Hi traders. A common question that come up is regarding when and if to roll up to a higher strike. I mentioned some of these thoughts in the comment section so forgive me for repeating them.
1. Nearly all my losses come from either rolling up to soon, or to an incorrect strike... NEARLY ALWAYS!!!
Try to fight the feeling that it is always correct to roll up. Never forget that to roll up you use more maintenance. This is off-set some as you also get more premium. But, often it is a near wash and yet you have endangered what was probably a safe position. If you are working with limited available maintenance and assume you have 10 puts s with XYZ stock, now when you roll up you can only do maybe 8 at the higher strike. You hardly made money and yet you now have to sweat some.
2. Try to keep in mind when you opened the position you were a happy camper. Now you want to tweak it some? Be sure to think it thorough.
3. A lot of this gets us back to GREED. We all suffer with trying to make the most we can, but this can be a dangerous game so always use caution. I am very familiar with the problem.
4. I now have AMZN monthly puts that started out around 3.5% profit. They have dropped a bunch as AMZN has moved up today. Now only one day into the month and my maintenance is sitting there only earning me 1.5% So this is a definite candidate to roll up. I usually give serious thought to rolling when my maintenance starts only earning around 1%. If you opened the position earning 4% and now you are down to 3%, my advice, don't roll up yet.
17 comments:
Jerry this is key IMO
2. Try to keep in mind when you opened the position you were a happy camper. Now you want to tweak it some? Be sure to think it thorough.
Insted of rolling up as the stock moves up close out you short for .05 or less and watch for a pull back.
That said R1 on Persons Pivots is 56.77 for LVS
really hard not to with all my shorts less than .05 Dec4 44's and Jan 32's
Just sold ANF (price 57) JAN 47 PUT @ .22
Maint Margin ROI is 4.4%
Cushion is 10pts (17.5%)
ProbExp is 92%
Earnings in Feb
Uptrending chart
Recent good news (today):
Teen clothing retailer Abercrombie & Fitch Co. ( ANF ) on Tuesday saw its price target and earnings estimates boosted by analysts at Jefferies & Co. The firm said it now expects shares of ANF to reach $85, which implies a massive 49% upside to the stock's Monday closing price of $56.99.
Hi guys (& dolls)
John, be careful with teen clothing stores. I like ANF and it is probably above the point listed below but something to keep in mind regarding - Trend or trendy items.
One mistake in the next season's buying and the stock can take a dive. I have had some of these bite me on the Butt... so I am very careful with clothing stores. Make sure on earnings reports and new buying trends etc.
Another type business that can take a hit is a stock like Boeing. One crash of a new jet liner or cancellation of an order etc and ouch.
Regarding ANF, a put sellers worst nightmare is hearing teens say things like... "Abercrombie, they are so NOT" etc. LOL.
Teens can be fickle. So I try to avoid stocks that can turn on a dime. Just one more way to turn the odds into your favor.
Gary, I know the feeling of just sitting on your dang .05 and feeling like you are wasting time. But in reality, you are wasting time making money. You might keep in mind the 1% idea. Once your maintenance is making only 1% it is time to give serious thought to rolling up or into a new stock position. Some of these ideas will be a basis for when to trade. Rules give discipline and direction instead of willy nilly. You might make different rules and guidelines but making them and then following them is what makes a successful trader.
Jerry
Hey Guys, I was wondering about the 1%. Do I take the remaining profit left on the option and divide that by my maintenece it is taking up?
EX: Premium is at .03 and maintenence is 2,000 on 10 contracts. This would be about 1.5% return. is this how i would calculate that?
Yes, that is how I figure it. But you might throw in that it takes another penny for comm etc so the real cost to close is more like .04 And if you open a new one that pays .05 you actually receive only about .04 So then you have broke even yet increase you potential problem with a higher strike. The point is to make sure it pays well enough to warrant the new exposure.
Jerry
Holiday Schedule for Weeklys and Quarterlys
Friday, December 24 the CBOE will be closed. Therefore, Weeklys that begin trading on Thursday December 16 will expire one day early, on Thursday, December 23. The last trading day for those options will be Wednesday, December 22 for Weeklys with AM settlement (NDX and DJX) and Thursday, December 23 for options with PM settlement, such as equity, ETF, OEX, XEO and SPX Weeklys.
Thursday, December 23 Weeklys option classes that expire on Friday, December 31 will begin trading. Note that Quarterly options will also expire on Friday December 31st. Therefore, classes that have Quarterly options listed will not have "Weeklys" options listed anew on Dec. 23. A list of classes with Quarterlys options listed can be found at: www.cboe.com/Quarterlys.
Friday, December 31 the CBOE will be open and have regular trading hours.
Weeklys and Quarterlys options listing and expiration dates are as follows:
Thursday, Dec. 16
Weeklys options will be listed that expire on Thursday, Dec. 23.
Last trading day for A.M. settled standard (cash-settled index) options.
Friday, Dec. 17
Third Friday of the month.
Last trading day for P.M. settled standard options.
Saturday, Dec. 18
Saturday following the third Friday of the month, standard options Expiration
Wednesday, Dec. 22
Last trading day for A.M. settled Weeklys (i.e. DJX and NDX)
that were listed on Dec. 16.
Thursday, Dec 23
Weeklys expiration. Last trading day for P.M.
settled Weeklys that were listed on Dec. 16.
Weeklys will be listed that expire on Friday, Dec. 31
(except for classes that already have Quarterly options listed).
Friday, Dec 24
CBOE will be closed.
Thursday, Dec 30
Weeklys options will be listed that expire on Friday, January 7, 2011
Last trading day for A.M. settled Weeklys that were listed on Dec. 23.
Friday, Dec 31
CBOE will be open with regular trading hours.
Last trading day for p.m. settled Weeklys
that were listed on Dec 23 and Quarterlys.
A test of discipline - actual stops vs. mental stops :
For the first time ever, I have been initiating actual stop orders whenever I write a put (vs. mental stops) -- I've been initially setting them at slightly over double the premium, and have been adjusting them downward as the premium price dwindles.
It's kind of weird because I'm battling a part of myself that doesn't want to get stopped out of a trade on a temporary price swing (which prevents me from setting the stop too low -or- perhaps not setting the stop low enough) versus a part of me that truly enjoys the peace of mind knowing that if the stock takes a free fall that I will get stopped out with manageable losses.
In the past I've always just 'watched the stock closely' and would jump out or roll or whatever based on my instincts about what I perceived the stock to be doing --- which I'm now realizing wasn't really much discipline at all, (and thus, really wasn't a stop) and potentially drove me nuts with extra worry.
I'm now trying to incorporate this extra mechanical step (of actually initiating a real stop order) after every fill. It's a greater challenge than I would have thought. Psychologically, I'm trying to think of this as insurance against a bad trade decision (i.e. "posterior protection").
Curious to know what other people do..."real stop orders" ( and how much with respect to premium rcvd)...or "mental stops"?
John, I use a stop limit on the premium of almost double. If the premium received is .20 i use a stop limit of .39 or so. this will get my stop started before i hit my rule of double the premium just like Jerry's book says. The only trouble is that it goes at market with this and who know what i will receive when it triggers. This is why i use 1 or 2 cents trigger before it hits double the premium. I am banking on that once it triggers at market price it may end up being double the premium.
Just sold 30 BAC JAN 11 PUTS......maintenance 3385........return 3.3%.....not exactly 20 percent OTM, earnings on JAN 17 and stock price well under 50....so I broke several rules here but hopefully I don't get burned.
i think you broke all the rules.(lol) run like hell from bank of america. financial companies will burn you quicker than most. you are very close on this and not sure if you have been in a trade when it goes south but it can take alot more out of your pocket than what your hoping to gain. just sayin be careful. i do this everyday and hate to see you lose any money.
I hear ya.....I appreciate the caution flag.
Hello, I want to get started in put selling, I'm looking at FAS, it closed today at 27.37, I see the Jan 11 $17 put shows bid/ask of 1.30/1.43, the last sale shows 1.10, this looks like a great return, I'll even take the last sale price of 1.10, do I have this right?
Thank you.
Wire, I Have to agree with Fish. One goofy report that something is wrong with the way accounting was done on foreclosures etc and ouch. Also the delta is so high that a drop in stock can equal the same drop in options premium.
today AMZN dropped $2 but the prem only went up .02 Cushion is a mighty nice thing when a stock turns against you. Good luck and it may pan out but do keep an eye on it.
Nicky, the option you are looking at is a Non-Standard option. An odd deliverable is also referred to as a non-standard deliverable. It is an option deliverable that differs from the typical 100-share contract size. A non-standard deliverable is typically due to a contract adjustment and is commonly the product of a corporate event which alters the underlying common stock.
The NS icon {} next to an option symbol indicates the option is a non-standard deliverable.
So the short answer is that you do not want to be involved with this options.
Jerry
Jerry
Quick question.....I have the book and it probably said in there....but just a quick clarification please.
Are we always looking to Options that expire within approximately 30 days (front month options)....what if I had for instance an option that was in Feb (and there were no earnings in Jan/Feb affecting this stock)? How should I evaluate potential return on maintenance, etc? Or again, is this something I shouldn't even explore?
Hi Jerry, just reading the above post and should it read a drop in a stock can equal the same RISE in a option premium with a high delta? Just trying to get it straight in my own head.
Thank you
Hi All,
Wire- generally yes regarding the 'front month'
Now and then I will make a move in the last week of an option period and jump into the next month. But not all that often. I VERY seldom go out past the front month as my biggest enemy is TIME. I try to control time and cushion. Regarding how I figure return. Is the same no matter how for out i would go. So it is the premium received divided by the maintenance needed. So if you took in .45 and the maintenance needed was 15 per - the return would be 3%
Hockyguy, yes with a high delta a premium would rise as fast or nearly as fast as stock price dropped. When you go way below the current stock price (lots of cushion) the delta is very low. This results in the premium hardly moving when a stock drops. But it is also a factor of TIME. A quick example is assume that the stock is trading at 100 and you have the 80 strike price. On the last day of trading the stock could drop 10 and the premium would not move. But if it were the first day of the month and the stock dropped 10 the same premium might from .30 to 1.50 etc.
Hope that helps - if not let me know for more or better examples.
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I hope all had as merry Christmas I did. A great family gathering and lots of laughs.
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