HI traders, I have had many inquires regarding what the flash crash of May 6 did to my account. I reviewed my positions and the results. NOTHING!
I had some AAPL it dropped round 10 pts the same with AMZN and NFLX etc. When observers see the dow drop 400 point or so they relate that to individual stocks. I get that a lot while golfing with buddy's and at party's etc."Wow, I bet that really hurt you". To non-traders and especially to non-put sellers it looked like a disaster. Mutual funds took a good hit as did individual stock owners. But with my BIG cushion rule I was saved any serious damage.
You read a lot of ideas that a spread will save the big loss. Yes it certainly can in a major problem. But most spread users seem to get close to the existing stock price to get better premiums. They might think that they have security as the spread will prevent major losses. Yes and no. EX: if you used a stock at 100 price and sold the 95 put and bought the 90 for a credit of maybe 1. If the stock drops to 90, yes your losses are capped at 5pt, minus the 1 you received. For a net of 4 loss. If you had 40 of these you just lost 16K But if you had sold the (crumb method) 75 strike price, you are safe with no loss. But different ways for all traders. Also before a trader gets approval to do naked puts you might have to build a history with your broker to demonstrate that you are experienced enough for naked options. Also you might need to do spreads while building your account to the minimum to go naked.
Jerry
7 comments:
WLT was a little bit of a mini wild ride today. Now I know why the premium was good: ...volatility at it's best...
Dropped below 131, but then settled at 134 by day's end. 115 PUT Premium settled at .28/.38, so the weekend time decay should be nice. And I still have plenty of cushion.
In the past, before using Jerry's Crumbs Method, I would have picked a near the money strike like 125 or 130. I would have been a total nervous wreck in that scenario.
But with Jerry's Crumbs method, I was able to keep my cool and not panic.
I think this trade is going to work out great :-)
thanks jerry for visiting this issue again and giving a detailed response.In short key is the cushion and not getting too greedy.Actually i reread your book on ipad last night and got better understanding and importance of 20% cushion. I would like to hear other traders experience of selling naked puts during flash crash as reading that blog of account getting wiped out completly was scary.
Doctorali,
Mathematically, an options' Delta (ie. rate of change of option value with respect to changes in the rate of change of underlying stock's value) is smaller with deeper out of the money strike prices. By picking option strike prices that are 20% or more out of the money, then you are naturally picking options with smaller, safer, deltas, too. So even though an option's premium will rise on a flash crash, it should be manageable. I recently started setting stop loss orders on every option I sell at double the premium received. And then I adjust the stop price down as the option premium erodes. So if we have a flash crash, I expect that I would probably get "stopped out" of my positions with manageable minimal damage.
Hi all. Some good comments on all the post. I enjoy reading them and comparing to ways that I invest.
I do want to remind all that using the 20% rule is where you start looking. If you use 20% and you get a return of 5% or higher, defiantly drop down a strike or two. the 20% is not a sure thing. It is where you can generally separate yourself from the loser in the option market. But for added security, try to find a starting income of 3% and as the month progresses you can roll up and make your 4%. But that also depends on the stock cooperating. If the stock is dropping you should still be safe and happy with around 3%
An example of one reason I like stocks with a higher starting price is--
Using a stock with a price of $5 means you could use the 4 strike...yikes..
but using a stock with a starting price of 100 would allow you to use a strike of 75. Ahhh much safer.
I am going to address this in the next post on the front page.
hi john
i really liked your principle of putting stop loss on every sold put.Also i was checking amazon site and it looks like you have been trading for 2 years,so how was your experience during flash crash.
doctorali,
While I have been selling puts for 2 years, I've only been using DEEP OTM Puts (i.e. Crumbs Method) for just a few months, so it's a much safer & more risk averse method than I previously used. In the past, I would still use OTM Puts, but only a couple of strikes below the stock price. Even with that approach, I've had very successful trading years. I believe during the flash crash, the stock price prices temporarily dropped below my strike price, so I rolled into the next month until the stock price eventually recovered back above the strike price.
I feel much more confident with the combination of using Crumbs Deep (20% or more) OTM Strike Prices with $50+ priced stocks and disciplined stops to minimize my losses.
Here's what I like about Stops -- let's say I have $10,000 and I take in $350 in premiums on average each month (i.e. 3.5%). If I initially set all my stops at double the premium, then theoretically, I'll get stopped out when the value of my premiums is around $700 (which could be slightly more or less depending on the timing, adjusted stops, and number of options stopped out) -- but attempting to use a simplified bad case scenario. In this example, I lost $700 but since I took in $350 to begin with, my actual loss was $350 -- so I really only lost 3.5% in my bad case scenario. However, by dropping the Stop as the Premium erodes, I can hopefully reduce my loss potential to something even less than this.
One of my current positions is CMG. I originally sold CMG 175 Jan Put for .80 and the premium price is currently around "mark" .15. As the premium eroded, I kept dropping my Stop price, which is currently set at mark .30 -- so theoretically, let's say I were to get stopped out at .30, I still walk away with a .50 profit. (note, I realize it may be a little different depending on the market price I receive when the stop activates, but I was attempting to simplify the illustration)
Hope this helps.
hi john,
thanks for the reply.i this method should be must for any put seller.It will save them from any black swann event wiping the account.
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