My RULE #1 may be overly cautious but, I think, should be rigidly adhered to, especially by inexperienced newbie traders. Never ever write a PUT option that you are not prepared to have assigned to you! Early assignment can and does happen, I have the proof in my account history.
Generally I write near month PUTs on stock I would like to own on a dip in price. I also use them to scale trade commodity based ETFs that are trading at long term lows. One current batch of open trades would be the USO positions I hold and write calls against. Some positions are uncovered (no short calls) allowing me an easy source of cash to do a roll-up if the underlying has a unusually large upside move. I can simply sell additional calls to generate the cash needed to roll-up deep ITM (In The Money) call options. There is no dividend to be had in this one so writing PUTs that have expired worthless as Crude oil ran up suites me just fine. Long term I am an oil bull so accumulating positions at low levels fits my trading plan. This has been a great ride since last February when I began scaling into USO with the sale of CSPs (Cash Secured Puts), most were never assigned, expiring worthless.
One quick note, I do this in both my IRAs and in a taxable account I trade to pay the bills here at the farm. I have margin on the taxable account BUT I NEVER have used it. Call me old fashioned but Grandparents taught me that when you run out of money the fun is over.
Regards and great trading,
Jack
From: joe & leigh <gass20@aol.com>
To: ConservativeOptionS
Sent: Tue, December 1, 2009 10:19:32 PM
Subject: [ConservativeOption
i don't want to sit down and write a detailed paper so people can try to follow to the letter. so, instead, let's all discuss short puts.
let's start with a discussion of what equity do you trade and how do you determine which one to trade? what expiration do you pick? and what strike do you pick?
after a discussion of the above we can discuss management up until expiration, then management at expiration, and if assigned, what to do next?
first, i only trade index etf's almost all my short puts have been iwm, qqqq, spy, eem but mostly iwm. i currently have iwm and qqqq short puts.
second, i decide how many contracts do i want to have outstanding. for example lets say i chose 15 contracts for iwm.
third, i use 90 days to expiration and i leg into the position.
lets say it is november expiration. i will sell 5 contracts with feb expiration. at december expiration i will sell 5 contracts with march expiration and at january expiration i will sell the last 5 contracts for april expiration. each successive month will have 5 contracts therefore coming to expiration.
fourth, i choose the first strike out of the money.
fifth, i do not do naked puts. i have 50% secured in a fixed income etf and 50% in cash in the margin account. i do not and do not recommend anyone using margin especially someone new to options and short puts.
sixth, i do look at charts...i like to look at 1 month and 3 month linear regression channels, macd, sto, and ma's ....i have no hard fast rules but i like to get an idea that it is definitely in an intermediate term uptrend and more in the oversold than overbought situation.
so let's here from the rest of you and after a few days of discussion we can move onto management after the trade is executed.
drjoe
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