The Giant thread of options

[beginner_av]

This is not harping. This is expression of opinion. But then, in today's world there are very few people with respect towards others' opinions.

Hey buddy, u got me wrong...i was referring to a book that completely derided covered call writing, saying it is hoodwinking by the brokers to get double brokerage....etc

Risk and Reward of both the strategies are the same and hence they are equivalent. If outflow of money is to be considered, the overall return of portfolio will diminish with covered call writing when compared to naked put or money covered put writing.

Completely disagree. Can you explain how risk and rewards are different including adjustments? MOreover its not about risk or rewards..its trading philosophy...ask yourself WHY and WHEN you should write covered calls and when and why you should write puts?

When we are comparing Covered Call with Writing puts, covered call writing causes more outflow of money and thus is not the optimum use of capital so far as the two strategies are concerned.

Can you explain why covered calls cause more outflow of money?

Dividend compared to Market Value in today's market is abysmal. Hence, dividend hardly justify more outflow of money for the same R:R.

SCI Rs 8, TISCO - Rs 13 etc...insignificant on 20 lots?

Equivalent strategies with the same R:R are possible in short put writing.

Many equivalent strategies are possible even without writing puts. How does it matter. Question is why use covered calls?

MOney covered Put writing takes care of it with less outflow than would occur in a stock owned covered call writing.

With margin facilities and less initial outflow, return on overall portfolio would offset the accrued profit advantage.

How? Less outflow?
Also consider tax free dividends, no LTCG if u r an investor and dividend arbitrage.\ if u r a trader.

I never advocate that one should write put when market is going down. After all, short put is a long position.

Who does? Then why write naked puts ONLY?

This is the most quoted and most abused phrase of trading.
How can a person know which strategy should be adopted to achieve his objective unless and until he knows about various strategies, their intricacies and the pros and cons?

Nobody will ever know that.If someone thinks that he will, he is living in a fool's paradise. What you should use may initially come from reading, but finally only through experience, trial and error, research and testing...finally it should suit your personality...another most abused phrase...but till u get it in real life, u'll always struggle as a trader. And i don't mean half-baked ones...who moonlights in the market, particularly in the last three years where u buy something blindly and make pots of money (readers, please don't take it personally)....i am talking about a full time pro whose living depends on trading, and uses well formulated trading systems for trading.

Regards

PS: For others following the thread:
Please understand the basic tenet of CC writing....you don't buy a stock only to write covered calls....there are many neutral strategies that can give you more rewards...neither do u expose yourself to adverse market moves by writing naked puts. if neiderhoffer hasn't opened your eyes...think again. You can always write covered puts. (theoretically more risky as stock can go through the roof on the upside, but only fall to 0).

 

[beginner_av]

Adding to the above: (the discussion can go on and on...but I want to stop here.)
To trade covered calls successfully
1. Ask when you should write covered calls, when you should leave the stock alone, and when deploy other strategy.
2. In India if anyone seriously trades options, he will tell you that writing puts is the toughest thing to do as you move OTM by three strikes or move to the middle or far month within 20 days of the current month.

 

[beginner_av]

I got this PM asking me why I am against put writing (that was pretty fast). To answer you, I am not against put writing. The whole discussion is about call writing. Covered call writing is entirely a different philosophy from writing naked puts. They are not up for comparison. IF anyone advocates writing put instead of covered calls I consider that as a lack of options trading knowledge. COVERED CALLS IS FOR INVESTORS, not PURE OPTIONS TRADERS. If I haven't said already, I advocate writing calls only on sound companies that you want to own for a long term, has moved up substantially, or is neutral and you want to increase your return. Once u own the stock, and want to increase your return, PUT WRITING DOESN'T FIGURE ANYWHERE. PERIOD.
But still if you want to write puts ...the question that I want to ask is that are you aware of the risk that you are taking by writing naked puts?

In reality u wont get enough puts to write a little deep OTM.

OTM puts hold more time value than OTM calls.

And finally my personal bias:

I started trading as a full time trader by writing covered calls and naked puts in India, just quitting my job as a faculty in a management college. Earnings was the most important thing. And what better way than to write covered calls - they provide regular income, don't they? As expected the stock went way below and my cover of the covered calls was blown away. Since then I have come a long way to successfully write covered calls and use many other options strategies and try even more new ones unsuccessfully. But I use one condition and one adjustment that gives me money in covered call irrespective of the market going up or down by any amount. That is NOT possible in naked put writing. So I'll always advocate covered call writing over naked puts.

 

[tulika]

I got this PM asking me why I am against put writing (that was pretty fast). To answer you, I am not against put writing. The whole discussion is about call writing. Covered call writing is entirely a different philosophy from writing naked puts. They are not up for comparison. IF anyone advocates writing put instead of covered calls I consider that as a lack of options trading knowledge. COVERED CALLS IS FOR INVESTORS, not PURE OPTIONS TRADERS. If I haven't said already, I advocate writing calls only on sound companies that you want to own for a long term, has moved up substantially, or is neutral and you want to increase your return. Once u own the stock, and want to increase your return, PUT WRITING DOESN'T FIGURE ANYWHERE. PERIOD.
But still if you want to write puts ...the question that I want to ask is that are you aware of the risk that you are taking by writing naked puts?

In reality u wont get enough puts to write a little deep OTM.

OTM puts hold more time value than OTM calls.

And finally my personal bias:

I started trading as a full time trader by writing covered calls and naked puts in India, just quitting my job as a faculty in a management college. Earnings was the most important thing. And what better way than to write covered calls - they provide regular income, don't they? As expected the stock went way below and my cover of the covered calls was blown away. Since then I have come a long way to successfully write covered calls and use many other options strategies and try even more new ones unsuccessfully. But I use one condition and one adjustment that gives me money in covered call irrespective of the market going up or down by any amount. That is NOT possible in naked put writing. So I'll always advocate covered call writing over naked puts.

Hello sir ,
i wont say that i am a very successful trader, but yes i have had my share of rewards as well as blows in this market.. i have traded in futures as well as options..and have lost a huge amount of my capital while trading agressively.. now since last two months i was out of this market just to gain knowledge..and i am studying studying and studying the markets since then..
what i have observed is that there are definitely some strategies in option trading which have the potential to give you a decent monthly income ..since i dont want to lose my money again ..i request you to share your successful option trading strategies ..so that i can add to my knowlegde with ur valuable experience..
thanx.
([email protected])

 

[uasish]

beginner_av,
Opening new vista of knowledge,CC.
Thks.

Asish

 

[subratabera]

The markets are very volatile these days and no options strategy seems to be working for me...

BTW I always look for credit strategies.

Subrata Bera.

 

[anjanr]

do a straddle on index. quite a good strategy with neutral outlook. well if the mkt is not moving then we have issue for this, otherwise this good with high volatility

 

[tulika]

thanx subratabera and anjanr..but do ypu keep the straddle till 10 -15 days or square off when one of em is gng down???

 

[aca_trader]

Completely disagree. Can you explain how risk and rewards are different including adjustments? MOreover its not about risk or rewards..its trading philosophy...ask yourself WHY and WHEN you should write covered calls and when and why you should write puts?

That is what I m saying, Risk & Rewards are the same. and IMHO, Put should be written in Bull Run and Call should be Written in Bear run as these are LOng and Short strategies respectively. Though I feel that it's against the prevalent practise in market.

Can you explain why covered calls cause more outflow of money?

Writing Puts causes outflow of margin while covered calls causes Entire value of stock to be purchased as initial cash outflow alongwith margin. Now if same amount of capital is deployed (with even say 100% reserves for M2M pressure), the return ratio is skewed 2:1 in favour of writing money-covered puts.

Who does? Then why write naked puts ONLY?

Nope! One should not write naked puts, in plain writing strategies Money Covered Put writing giving the best return on capital alongwith containing risk to a much larger scale. But, it's the timing of writing which gives the best money.

IF anyone advocates writing put instead of covered calls I consider that as a lack of options trading knowledge.

My Options trading mentor (A fundamental investor otherwise) is into options trading since last 12 years. His Indian Market returns average 5% per month from money/stock covered put writing and 25% per quarter in the US market from long side which we are trying to enhance with the help of Technical Analysis now a days.(A few other Delhi based Traderji members have also benefitted from his experience).I wonder if such a person has lack of options trading knowledge!! In his own words it took him more than one year to come to the terms with the principle that writing puts in bull run is better than writing Calls.

Once u own the stock, and want to increase your return, PUT WRITING DOESN'T FIGURE ANYWHERE. PERIOD.
But still if you want to write puts ...the question that I want to ask is that are you aware of the risk that you are taking by writing naked puts?

Even if an investor is owning stocks, it makes sense to use those stocks to be used as margin for writing puts and enhance the returns. It won't be naked put writing at all. Afterall, one should own stocks in bull run and not bear run, so why to write call (go short) in a bull run instead of going long (Shorting puts) in a bull run.
So far as risks are concerned, we all are aware that covered call strategy has same risk as naked put writing has.

Best Regards,
--Ashish

 

[beginner_av]

Respecting your point of view, my reply remains the same. And yes, Using stock margin to write puts seems the most ridiculous strategy. When market moves sharply against you, as it has been seen repeatedly recently, you get double whammy. There is no rational in this strategy whoever is practicing it. But if he seems to do it to his satisfaction, great for him.

And yes, on one hand you talk about margin, and on other hand you talk about risk and return. if you are SO CONFIDENT of bull market...as well as money outflow...and return TOGETHER, why bother about discussing writing puts? See my earlier post to praveen's reply as to why not to write puts, but buy calls if you are so confident of bull markets. My bought calls give more than 50 to 250% returns (now if any of you will ask for contract notes, dont look further, check gujambcem 110CA and TISCO 440 CA over the last 18 days) in the bull phase...so lets not talk about 5% return etc.

lets not talk about US markets here. there many floors write puts, but immediately take protection by either shorting UL, or spreading.

You still have not got the basic point. You do not buy stock to write covered calls....you write covered calls o stock you own...or want to own...else u dont.

and finally, i am not here to convince anyone to abandon put writing and take up covered call writing. i prolonged this argument so that people do not compare apples to oranges and know the pitfalls in both.

You can take any path as long as you master it to perfection and WIN consistently.

As for others asking for strategies, I started this thread saying that I wont give any strategies here. Sorry for that.