Hi Dr. Joe,
Thank you for a very detailed and enlightening post on your strategy.
I would like to clarify one item, having to do with position sizing.
If I wish to limit my position size to 27 contracts, you wrote that the
details would be as follows.
November sell to open 9 contracts ATM, 9 contracts 5% OTM and 9 contracts
for 10% OTM for February expiration.
Repeat for December and January each with one month later expiration.
Since I will have 81 contracts open at a time, if I wished to use cash to
secure the puts would I not need enough cash for 8100 shares?
Dan (dan2fl)
-----Original Message-----
From: ConservativeOptionS
[mailto:ConservativeOptionS
leigh
Sent: Thursday, March 25, 2010 9:28 AM
To: ConservativeOptionS
Subject: [ConservativeOption
mike my basic strategy for cash-secured puts is below: i do vary it on a
regular basis but
much the basic principles i use to trade it. i use almost exclusively
trade iwm. as you will read below i sell atm, 5%otm and 10%otm puts with
equal lots of each. over the past 194 months from jan 1994 to present iwm
dropped greater than 5% only 30 times or 15.5%, greater than 10% only 8
times or 4.1% and over 15% only 3 times or 1.5%.
CASH-SECURED PUT STRATEGY
INDEX
Diversified ETF: SPY, IWM (favorite), EFA, EEM, QQQQ, for example.
POSITION SIZE
Determine the size of the position if you were buying that index
for your buy-and-hold strategy. Do NOT leaverage !!!!!!!
If you wanted 2700 shares in your portfolio, then do not STO
more than 27 contracts. Assuming you have no shares currently.
EXPIRATION
Ninety days (90)
Leg in 1/3 of calculated position size every 30 days
ie. If 27 contracts is your determine final position size, then
Nov expiration STO 9 contracts Feb expiration
Dec expiration STO 9 contracts Mar expiration
Jan expiration STO 9 contracts Apr expiration
Feb expiration initial 9 expiring to be managed
STRIKE
1/3 or 9 contracts ATM
1/3 or 9 contracts 5% OTM
1/3 or 9 contracts 10% OTM
FUNDING
100% secured with cash or 50% cash account and 50% in
fixed income ETF
MANAGING OPEN POSITIONS
BEFORE EXPIRATION
If stock is above put strike no management required.
What are the options if the index is decreasing in price?
1. Close position at a loss
2. Buy leap puts for protection
If decreases 5%, purchase 50% leap puts
If decreases 10%, purchase other 50% leap puts
Strike at CSP (cash-secured put) strike price or
at current stock price based on your risk
Since the above 3 strikes gives one 5% protection
and I am willing to accept some loss, I place a contingent order in
the initial setup to purchase leap puts when stock decreases 10% and
I choose a strike that is 10% ITM. Ie. Initial setup stock was
$100.
The initial strikes would be $100, $95, $90 (0, 5%, 10% OTM)
I woud put a contingent order in to purchase the leap put with a
strike
of $100 when underlying decreases to $90.
3. Roll the CSP
Roll out and down and decrease number of contracts
Can be done for net credit or approx break even
example: based on Dec 2, 2009
IWM @ $58.99
CSP is Feb 58 Put @ $2.84 ---10 contracts
Look at June 56 Put and Sept 56 Put
June 56 @ $4.35
Sept 56 @ $5.55
Market drops 5% today to $56
Using option calculator the
June 56 increases to $5.57
Sept 56 increases to $6.67
Feb 58 increases to $4.32
BTC Feb 58 for 1000 * $4.32 or $4320
STO June 56 - 8 contracts for 800 * $5.57 or $4456
You have reduced your risk 20%
or
STO Sept 56 - 6 contracts for $4056 or
7 contracts for $4732 reducing risk 30-40%
Regarding rolling CSP's: each time you roll you should be
able
to decrease your exposure. First roll usually can decrease
10
contracts to 7 or 8, second roll the 7 or 8 to 5 or 6 and a
third
roll the 5 or 6 to 3 or 4. All without adding new money and
frees up margin each time
4. Do nothing until expiration
AT EXPIRATION
Stock > put strike price
Continue selling CSP same as above
Stock < put strike price and assigned
Sell covered calls 3 months to expiration
Strike NO less than cost basis, ie put strike at assignment
If premium is small because stock has dropped
significantly, sell at a strike less than cost basis if you
understand how to manage covered calls and prepared to
roll out to avoid being exercised before expiration
below your cost basis
GOAL be exercised at or above cost basis and go back to selling
CSP's
--- In ConservativeOptionS
<michael@...
>
> Dr Joe,
> I'll start it off. I like writing front-month cash-secured puts. I
like to do them on somewhat high-beta stocks (e.g. TSL, IPI) and well as
more stable stocks such as PFE, MRK, XOM. I tend to avoid samll drug and
biotech stocks becase of past dissapointment. I try to enter these csp's on
down days. I will take a profit at .05 to .15, if reached, before
expiration. I write only enough puts (3 to 10 depending on the strike price)
that if assigned I'm equally happy and then will write calls on these. I
will consider putting a protective collar on some of these if they advance
far enough although I prefer to be called out. I do this in a tax-deferred
account. In my taxable account I like to do front-month credit spreads on
ETF's.
>
> Michael
> www.safe-options-
>
> --- In ConservativeOptionS
<gass20@> wrote:
> >
> > i really would love to hear from people who are doing dls (calls) and
short puts selling cc's if assigned,,,,
etc....do you use protection with long puts....maybe we can get a discussion
going....drjoe.
deleted
> >
>
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