jbenko_IHB
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Stock Market Day-Trading Discussion Thread
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Every time I have analyzed the married put strategy I have always found the cost of the put to be prohibitive. The only reason I would employ that strategy is if I were a large fund with a position so large I could not bail on a moments notice. IMO, the best protection from a bear market is to get out of it and be in cash. I haven't had an overnight position since June.
First, preceding the Great Depression stocks went up 400% in the previous eight years. People who think the stock market will drop another half because "this will be just like the Great Depression" are forgetting this. There's a reason it was called "the roaring twenties" before the Great Depression. I don't think we'll go back and look at 2000-20008 as "the roaring start of the millenium" by any measure.
As for covered call protection - as with any investment strategy the devil is in the details. As I mentioned before, the premium has to warrant the risk. For me, a 3-4% monthly premium if a stock falls no more than 20% is a great risk/reward (as long as the underlying company is sound!). At the peak of the crisis I could sell covered calls that would grant a 6% monthly premium as long as the stock didn't fall more than 30% (and that was AFTER the stock had already fallen 25% on NO news) - now that was just crazy. I think those juicy premiums will diminish over time - I'm seeing less of these deals today and I have to be more picky.
Buying puts to cover longs is, in my view, is a loser's game if it's done every month. An at the money put for protection till January will cost me 20%. I mean come on - if my stock does a great 20% in this market I get nothing and if it stays flat I lose just as much as I would have lost in a crash. I'll pass. Buying puts makes sense for short term trades, not for investment "protection". Like all insurance-type schemes, buying options is a game where 95% of the people pay more than they event get out of the system.
Covered call writing is a strategy where I wouldn't bet the farm on either a nascent bull market or a great depression decline. The great depression decline, after the initial crash (which I think the initial crash has already happened), declined over a period of many years to its final bottom. In this scenario covered calls with 15-20% protection will eventually turn up some profit as the decline is slower than the padding put in the calls. If a bull market resumes or the market stays flat, 3% monthly premium are plenty good to get an excellent yearly return, even if assuming a 10% loss on one or even two of the months. Not swinging for the fences, and no slouch either.
The main weakness of the strategy is I don't think these premiums are here to stay and I expect the premiums will flatten to 2 and then 1% for the same level of protection at which point the risk may be too high for me.
This is a strategy where I'm neither totally out or totally in. If a roaring bull starts and my stock goes up every month, I will "only" make 3% every month. Geez, only some 42% return. But that's not going to happen - the stock will zigzag and it is to be expected may drop more than 20% month-to-month on some trading action. If the call is in the money 20%, then the stock has to drop... say 30% multiple times to negate all the premiums. That's a pretty extreme string of bad luck (and again keep in mind the analysis is that the outlook on the company is fine, I wouldn't do this on a Ford or anything). Even in last month's crash the strategy would have eeked a 2% loss on the stock I'm looking at.
I don't really "pick" a strike price. I look for a certain amount of protection for each amount of premium I want, is all. 20/3, when I calculate the odds, gives me good chances. If I would be really bullish on the stock I could go for something like 15/5. I don't really try to predict if the stock will go up or down. I keep my ear to the ground and if something fundamental will tank the company, I can adjust.
Stocks have dropped 50%, but for most that's from the absolute peak. Some amount spreading the calls over time would have helped to alleviate this. There's never any guarantees, whetehr using stops, calls, or whatever, these are all just different ways to trade probabilities.
I think we can both be right
. Unless you absolutely need another 40% drop in the market to be right 
.
I couldn't find any I liked today, the premiums were too low for my taste. But, let's take, for the sake of an example, FXI, the China ETF. I would NOT, I repeat, would NOT, do this with FXI right now, because a) it's already up 26% in 4 days and very vulnerable to substantial pullback and b) it's an index, and it's hard for me to vouch for a far away country I don't know that much about.
So FXI is at 25.65 at the close.
You can sell the 21 FXI calls for 5.6 on the bid (you can try to spread the bid with the market maker but that's generally a waste of time).
So the call is 4.65 in the money. 0.95 is the time premium.
If FXI is anywhere above 21 on November 21st, you make your premium. 21 is a 18% drop from here on the Chinese index. The premium is a 3.7% return on your investment in three weeks only (it probably was 4ish percent a week ago).
You still make money if it drops below but your premium starts getting eaten away. You have until 20.05 before showing a loss on your end, which is a 22% drop.
The strategy would have produced a loss in the last month, of course. FXI had its worst month in history. But that only produced an 8% loss, compared with a 30% drop in the index. Something that will be made back by just two months of non-catastrophy. The strategy if you let the odds work over multiple months. There's bound to be a month here and there that shows up a loss, hopefully nothing too bad. And if you're a happy camper like Panda who's actually interested in owning FXI for good, getting it for 20% cheaper might be good enough for you, if that's your cup of tea.
FXI isn't ideal - the premium is right, but as I said, the stock just rose up too much. Plus, the monthly trend could still be downward. Better to pick something which had a drop before, has flattened but is still pumped with volatility. If I had to do play FXI, I would wait till it comes back down, and I would go as far as the 20 calls, for 25% protection and a lower 2.5% premium.
This totally fails if the same stock is hit with multiple catastrophies every month (just like any insurance type of business). But less risk than owning the stock outright either way.
Several months of premium, and you will need the bull just to break even.
If you buy puts @ 21 you're no longer collecting premiums - the premiums collected from your call get eaten away by the put premium daily. You're fully protected all the way down to zero but there is no upside whatsoever since you're not collecting premium. Basically this is the same as just selling everything.
The theta decay on the near-month puts would be higher than the decay on the far-month calls. So the premium you're paying melts away faster than the one you're collecting. Not good. I would do the opposite - buy far-month puts and sell short-term calls. In that case both the losses and gains are capped (unlike covered calls where the losses are uncapped). Your premium would be lower than 3-4% monthly though. I haven't looked in the detail at what the expected premium would be, and i fthe risk-reward would be good enough in this case.
Hehe ya I thought about that one some time ago. Shorting and going long at the same time just cancels out - it's net zero position (in fact my broker won't allow this - the "sell" command is the same as the "short" command and being short is defined by if my position is negative). It has no hedging effects whatsoever.
But you could go long and sell those 5 calls/5 puts. That would a straddle. A 20% out-the-money straddle would pay a whopping 7% premium for 3 weeks of holding, so could be tempting. The stock needs to go 27% either way before you start to accumulate a loss in that case.
In the original example I was mostly assuming you held till option expiration to collect the full premium. You could buy back the call when it's cheap and sell it again when you think it's expensive. Though at that point the strategy is more like regular trading, in which case buying and selling calls is about the same.
It's a strategy that in my view fits the current environment (no clear trends, choppy trading, oversold but no catalyst for going up, high premiums, little risk premium in other assets). If I was a good daytrader I'm sure there's oodles of money to be made at it in the current environment, but I just suck at it.
jbenko_IHB
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jbenko_IHB
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IrvineRenter_IHB
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blackvault_cm said:
Every time I have analyzed the married put strategy I have always found the cost of the put to be prohibitive. The only reason I would employ that strategy is if I were a large fund with a position so large I could not bail on a moments notice. IMO, the best protection from a bear market is to get out of it and be in cash. I haven't had an overnight position since June.
jbenko_IHB
New member
If you get out...you miss the bull. If you buy puts to cover your longs...You will never miss the bull.
muzie_IHB
New member
blackvault_cm said:
First, preceding the Great Depression stocks went up 400% in the previous eight years. People who think the stock market will drop another half because "this will be just like the Great Depression" are forgetting this. There's a reason it was called "the roaring twenties" before the Great Depression. I don't think we'll go back and look at 2000-20008 as "the roaring start of the millenium" by any measure.
As for covered call protection - as with any investment strategy the devil is in the details. As I mentioned before, the premium has to warrant the risk. For me, a 3-4% monthly premium if a stock falls no more than 20% is a great risk/reward (as long as the underlying company is sound!). At the peak of the crisis I could sell covered calls that would grant a 6% monthly premium as long as the stock didn't fall more than 30% (and that was AFTER the stock had already fallen 25% on NO news) - now that was just crazy. I think those juicy premiums will diminish over time - I'm seeing less of these deals today and I have to be more picky.
Buying puts to cover longs is, in my view, is a loser's game if it's done every month. An at the money put for protection till January will cost me 20%. I mean come on - if my stock does a great 20% in this market I get nothing and if it stays flat I lose just as much as I would have lost in a crash. I'll pass. Buying puts makes sense for short term trades, not for investment "protection". Like all insurance-type schemes, buying options is a game where 95% of the people pay more than they event get out of the system.
Covered call writing is a strategy where I wouldn't bet the farm on either a nascent bull market or a great depression decline. The great depression decline, after the initial crash (which I think the initial crash has already happened), declined over a period of many years to its final bottom. In this scenario covered calls with 15-20% protection will eventually turn up some profit as the decline is slower than the padding put in the calls. If a bull market resumes or the market stays flat, 3% monthly premium are plenty good to get an excellent yearly return, even if assuming a 10% loss on one or even two of the months. Not swinging for the fences, and no slouch either.
The main weakness of the strategy is I don't think these premiums are here to stay and I expect the premiums will flatten to 2 and then 1% for the same level of protection at which point the risk may be too high for me.
This is a strategy where I'm neither totally out or totally in. If a roaring bull starts and my stock goes up every month, I will "only" make 3% every month. Geez, only some 42% return. But that's not going to happen - the stock will zigzag and it is to be expected may drop more than 20% month-to-month on some trading action. If the call is in the money 20%, then the stock has to drop... say 30% multiple times to negate all the premiums. That's a pretty extreme string of bad luck (and again keep in mind the analysis is that the outlook on the company is fine, I wouldn't do this on a Ford or anything). Even in last month's crash the strategy would have eeked a 2% loss on the stock I'm looking at.
jbenko_IHB
New member
,
muzie_IHB
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blackvault_cm said:
I don't really "pick" a strike price. I look for a certain amount of protection for each amount of premium I want, is all. 20/3, when I calculate the odds, gives me good chances. If I would be really bullish on the stock I could go for something like 15/5. I don't really try to predict if the stock will go up or down. I keep my ear to the ground and if something fundamental will tank the company, I can adjust.
Stocks have dropped 50%, but for most that's from the absolute peak. Some amount spreading the calls over time would have helped to alleviate this. There's never any guarantees, whetehr using stops, calls, or whatever, these are all just different ways to trade probabilities.
I think we can both be right
. Unless you absolutely need another 40% drop in the market to be right .
muzie_IHB
New member
blackvault_cm said:
I couldn't find any I liked today, the premiums were too low for my taste. But, let's take, for the sake of an example, FXI, the China ETF. I would NOT, I repeat, would NOT, do this with FXI right now, because a) it's already up 26% in 4 days and very vulnerable to substantial pullback and b) it's an index, and it's hard for me to vouch for a far away country I don't know that much about.
So FXI is at 25.65 at the close.
You can sell the 21 FXI calls for 5.6 on the bid (you can try to spread the bid with the market maker but that's generally a waste of time).
So the call is 4.65 in the money. 0.95 is the time premium.
If FXI is anywhere above 21 on November 21st, you make your premium. 21 is a 18% drop from here on the Chinese index. The premium is a 3.7% return on your investment in three weeks only (it probably was 4ish percent a week ago).
You still make money if it drops below but your premium starts getting eaten away. You have until 20.05 before showing a loss on your end, which is a 22% drop.
The strategy would have produced a loss in the last month, of course. FXI had its worst month in history. But that only produced an 8% loss, compared with a 30% drop in the index. Something that will be made back by just two months of non-catastrophy. The strategy if you let the odds work over multiple months. There's bound to be a month here and there that shows up a loss, hopefully nothing too bad. And if you're a happy camper like Panda who's actually interested in owning FXI for good, getting it for 20% cheaper might be good enough for you, if that's your cup of tea.
FXI isn't ideal - the premium is right, but as I said, the stock just rose up too much. Plus, the monthly trend could still be downward. Better to pick something which had a drop before, has flattened but is still pumped with volatility. If I had to do play FXI, I would wait till it comes back down, and I would go as far as the 20 calls, for 25% protection and a lower 2.5% premium.
This totally fails if the same stock is hit with multiple catastrophies every month (just like any insurance type of business). But less risk than owning the stock outright either way.
jbenko_IHB
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IrvineRenter_IHB
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blackvault_cm said:
Several months of premium, and you will need the bull just to break even.
jbenko_IHB
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jbenko_IHB
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muzie_IHB
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blackvault_cm said:
If you buy puts @ 21 you're no longer collecting premiums - the premiums collected from your call get eaten away by the put premium daily. You're fully protected all the way down to zero but there is no upside whatsoever since you're not collecting premium. Basically this is the same as just selling everything.
blackvault_cm said:
The theta decay on the near-month puts would be higher than the decay on the far-month calls. So the premium you're paying melts away faster than the one you're collecting. Not good. I would do the opposite - buy far-month puts and sell short-term calls. In that case both the losses and gains are capped (unlike covered calls where the losses are uncapped). Your premium would be lower than 3-4% monthly though. I haven't looked in the detail at what the expected premium would be, and i fthe risk-reward would be good enough in this case.
blackvault_cm said:
Hehe ya I thought about that one some time ago. Shorting and going long at the same time just cancels out - it's net zero position (in fact my broker won't allow this - the "sell" command is the same as the "short" command and being short is defined by if my position is negative). It has no hedging effects whatsoever.
But you could go long and sell those 5 calls/5 puts. That would a straddle. A 20% out-the-money straddle would pay a whopping 7% premium for 3 weeks of holding, so could be tempting. The stock needs to go 27% either way before you start to accumulate a loss in that case.
In the original example I was mostly assuming you held till option expiration to collect the full premium. You could buy back the call when it's cheap and sell it again when you think it's expensive. Though at that point the strategy is more like regular trading, in which case buying and selling calls is about the same.
It's a strategy that in my view fits the current environment (no clear trends, choppy trading, oversold but no catalyst for going up, high premiums, little risk premium in other assets). If I was a good daytrader I'm sure there's oodles of money to be made at it in the current environment, but I just suck at it
.
IrvineRenter_IHB
New member
I am done for the day. I made money.
The NASDAQ broke through the resistance high from the last two days and found support off the 20-SMA. I believe the market is heading higher for a while.
The NASDAQ broke through the resistance high from the last two days and found support off the 20-SMA. I believe the market is heading higher for a while.
usctrojanman29_IHB
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Agreed, double top at 9,400 resistance level like I figured...picked up 2 more Dec DOW puts. Looks like the funds are getting into stocks and out of cash so they can show their clients they are invested. Low volume is also making this rally smell funny.blackvault_cm said:
jbenko_IHB
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usctrojanman29_IHB
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I usually buy slightly in the money puts, in this case I picked up two 96 Dec DOW puts.WINEX said: