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Shortput

OPENING (IRA): IWM JANUARY 22ND 170 SHORT PUT... for a 2.10 credit. Notes: Opening a short put nearest the 16 delta in the broad market instrument having the highest 30-day implied on the board. Here, it's IWM with 30-day at 27.5% and expiry-specific at 29.5%. ROC: 1.25% as a function of notional risk at max; 10.14% annualized at max. For smaller accounts, consider going spread with the short leg camped out at the 16 delta, the long out from there to generate at least 10% of the width of the spread in credit or a similar spread in RUT (e.g., January 22nd 1645/1695, paying 5.20 as of the writing of this post).
AMEX:IWM
by NaughtyPines
OPENING (IRA): SPY FEBRUARY 19TH 324 SHORT PUT... for a 3.30 credit. Notes: Here, starting to build out a medium to longer-term laddered short put setup in SPY in the IRA, targeting the strike paying at least 1% in credit of the strike price. I'll look to roll these up intraexpiry at 50% max with >45 days until expiry and am fine with taking assignment and then selling call against. Cost basis here is 324 - 3.30 or 320.70. For smaller accounts, consider doing this in XLK (currently 129.51) or EFA (currently 71.45).
AMEX:SPY
by NaughtyPines
OPENING (IRA): SPY DECEMBER 17TH 175 SHORT PUT... for a 1.81 credit. Notes: Targeting the short put strike in December '21 paying at least 1% of the strike price in credit. Roll up intraexpiry at 50% max with > 45 days until expiry; pull off on approaching worthless and/or sell call against if assigned. That'll pretty much do it for this setup. Will fill in July/August/October/November as those expiries become available, as well as potentially add onto the back end (January '22, etc.). I would note that some buying power will need to be kept free for potential roll up to pricier strikes, since the buying power effect of the 250 strike, for example, will be greater than the buying power effect of the 175.
AMEX:SPY
by NaughtyPines
EDUCATION (IRA): SPY SHORT PUT VERTICALS VS. SHORT PUTSShort puts or short put verticals in a cash secured environment? Here's a comparison and contrast of the advantages of going short put vertical over naked put. Pictured here is a 50-wide* SPY short put vertical in the January monthly with the short option leg camped out at the 17 delta and the long 50 strikes out from there. Here would be the metrics for the short put and the 50-wide: Stand-Alone 332 Short Put: Buying Power Effect (Cash Secured): 328.65 Break Even: 328.65 Max Profit: 3.35 Return on Capital at Max: 3.35/328.65 = 1.02% Return on Capital Annualized: 1.02% x (365/50) = 7.45% Trade Management Advantages/Disadvantages: Easier to roll for a credit 282/332 Short Put Vertical: Buying Power Effect (Cash Secured): 47.27 Break Even: 329.27 Max Profit: 2.73 Return on Capital at Max: 2.73/47.27 = 5.78% Return on Capital Annualized: 5.78% x (365/50) = 42.19% Trade Management Advantages/Disadvantages: Difficult to roll for a credit on break even test Seems like a no brainer to go with the short put vertical over the short put every time: The buying power effect is less than 15% of the naked short put while the ROC%-age at max is 81.5% of what you'd get for "going naked." That being said, this doesn't mean that you should deploy 100% of your buying power in short put verticals, since there is one aspect of these that people overlook, and that is assignment risk on the short option leg,** so you either (a) have to keep buying power free in the eventuality that price does break your short option leg and/or break even; (b) cut your losses short at particular loss metrics;*** and/or (c) trade cash-settled products that don't have that risk. Consequently, when I'm on an acquisitional bender, I tend to take a short of hybrid approach with spreads, deploying them with the notion that I'm fine with acquiring shares at the short option leg price (minus any credit received, of course), but limiting my max loss in the event that the underlying totally breaks down below the long option leg. On assignment, this makes my selling call against task potentially easier because the ground I have to make up is limited to the width of the spread. For example, SPY goes to 250. In the case of the spread, I exit the long option at or near max (closing for a 32.00 credit -- the difference between the long option strike and current price) and get assigned shares at the short option strike (a 332.00 debit): I can sell call against at current price + the width of the spread or at the 300 strike and still get out of the trade profitably if SPY pops back up to 300.**** With the short put, I'm generally forced to sell call against at or above my cost basis if I want to potentially exit the trade profitably, which would be around 329 here in this example. * -- I'm using a 50-wide here just for comparison and contrast purposes, put there is actually a "sweet spot" where ROC%-age on the spread is the highest. I generally start out with the 16 delta for the short option leg (it's the 2 x expected move strike) and then fiddle with the long to get 10% or greater ROC%-age for the spread. I'm using SPY here, but the general principles apply to any underlying. ** -- This is naturally only in products like SPY, QQQ, IWM, etc. which are not cash-settled. SPX, RUT, and NDX are cash-settled, so the risk of assignment isn't an element of those trades, which is why I go for those products over the exchange-traded funds when I'm not interested in taking on or risking taking on shares in the underlying. *** -- I have previously used 2 x the credit received as a good rule of thumb. **** -- Here's the math: On fill: 2.73 credit + 32.00 credit for closing the long put at or near max - 332.00 debit for the assignment at the 332 strike = 297.27. I will also get a credit for selling a call the shares I was assigned. I can actually sell a call at the 297 strike and still be profitable on a finish above 297 because of this.
AMEX:SPY
by NaughtyPines
EDUCATION: SYNTHETIC DIVIDEND GENERATION VIA SHORT PUTI think everyone can generally agree that idle cash sitting in your account doesn't earn you much. Here are a couple of methodologies to deploy that capital to emulate dividend generation without being in the stock itself. For purposes of this exercise, I've chosen HYG, which is not only options liquid, but also has a decent dividend relative to the broader market. Currently, it's 4.92% annually, and its last monthly dividend was .359/share compared to SPY's annual yield of 1.59% and TLT's 1.57%. In the past, I've used several different methodologies to generate a yield approaching what the underlying is paying annually, depending on how much capital I wanted to or needed to tie up while waiting for opportunities. (a) The Once a Month/30 Days 'Til Expiry Option: When the next monthly is 30 days until expiry, sell the option paying greater than or equal to the current monthly dividend. Run it until expiry and allow the option to expire worthless and/or take on shares if in-the-money, and sell call against at the same strike as you sold the put. Manage thereafter as you would any ordinary covered call. This is potentially the least buying power intensive setup if you're just selling one contract per month and will necessarily be of short duration. (b) The Each and Every Weekly 30 Days 'Til Expiry Option: Each week, in the expiry nearest 30 days until expiry, sell the option paying greater than or equal to the current monthly dividend, again allowing each successive weekly option to expire worthless and/or take on shares if in-the-money, selling call against at the same strike as you sold the put, managing it thereafter as a covered call. Naturally, if you want to do something like this each and every week, doing, for example, one contract per week, you'd be tying up greater buying power and/or notional risk to do so. The upside: your longest duration is going to be 30 days. (c). The Laddering Out in Successive Monthlies Option: Instead of doing just the next monthly at 30 days until expiry, ladder out 30, 60, and 90 days until expiry, selling the put in each successive monthly expiry for an amount greater than or equal to the current monthly dividend. For example, sell the December 18th 83 for .38; the January 15th 80 for .42; and the February 19th 76 for .38. When the front month expires worthless, consider selling a new back month, again for a credit that is equal to or exceeds the monthly dividend. The downside to this methodology is that it is not only buying power intensive, it ties up buying power for greater duration.
AMEX:HYGEducation
by NaughtyPines
10
OPENING (IRA): XBI NOV/DEC/JAN 87/90/93 SHORT PUT LADDER... for a 5.91 credit in total. Notes: Going where the volatility is ... . 30-day greater than 35% (39.8%) with the November at-the-money short straddle paying 13.1% of where the stock is currently trading. This isn't usually an IRA play I go for, since you won't get paid to wait if you get assigned shares (the yield is absolutely paltry at .10%). However, I'm pretty much in all the plays or in a closely correlated play at the top of the exchange-traded-fund board: XOP (56.2%) (play on in XLE); GDXJ (51.1%) (plays on in SLV and GLD); SLV (47.7%); EWZ (47.5%); GDX (42.9%) (plays on in SLV/GLD); XLE (42.6%), and SMH (39.6%) (no play on).
AMEX:XBI
by NaughtyPines
OPENING (IRA): QQQ NOVEMBER 20TH 239 SHORT PUT... for a 3.90/contract credit. Notes: My weekly 2 x expected move/16 delta short put in the broad market exchange-traded fund with the highest 30-day, which is QQQ here at 33.6%. There isn't a weekly expiry available right around 45 days, so going with the monthly. 235.10 break even with a 1.66% ROC at max. Will run to approaching worthless and/or roll out "as is" for a credit or proceed to cover/sell call against if assigned.
NASDAQ:QQQ
by NaughtyPines
2
EDUCATION: SHORT PUT "WINDOW DRESSING" ROLLSPictured here is a QQQ November 239 short put I filled for a 3.90 credit. (See Post Below). It's got 33 days to go, and was valued at 1.32 as of Friday close (i.e., it's in profit by 2.58 ($258)). I would like to lock in that profit here, but stay in the play a little longer to bleed the last bit of extrinsic (1.32) out of it. Rolling out in time is one way to do that. Looking at the November 27th expiry in table view (that's extending duration just one week), I'm basically looking for a strike that is paying greater than 1.32 in credit. The November 27th 230 is paying 1.07 (too little to roll for a credit), while the 240 is paying 1.71 (which is greater than 1.32). There are only five-wides available in the November 27th expiry, so I would roll the November 20th 239 to the November 27th 240 for a credit that is equal to 1.71 (what the November 27th 240 is paying) minus the price of the November 20th 239 (1.32) or .39. This way, (a) I book a profit on the November 20th 239 of $258/contract; (b) increase my total credits received on the play by .39 (for a total of the 3.90 originally received plus .39 or 4.29); and (c) give myself a little more time to squeeze out what extrinsic remains in the short put, all while increasing net delta only slightly (from 7 delta for the November 20th 239 to 9 for the November 27th 240).
NASDAQ:QQQ
by NaughtyPines
OPENING (IRA): HYG NOVEMBER 20TH 77 SHORT PUT... for a .66/contract credit. Notes: A starter position in "junk" at the 17 delta in the November cycle. The implied volatility here is quite low -- 15.7% for the 30-day, but I'm looking to eventually swap out my TLT position for something that pays more on a percentage basis. HYG's yield is currently 5.02% with a monthly dividend payment of .341, with the short put premium nearly twice that amount, so I'm fine with just keeping the premium versus actually being in the stock. TLT's yield is currently a paltry 1.62% with a monthly dividend of .18292 as of the last distribution.
AMEX:HYG
by NaughtyPines
OPENING (IRA): SLV JANUARY 15TH 18.5 SHORT PUT... for .48/contract. Notes: Selling some more SLV (30-day at 47.7%), as well as collating my "ladder" into a single post. Will add in a December monthly "rung" once that becomes available, assuming the volatility hangs in there. Collected 1.74/contract in total. Here's the way I look at this trade relative to one put on in GLD: Currently, GLD is trading at 178.16, SLV at 22.65, so GLD is about 8 times the notional value of SLV here. The November 20th GLD 15 delta 184 strike is paying 1.14; the November 20th SLV 14 delta strike at 19. .31 and 8 x .31 = 2.48. Consequently, you're getting more than 2 x "bang for your buck" in risk premium as a function of stock price in SLV than GLD here, primarily due to the differential between SLV 30-day IV at 47.7% versus GLD's 20.4%.
AMEX:SLV
by NaughtyPines
EDUCATION: SPY SHORT PUT OR SPX SPREAD? PROS AND CONSPictured here is an SPX short put vertical I recently put on as an alternative to going SPY short put in cash secured environment. (See Post Below). When do one as opposed to the other and how should I manage each? First, let's compare the metrics of the two strategies, both of which are neutral to bullish assumption: they will make money at expiry if SPX/SPY goes up, sideways, or down, as long as it doesn't go so far down as to finish below the setup's break even. Currently, a "ten percenter" in the SPX November expiry (i.e., a spread paying at least 10% of its width) would be the 3080/3130, paying 5.00 even as of Friday close on a buying power effect of 45.00 ($4500), with a 3125 break even. The buying power effect is the same regardless of whether it's on margin or in a cash secured environment. A SPY short put with a similar break even (and therefore a similar probability of profit) would be the November 20th 315, paying 3.05 as of Friday's close with a break even of 311.95. Here, the buying power effect is different on margin versus cash secured. On margin, it should be approximately 20% of the short put strike or ~63.00 ($6300); in a cash secured environment, it is the short put strike (315) minus the credit received (3.05) or 311.95 ($31195). Buying Power Effect: On Margin: $4500 for the short put vertical, $6300 for the short put. Cash Secured: $4500 for the short put vertical, $31195 for the short put. Return on Capital: On Margin: 5.00/4500 = 10% for the short put vertical; 3.05/63.00 = 4.84% for the short put Cash Secured: 10% for the short put vertical; .98% for the short put. Given the expensiveness of going short put and the lower return on capital, why would I ever opt for that strategy over the short put vertical with its lower buying power effect and higher return on capital? 1. I am looking to acquire shares in the underlying, but don't want to reduce credit received by buying a long leg. In this particular example, I will never pick up shares via an SPX spread since it is cash settled.* 2. I am looking for flexibility in managing the strike price at which I'm potentially assigned shares. The short put can be rolled for additional credit, reducing cost basis further, or the strike improved via roll to change the strike price at which I'm assigned shares. The SPX spread won't roll well for a credit if tested. Trade Management: Short Put: Generally: Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll out for a credit), whichever comes first. In cases where I'm looking to acquire shares in the underlying, however, I'm more likely to run the short put to approaching worthless, at which point it will be fairly clear that I'm not going to be acquiring shares in that cycle. There's little point in tying up buying power further to milk what little is left out of the option, particularly if there is oodles of time left until expiry. If it's in the money toward expiry, I compare and contrast whether I should roll out the short put "as is" for additional credit, versus allowing assignment of shares and then covering the shares with a short call. I generally go for the option that yields a higher credit. Short Put Vertical: Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll for a credit), whichever comes first. * -- I can naturally sell a SPY spread and take on shares if the short put is broken which is another option to consider if I'm comfortable with and am able to take on shares at the short option leg price.
SP:SPX
by NaughtyPines
1