Ahh, so you were selling puts too, not buying them. The problem with that, for me...
100 shares of stock is worth $63,300 right now. If I sell a put at 570, that means that if the put exercises I need $57,500 liquidity for each block. The premium of a 790 call and a 570 put is only 121.97, so I'd earn $12,197 (less taxes) which is far lower than my current liquidity. If I write a put at 570 and a call at 790 against my entire position in that stock, I'd have to sell a significant portion of other holdings to buy if the put exercises. And it's on a concentrated position in a stock I want to diversify away from, so I don't necessarily want to own more of it right now.
Yeah, I meant that as more of a general comment about options not specific advice to your situation.
I'll build that out a little with my upthread example, here is what I generally would do using the GM at ~$72.50 price.
Say that given my portfolio size and risk tolerance I want to hold stocks in roughly $5-10k amounts. Thus if I want GM, I ultimately want 100 shares of it (100*72.50=$7,250).
My opening position will be to write (the seller of an option "writes" it) a put a little under the current price for 400 shares (4 contracts) three months out. So I'd write a May put on GM at say $70 for 400 shares. Say I get $1.50 for it so that is $600 but now I have to have $28,000 cash available because if the stock gets put to me I need to pay that for it ($70*400=$28,000). However, I got $600 for writing the put so that is part of it, I just need the other $27,400. In the next three months one of two things happens either:
- The stock stays over $70 and I do NOT have to buy 400 shares for $28,000. In this case I pocket the $600 and start over. or
- The stock drops below $70 and I DO have to buy the 400 shares for $28,000. In this case I now own 400 shares of GM but my basis isn't actually $70 it is $68.50 because I got $600 then paid $28,000 for a net of $27,400 and I have 400 shares ($27,400/400=$68.50).
In case #1 I just start over and usually do it again.
In case #2 I now own 400 shares of GM that lets say is trading at $69. The good thing for me is that remember I only paid $68.50 for it so I'm up $0.50/share or $200. Now I do the straddle. Recall that I wanted to own 100 shares so I write a call on 300 shares at $70 and a put on 300 shares at $67. Say I get $1.75 for the call (because it is only $1 over current) and $1.25 for the put (because it is $2 under current). The spread here is intentional because I kinda DO want to sell 300 shares and I'd rather not buy 300 shares. Ok, for those options I get:
- $525 for the call ($1.75*300) and
- $375 for the put ($1.25*300) for a total of $900.
Viewing this holistically I now own 400 shares of GM and in total I have $26,500 in it ($28,000-600-525-375=$26,500) so I now have $66.25 per share in this ($26,500/400=$66.25). Now three things can happen (technically more but the others are more-or-less irrelevant):
- The stock goes above $70 so 300 shares get called away from me at $70. I get $21,000 and I'm left with 100 shares of GM. In this case I now own 100 shares of GM and in total I have $5,500 in it ($26,500-21,000=$5,500) which works out to $55/share.
- The stock stays between $67 and $70. In this case I still own 400 shares of GM which I have $26,500 in and I can do this all over again.
- The stock goes below $67 and I get another $300 shares put to me at $67 so I have to pay $20,100 and I now own 700 shares which I have $46,600 in ($26,500+$20,100=$46,600) which is $66.57/share ($46,600/700=$66.57.
In the case of #1 I'm pretty much done trading GM and I'll just hold the 100 shares that I originally wanted.
In the case of #2 I just rinse and repeat.
In the case of #3 I now have WAY more GM stock than I want to hold. I own 700 shares which I have $66.57 per share in and I ultimately only want to hold 100 shares. At this point I will sell two calls. I will sell a 2 month call that is either "in the money" or barely out of the money. Ie, if GM is trading at $65.25 I'll write a 2 month call on 200 shares at $65. Then I write a three month call on 200 shares at (usually) the next dollar up so my 200 share 3 month call will be at $66.
Then I wait a month and see what happens. If GM continues to fall such that I'm still stuck with it and it looks like neither of my existing options are going to be exercised then I'll write another 200 share in the money call at 3 months so that now I have three overlapping calls out:
- A 200 share 1 month call at $65 - this is the 2 month call that I wrote a month ago but now it is 1 month.
- A 200 share 2 month call at $66 - this is the 3 month call that I wrote a month ago but now it is 2 months.
- A 200 share 3 month call at something less than $65.
I own 700 shares and 600 of them are subject to call. I don't have any naked calls and if they all get exercised I'm back to the 100 shares that I wanted.
Then I'll usually roll the calls as they expire until they get exercised at which point I'll recalibrate.
Using this method essentially I am the house. If you think about the gambling analogy with a slot machine, the gambler loses small almost every time, wins big once in a while, and he loses overall. The house wins small almost every time, loses big once in a while, and wins overall. This is me. I usually win small. Once in a while I get hammered.
