the premiums I collect will increase as well.

An obvious alternative is Naked Put selling, but with a much higher risk potential. The Bulls are not just in control, they are also showing their strength. Bull market correction was underway. When the market is digesting gains, in Bull Market Stage 2, traders tend to deliberate and weigh good news, only pushing stock prices higher if they believe the news justifies it. If the higher premiums are insufficient to offset my losses, the Bulls have lost control. Bulls are in control. Ultimately, it is not just the profit that matters, but the risk it took to earn that profit. When considering the trend of Long Calls outperforming Naked Puts, it may be worth considering that through such a trend a trader is being enticed to accept higher risk in order to maintain the same returns as previously were common.

Covered Call or Naked Put to earn a profit, it means prices are falling too fast. Bull Market Stage 2 tends to drive implied volatility down, resulting in low values for the VIX. Put buyers may be willing to pay higher premiums to insure their skyrocketing stocks, since their pockets are overflowing with extra cash. Traders using the VIX as an indicator of fear would do well to remember that it is also an indicator of greed. The truth is that such low levels are at least partly attributable to a lack of euphoria, not necessarily the disappearance of fear. Put and still manage to earn a profit, then prices have not just been moving quickly, but at a rate that is surprisingly fast. It can also be seen that the trend over the past year or so has been for fewer and fewer instances of Call Buyers outperforming Put Sellers. Before comparing profit size, it is important to know if either Naked Puts or Long Calls, or both, are currently profitable at all. Option premiums often decrease drastically during Stage 2, so Stage 2 tends to be accompanied by a decrease in implied volatility.

Bull Market Stage 1 to resume. Lottery fever, as it is defined here, exists when Long Call profits exceed Naked Put profits, thus demand for Calls may be higher while supply for Puts may be lower, effectively driving both premiums higher. Covered Call or a Naked Put and make a profit, then prices have either been going up, or have not fallen significantly. He uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Most important is the profitability of these trades opened 112 days prior to expiration. That means the Bulls have been in control since late 2011 and remain in control here in 2014. So, it makes sense that Put sellers make money when stock prices rise.

STEP 3: Have the Bulls or Bears Overstepped their Authority? If I pay the premium on a Long Call or a Married Put and fail to earn a profit, then prices have either gone down, or have not risen significantly. It is therefore very important for an option trader to recognize which method is the better choice for the current market. Bull market, when stock prices are generally on the rise, both strategies are considered to be bullish. Such weakness can be dangerous because it lowers the perceived reward potential for stock owners, which makes stocks less attractive, in turn lowering the price stock sellers are able to obtain from buyers. Quickly rising prices draw buyers from the sidelines, causing prices to rise even more, creating further euphoria.

Profits represent an unusual condition for Long Straddle trading, one of three unusual conditions that warrant attention. The end result is that a lack of euphoria tends to cause a drop in demand for Call buying; and a drop in demand in turn tends to lead to lower premiums. Long Call trading became unprofitable this past March, Those losses intensified during April and early May before reverting back to profits in recent weeks. In addition, future increases in the VIX from its current levels would not necessarily indicate an increase in fear, since a return of euphoria could also cause an increase. The stalemate between the Bulls and Bears has gone on far too long, and the market needs to break out of its current price range, either to a higher range or a lower one. No matter how much strength the Bulls or Bears have, they have pushed the market too far, too fast, and it needs to correct, at least temporarily.

Long Calls, or else seek an alternative. Covered Call trading did not experience a single loss of money in 2013, and the streak endures so far in 2014, continuing a streak of nearly lossless trading extending all the way back to late 2011. STEP 1: Are the Bulls in Control of the Market? At the same time, the stellar track record of Put selling tends to increase the attractiveness of the method, leading to an increase in Put supply; and the increase in supply tends to lead towards lower premiums for Puts. Either way, if the Bulls are in control they are not showing their strength. Option position returns are extrapolated from historical data deemed reliable, but which cannot be guaranteed accurate. For the right to sell a number of shares at a given price into the future, the options buyer pays the options seller a premium, which is essentially the cost of the bet behind the option. Therefore, being very careful when playing with leverage is key.

Gulf of Mexico oil spill from 2010. As a result, I would have to purchase 100 shares of BP for every options contract I sold to the buyer of the put option. If the stock price is down, I get to buy shares in a company I am interested in, but at a lower price. Since I am low on investable funds, I decided to sell some puts on BP stock. People buy put options in order to protect themselves from a decline in prices and limit their losses. Verizon for High Dividend Income? Full Disclosure: Long BP and short BP puts. April 2015, I will have essentially earned five shares for every options contract I sold on BP. Astute readers can see that as long as the stock price is flat or up, I get to keep the premium. The number of shares per each options contract is 100.

You can still take losses using this approach and I recommend being comfortable with any option risk before delving into the market. Coffee rallies then falls. Following what his textbook teaches, Dr. FUDOM of course is not bulletproof. Speculators are watching weather reports and feeling nervous. That being said, after years of years testing different option selling approaches, our conclusion is that the FUDOM method is the most efficient and most beneficial to your bottom line as an option seller. Selling Deep out of the Money put your position well above the short term price rally that stopped out Dr. April 2014 again and YOU are the investor. However, other forces can temporality push markets away from fundamentals.

Not only should it keep you in options with high odds of expiring worthless, it can do so in a manner that allows you to sleep well at night. John on his call. FUDOM is an acronym for FUndamentals combined with Deep Out of the Money options. Johns options only have 45 days until expiration, he had to sell them fairly close to the money to get any premium. If you like day trading in and out of options, feed on action, love the daily excitement, then FUDOM is likely not for you. FUDOM is covered extensively in this information pack. While you have to sell 105 days of time value, doing so would have put your option deeply out of the money, well above the frey our textbook trader had to endure.

Another drawback is that a sudden surge in volatility can stop you out of your options well before they go in the money. Is that something you invented? Instead of going 45 days out and selling the July Calls, you want to give yourself a chance to profit even if your timing is off. The rational for this is that as options experience the fastest rate of decay in the final 30 days prior to expiration; it makes sense that the highest probability option sales are to be made during or immediately preceding this time period. For more information on managed option selling accounts visit www. This is true, although accurate fundamental forecasting can go a long way toward mitigating this risk. Markets do not always immediately obey fundamentals. If you are a serious investor who prefers a more passive but high odds approach, I wholeheartedly recommend it to you. FUDOM puts you in a position to take advantage of the ultimate fundamental bias in the market, even if the market chooses to move against you a certain degree in the near term.

In fact, FUDOM is the opposite of this approach. But your research from the USDA and Ag Attaches in Brazil tell you that there appears to be little affect on the crop as of yet. You have just employed the FU in the FUDOM method. For example, an investor who is bearish wheat based on a record crop and resulting supply glut might sell deep out of the money call options prior to harvest. Therefore you elect to sell calls, and skip the puts. To get any premium, with only 45 days left until expiration, he has to sell this close to the money.

Alternatively, if you are a high net worth investor interested in working directly with James Cordier, request your Investor Discovery Pack at www. Electing to employ FUDOM, you Skip over the July options and go out to September. Then, the market immediately reversed, putting his put option in the money prior to expiration, likely triggering his stop and bringing losses on that side as well. Immediately following the sale of his options, the market rallied, putting his call in the money and likely stopping him out at a loss of money. An email appeared in my inbox a few weeks back from a confused option trader. With Coffee prices rallying, you research the fundamentals behind the rally. Use it as you see fit. Our experience has been that this is not the case.

The second part of FUDOM is Deep Out of the Money. Sell short time value. Using FUDOM, the market can do many things and you can still make money. Now lets take the same market and apply the FUDOM method. FUDOM is about selecting options with a high probability of staying out of the money and expiring worthless, then having the patience to wait a few months for them to do so. This is where the advantage of using FUDOM comes in. Should You Use FUDOM? For example, lets go back to late April of 2014.

FUDOM, like any investment approach, is not perfect and not without risk. It can allow you to profit even if your fundamental diagnosis is somewhat wrong. Rather, something I discovered. By going out further in time you allow yourself to sell Deeper out of the money options. Drawbacks include having to wait longer for your options to decay. Hills The Complete Guide to Option Selling today. The problem with selling this close to the money is that any type of market hiccup can put Dr. There is only one thing it can do for you to lose money. Fundamentals are more like a weight that eventually pulls the market one way or the other.

That being said, in 15 years of selling options for high net worth investors, I have found no other approach that gives such an optimum balance of high odds, low stress and potential for solid return than FUDOM. If this market still has room to rally, you want to put yourself in a position to profit for what you feel will be an eventual decline. Fundamentals can tell you which side of the market to sell. Michael Gross is an analyst with OptionSellers. It seems that prices are climbing because of anxiety over wet weather during the Brazilian Coffee bean harvest. Ideally, the implied volatility should be low when purchasing the put so that the option premium is not overpriced.

In order to support the point that there are more possible opportunities to benefit from selling options rather than buying them, this article will look into the intricacies of option buying and selling. The first part about a long put, and the second about a short put. Josip Causic of Online Trading Academy. When it comes to selling options, the up, down, and sideways world is not specific enough. This means that premium is received by the put seller, and whether the price action takes off wildly or just simply grinds up, the premium received is just the same. That question is so loaded that without the proper context, it cannot be correctly answered. Number one, the price action should challenge support but fail to bounce off that support, consequently heading lower. Occasionally, I am asked if the idea of buying a put is a good idea, period. The only undesirable outcome is if the put was sold and the underlying drops.

The second ideal environment for buying a long put would be when price is at resistance, specifically after price has failed to break above it, giving up the upward push and falling lower. If the underlying goes down, and we are holding on to a sold put, whether we lose or not will depend on exactly how much the underlying drops. There are three possible outcomes, yet the desired outcome is only one: that the underlying price would drop. In this first case, the support is clearly broken and the price action is in a freefall; therefore, shorting either by selling short or buying a long put would be the correct method. Ideally, the implied volatility should be high. There is a right time for both actions. There are two extra levels needed to judge the outcome: The market going up a lot and going down a lot. Options have a finite lifespan.

When these two additional outcome possibilities are entered into the discussion, then we can see the market in full color. Go up, go down, or simply chop around in a sideways motion. If a trader is considering buying a put, then the environment should not only be bearish, but also the price action should be doing either one of two things. With a bought put, we expect a move down and are expecting it now, whereas with a sold put, not much in terms of price action needs to happen; the underlying can go up, up a lot, sideways, or even down a BIT before we have any concern.