Hi guys, reading the comments section I see a lot of traders are getting itchy fingers to make a trade. I certainly am. But I am trying to resist until maybe Friday or next Monday. The trades will still be there and at the same time we will have a clearer idea of the market direction. Try to keep in mind that when we opened the position we were happy...lol I know, I know, your mouth is watering for some of the good trades but hold on for awhile. This is an important earnings season. It should validate that stocks are doing pretty good. If most traders are like me, they enjoy making good trades so these times are juicy. When making trades please leave lots of cushion as we don't want to get caught if the mkt hiccups.
With fuel (oil) going up, there might be some good plays with FSLR. Also AAPL after next weeks earns. One of these days they will announce a 10-1 split...
positions I am sitting on. as of today-
CMG 180's Amzn 165's Nflx 160.
Jerry
30 comments:
FYI
I think market is closed next Monday.
Martin L. King Day
Ed
Jerry,,
I was curious to know about your experience with selling puts back in 2008/early 2009 when the market was so volatile with lots of bad news shaking the market. Could you please share with us how you managed your put positions, which stock you generally picked and avoided...etc. Thanks!
Have u ever discussed why you don't like/use iron condors or verticals? I'd love to read your thoughts?
jerry i dont know how you answer all these questions..lol.. we could open two blogs--one for jerrys kids and one for jerrys traders.. anyway you said something about first solar and i have been on this stock for 3 weeks and it is bringing great returns.i highly suggest getting some of this free money over here. i have been all over the 105 and 110 strike and the trades are so good that i have to get out a week early sometimes becuase there is no premium left.
LOL..Fish, I also like FSLR as I said, especially with the oil price going up. Over the years that I have watched them they seem to move in tandem with oil. Oil up fslr up etc. Do keep an eye on them. My experience is that once a stock makes a good run, there is always someone that dumps a zillion shares and then everyone starts taking profits and out of the blue the stock drops fast.
Deirdre and Brian; I don't use the condors or actually any spread for years. I'm sure they work but I stay in my corner and let them stay in their corner..lol Not to be flippant, but 10 years ago I tried some of most of the different spreads. Pretty soon I was spending time deciding between Puts, naked calls, covered calls, calendar spread and iron condors and butterflies etc. I just decided to specialize and concentrate on a style that fit my temperament and and many of them have a different style and love theirs. So I guess it is what you like and know. I do use verticals when rolling up within the same month but that is about it.
I hope I answered it ok..
KJ, it was a tough time to make money. I generally dropped down to making 1 percent trades and even some of them went south on me. I would open a trade for around 1% and if the stock cooperated I would later roll-up and try to get 2% etc. Stocks I used were a lot of the same suspect of today. POT -MOS- BZR -DECK -AMZN -GOOG -ISRG -FSLR ETC. Even in those darker days, there were some stocks that moved up.
Good questions gang.
From a risk perspective, for me, the risk of spreads seems much higher vs Selling Deep OTM Puts (Crumbs). With Crumbs, the reward is achieved by effectively using leveraged maintenance margin (vs spread leverage). Let's take a .25 premium example. In a reasonable OTM spread, this would probably be a 2.50 spread, meaning taking in $25, but risking $225 (i.e. $250 spread minus $25 rcvd). However, (and this is significant) the spread would likely only be about 5% OTM at best (and probably less than 75% probability of expiration). Let's take the same .25 for a Crumbs DEEP OTM Put: It would have likely been something like an $80 Strike of a $100 Stock with 20% of cushion, and (key) a VERY small delta, and very high (90-95%) probability of expiration. This small delta enables the ability to set a stop order on the premium around .50 -- meaning that I'm able to risk only $25 (i.e. $50 minus $25) ... but I will acknowledge that my maint margin is $825, which is certainly higher than $250 on the spread.
I know the above sounds like a lot of gibberish --- but my point is with Crumbs, a trader can use the leverage power of 'maintenance margin' to go extremely deep OTM and select Put strike prices with a 90-95% probability of expiration -- and expect to achieve 2-5% monthly returns, depending on the market conditions -- but at a greatly reduced risk.
I also strongly believe that along with all the rules Jerry outlined in his book, a major key to real discipline in using the Crumbs method is executing a real (not mental) Stop Order (at double the premium received) immediately after getting the short Put filled. I'm finding this to be a terrific means of taking my emotion out of my sell decision if the stock happens to go south.
With current market conditions, 4% monthly returns are quite reasonable. Thus, with properly set stops, I should also never have a month that loses more than 4% either. And if stops are adjusted each night, this loss potential can be reduced even further.
Sorry for the ramblings...
John,
Both verticals and deeper OTM Puts will work returning the monthly 2-5% in "normal" markets. That's not the problem. The problem is in the rare and unpredictable occurrences, but sure to happen again some day. We are risking our entire portfolio with selling puts using maintenance margin. Should prices drop dramatically, we are obligated to purchase more stock than we have cash in our accounts. Let's say that over the next week or so, the markets drop relatively slowly, 1-2% every other day. After a couple of weeks, prices are 10% down. Our positions are still OTM, but we've lost much of our cushion. Then something big happens, the proverbial "black swan" and the markets drop another 25-30% overnight. Your stop orders won't get executed. All of our naked OTM positions are now in the money. If we're close to expiration, we'll get assigned and we won't have the cash to meet our obligation. We're broke. What the vertical spread does is objectively identify the downside risk. Without buying the protective put, selling the put leaves us open for an undeterminate loss ... we can't define how low it can go. I prefer to mix the Crumb method with a spread ... still using a strike about 20% below. I will make less profit yet I will be protecting my portfolio by using a vertical spread. Be selective, pick good stocks and you can stil pick up the crumbs.
However, if I sell a put using an index, I'm less worried, so I don't usually use a vertical for index puts. Also, if I can pick up a crumb by using a strike that's 30% or more below, then I'm less likely to feel I need the spread.
Be smart out there ...
Jim,
Great points. I'm digesting your comments.
I've also considered buying some 3-6 months OTM market index puts as insurance to protect against a sudden overnight drop you speak of.
Have you considered this approach for crash protection?
Jerry,
Curious to your thoughts on this recent discussion -- and protection against the unexpected "black swan" scenario like Jim discussed. I've never experienced such a situation while being heavily leveraged in margin so I can only imagine it for now.
Thanks
I guys, John, I have lived through two big drops, the bubble popping back around 2000 wasn't a 'flash crash' per se but the mmkt dropped way to quick for me to adjust to. As I mentioned in the book, I also at that time had no experience with down markets. The mkt of 2008 was also a downer but again not an overnight thing. Now what you don't want to be doing (i did) is being out golfing and comeback to the pro-shop and have everyone talking about the flash crash. Whew, I couldn't wait to get home and check my positions. As I said in an earlier post I wasn't hurt, worried yes, hurt no. Premiums went up but it happened with only 10 days or so left in the period. My stocks dropped 10 points or so but had already gone up enough that the premiums weren't even where they started the month.
So I do admit that a vert spread gives some protection for the 'what if' type thing. But for me picking good stocks and allowing 20+% and i emphasize the PLUS, will give enough cushion to prevent super losses. There are no free rides so some diversification gained by using a few different stocks. Good amounts of cushion and using several different positions seems enough protection for me.
Hope that helps
Jerry
Thanks Jerry.
The thought of this scenario certainly motivates me to remain very religious in executing and adjusting my stops throughout the month. Nearly all my stops for this month are now set around 30-50% of the premium I received to being with -- in other words, many of premiums have basically dropped to about 15-25% of the credit I received, so I've adjusted my stops accordingly to keep the stops roughly 2x the current premium "mark" value. Theoretically, even if I got stopped out today on everything, I would still have a profitable month.
In consideration of Jim's comment, I acknowledge that an overnight crash could potentially runs those premiums up even higher so I may still end up with a loss --- but hopefully, in keeping positive control on my stop orders, a little time away from watching the market won't kill me.
I appreciate all these risk management discussions, since it's so easy to get caught up in the greedy ROI discussions.
I like this blog becuase it is usually about selling puts my way and thats more profitable than a bunch of what ifs and msnbc fast money watchers.. I try not to spend my life worried about nuclear attacks and what if scenarios and have traded for 6 years. look forward to this blog getting back to ideas based on most of our principles. I usually get on here to read about different trades that apply and here lately its people trying to change our core principals. I got an idea! Write your own book and start your own blog where people share your thoughts.Well I own a business so i have to get back to doing something productive and dont have the time to write 4 pages.
I apologize if I've offended anyone. For the record, I am as big a fan of Jerry's method as anyone. I just had some risk management questions and thoughts, and nothing more. Peace.
I sold another 20 115 FSLR @ .17 at the bid & immediately after execution the bid dropped to .15. Talk about timing. An 18+% cushion for 9 DTE. Only 1.5% yield but I'll take it.
Ed
No apology necessary as far as I'm concerned John. Appreciate your posts. Especially interested in your ongoing review of Poweroptions.
Ed
Fish -
Last time I checked, this is Jerry's blog and he appears to welcome any and all questions and comments. How is asking a question about something other than selling puts "changing our core principals"? I for one enjoy reading everyone's questions, experiences and strategies and especially the responses from both Jerry and the other knowledgable posters here. Sorry if that offends you, but until Jerry says differently, I suggest you get over it.
Question for you Jerry - if AAPL splits by 10 (each share may possibly be less than $50) will you still consider it a 'crumby' stock?
:)
Mark
Here's an example where it makes more sense to do the vertical vs. selling a put.
Right now (1/13 2:07PM EST) here's the Feb 19 AMZN option premium (Strike, Bid Ask):
AMZN $186/sh
$145 .30 .32
$150 .46 .49
If I want the $150 strike (almost 20% below), selling the put is .46 on a margin of about 1.65 or almost 3%. To get about $1000 in premium, I would have to buy 20 contracts or about $35K of maintenance, with no downside protection.
If I want the vertical spread, I get .46-.32 or .14 on a $5 maximum loss, or about 3% return. For about $1000 in premium, I would have to buy about 70 contracts or $35K of maintenance, but that is the maximum I could lose.
To me, I'm getting better safety for the same return.
Hi Everyone, well I know this is a bit early with 5 trading days left for this options period but I wanted to share my success! This month I am on track to make 9.8%!! Granted I had much help along the way from LVS but I was able to do this by keeping a 20% cushion the entire time up till the end, where I then moved to 15% cushion. My trades this month were LVS $34, then I rolled to the 37, and then the 40 and sold a few days ago when the reached .01 premium. I had FSLR 105 and rolled to the 115 which i will probably hold till expiration. and then lastly i held ANF $44 and I have not rolled any because the premium is taken over by pirates who ask to much and I would rather hold till expiration then to pay because rolling up would cost more money to me. I cant wait for this month although I am cautious because of earnings. Ill admit that I strive for 4%, but heck it awesome when you follow rules and you get a higher yield than expected. :)
Jonathon
Hello All, I've been following Jerry's blog for a couple of months now and have found everyone's input quite valuable. Just wanted to let Jerry know his crumb method has been working very well for me. Some of the other methods mentioned do sort of leave me a bit confused, but they do serve as a reminder of why I like Jerry's method so much.
Good Trades All,
j d
HI all, I do welcome all parts of our put discussion. Each contribution will have many reading it several times and many will have someone saying 'what's with that'.lol
Let all continue to be courteous. Remember that many are learning and trying to get their understanding of puts and spreads etc.
Jonathon; a good trade but don't push the envelope to hard or fast.. As I have said nearly all of my losses are because i rolled up to soon and or to high.
Jim some great points on the safety of spreads. These are especially good for traders that are working there way up to 'NAKED' ability.
Fish; I know what you mean wondering if we get off track but all of these views help others get a feel and understanding for puts. Have patience with the different views. And the next time I am down in TX i expect a fishing trip..
An odd thing is going on with some of my puts
I have some CMG 185 I want to close them but they are asking .10 / .20 - to much thank you..
but the 190 are .10 / .15 lol goofy
My AMZN 165 are .10 / .12 getting close to close
my NFLX 160 are .10 / .12 also Maybe tomorrow I can close them all.
Don't forget Monday the mkt is closed MLK day
John,
You asked if I've considered buying some 3-6 months OTM market index puts as insurance to protect against a sudden overnight drop.
I have looked at that, but it's been a while. It's recommended in some books that I've read. You have to buy enough puts to get the insurance you want to protect a reasonable portion of your portfolio ... estimating how much you would make to balance the losses in the puts you sold.
The decision is whether the cost of buying these relatively large number of puts, which is eating into your profit, is too expensive.
All, Since I am new and you exlain in lamens terms the DELTA John mentioned. I read about it but it makes no sense to me. What should I look for when making trades etc..
Delta is basically how much a option moves accordingly to a stock price. In simple terms if the delta is at .70 then it moves about .70 for every dollar a stock moves. It's only important to people who buy options not selling options. In reality it's not important to put sellers. I'm sure there are more complicted versions out there but basically it prevents the options buyer from purchasing an option that doesn't perform in sync with the stock price. It's been years since I read the definition but that's close.
Delta (a number that measures how much the theoretical value of an option will change if the underlying stock moves up or down $1) can be useful for put sellers in 'approximating' the probability of expiration, which considers a stock's volatility, stock price, and time remaining until expiration. There are other resources, like ThinkOrSwim's console for a more exact calculation of Probability of Expiration, but this works fine for an approximation.
Simple example: An OTM Put Option with a delta of -.04 has 'approximately' a 96% probability of expiring, which is very good for a put option seller (100 - 4 = 96). As a crumbs Deep OTM Put Seller, I try to avoid deltas that are not in single digits. In nearly all cases where you select a Strike Price 20+% OTM, you will virtually always have single digit deltas. If it's not in single digit, then I am very suspicious and would avoid the trade.
February Example:
Netflix NFLX - closed at 191.49
NFLX FEB 150 is 22% OTM.
NFLX FEB 150 delta is -.08
This implies 'approximately' 92% probability of expiration.
Comparing this to a more exact calculation, the calculated probability of expiration for NFLX FEB 150 is 89%, within 3% of the delta approximation.
If you stick with Jerry's 20+% OTM rule, then you'll usually be in great shape...assuming you follow all the other Crumbs rules, too.
Hope this helps....
Fulgore, as both Fish and John said there are many parts to DELTA. I don't pay attention to it (more on the fish side) It is just a number that means different things at different times. For example as the guys have mentioned it is relative to the stock movement but and a big butt lol.......
If it is the last day of the period and you still have 20 points of cushion, the stock can fall 15 points and the option might not move a bit. but on the first day of the period it would drop like a rock,. So the when and where is the thing. For me a funny thing happened as I first learned of options. I mentioned in my book where I had read you should always know the delta. I asked my broker what the delta of an option was he laughed and asked why i thought i need that info.. 14 years later and I still have no answer. So I guess my advice is 'Don't worry about delta' If you want to get caught up in Greeks stuff there is beta, gamma etc etc. It is all 'Greek' to me. lol
Just pick good stocks- leave lots of cushion and make some money.
Jerry
hi jerry
I was wondering under normal circumstances whats the effect on stock if split is announced.Does it jump like 5-10% normally on announcement.Also regarding black swann event how about selling calls.i understand the return will not be as good as the premium on calls are much less than put.Probably the cushion canbe reduced to 15%.However the only forseeable black swan event in case of selling calls is company getting bought out,the case in point is recent Offer for POT.Lastly how was your return for the year 2008..were u still able to achieve 35% return.thanks
Great discussion this week All! Very much appreciate Jerry, Jim, and John's comments! Lots to think about as I try to hone in my style. Trying out the verticals and condors this months... frustrated! But good learning!!! :-)) Will get to compare how I did this month to previous crumb month... Loved the Book Jerry!!!!
I will start a new post as this one is great but LONG..
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