any reason why trading ‘safe’ put options eg:0.2 delta on margin is a bad idea? I have been trading simple options for about an year and just recently started researching Margin account.
example: selling puts on AAPL every two weeks at 0.2 delta is going to give me credit of 80$ every two weeks. if I use margin this looks like free $ – thats close to 2K$ per year for little to no risk.
yes. there is a possibility of market crash and I can get assigned – I can either roll my option at that time or buy it back at a loss. what am I missing?
appreciate your insights.
Let’s say that you are absolutely correct and do a little theoretical even-handed math.
So for October 8th I went and looked at the 138 put for AAPL. The current price is 142.58. So the shift would be -$4 in a week. That’s not unheard of for AAPL. That’s delta .20 and that is selling for about 65. The put that is about 80 is the 139 put for AAPL and is delta .24. Okay.
So let’s look at what this really means. You are willing to collect $80 to risk paying $13,900 as of this writing. As the price goes up (which you hope it does) that amount you’re willing to risk rises but your premium, that $80, doesn’t. Okay.
So here’s the rub. If you are willing to sell these puts that means that you don’t think the price will fall but if that’s the case why not just the calls for the risk that you’re putting up? Remember that you’re making $80(26) for a risk of $13,900 at this time so that means that conversely you should be rationally willing to put up to $13,900 on the line in long options to profit $2,080 in one year.
But let’s really dig into what these two bets would be rationally. Because you are doing this over the course of a year you have something on your side with the calls rather than the puts which is time. You can buy a 9/15/23 $140C for approx. 2.4k so up to 5 about one year out from today with a target return on these slightly ITM calls of 17.3%. I am no wizard but I can promise you that if you did that, risking only ~$12,000, you would make that money. That’s a safe bet in my opinion. That’s just one good day and boom, you made your money. But the thing I want you to pay attention to here is the number of trades you have to put on here: 1. One trade. One profit target. Set your limit and walk away. Nothing to manage.
In your other strategy you have to put on 26 trades. That’s 26 chances for things to go against you and cost you however much in the case that you are wrong. Certainly you can close early and such and may be able to skirt death all year long but you’re not guaranteed the $80 tag for the .2 delta and you certainly aren’t guaranteed that you won’t get assigned which will, at the moment, cost you $13,900.00. But there’s something that you have to keep notice of; delta is not a “number”, it is a concept, and it is anything but steady. Your .2 delta today could be .5 tomorrow and that’s the problem in my opinion. You didn’t detail to me an exit point for when things are going sour and it doesn’t like you really thought that through. In fact I would pose that you did the opposite; you decided that the market would cooperate with you (exactly how you die in this game) and detailed not really a “plan” so much as a “dream”. You told me your dream. You did not tell me a plan. You dream of getting $80 biweekly from selling these puts but there’s no reason to believe that’s anywhere near realistic because you’re ignoring things like events throughout the year. What will you do during earnings? Or AAPL day for instance? Their expos? Releases of products? Disappoints and losses of landmark cases?
I didn’t type all of this to put you down. I typed it all because you need to really think about this at this depth (at least); you’re not really “thinking” about it, you’re suggesting it, kind of poking around with the bear, but not even aware that it’s a bear. You act like it’s a fluffy sheep. I recommend that you think about it. Do not take this as an attack. Do not mistake this as chiding. You will do what you want to do but please, please try to unplug yourself for a moment from your emotions and “ownership of the idea” and pretend it’s your worst enemy asking you for advice. If you would say, “Yeah, do that.” it’s a bad idea.
Always, always think of the inverse of your own ideas. If you’re willing to put on 26 trades for a 17% profit over the course of a year why would you not be willing to put on 1 trade for a 17% profit, the same 17% profit, over the course of the same year?
> As the price goes up […] that amount you’re willing to risk rises but your premium […] doesn’t.
Well no, as the price goes up, the risk stays the same at $13,900.
As others mentioned: buying calls you piss against the wind, theta is a *decay*. You want to sell theta, which is what OP is suggesting.
I’m currently selling puts, looking at how it’s going. When I’m long calls, they are deep ITM LEAPS. I’m also looking at how that is going.
Keep in mind also that when you sell a put, you aren’t using your capital in the same way as when you buy a call. You buy a call, the monies is tied up. You sell a put, you actually get more monies to work with, even if you tie up margin. You tie up margin, not capital, when selling puts.
> I am no wizard but I can promise you…
Um… you are promising me that AAPL will rise 17% every year? Can I do an insured total return swap on that statement? 🙂 I’ll take out the worst loan, a credit card loan to enter a position like that! (sarcasm)
> You can buy a 9/15/23 $140C for approx. 2.4k so up to 5 about one year out from today with a target return on these slightly ITM calls of 17.3%. I am no wizard but I can promise you that if you did that, risking only ~$12,000, you would make that money.
Yeah let’s rework this statement. $140 strike Sep 16, 2022 CALL goes for $17.17 . AAPL has to go up 12% for this CALL position to just *not lose money*. AAPL historical return is 150%/yr over 10 years, 80%/yr over 5 years, and if you look at it over one year, it’s pretty closely tracking QQQ. AAPL has grown and you cannot expect young AAPL returns from it anymore. So can we conservatively suggest it’ll go up at a pace slightly faster than QQQ? Let’s say 20%/yr. That’s still good, right? Still nobody achieves that at scale on average over a long horizon. AAPL also carries much more risk than an index.
Edit: my math was off from here on forward and I corrected it.
Okay so you’ll get $3,110 profit on that call (81% profit), and if you’re *investing* $13,600 (current “risk” of a short-term .2 delta put) that’ll net you $11,016/yr before taxes. You would be leveraged 100:1.
Oct 15 2021 $136 PUT (that’s .19 delta) that’s 12 days out, which is 365/12=30th of a year, for $88 this comes out to $2500 before taxes and fees, which is around 18% return for the “risk”.
u/Away_Expression_1852 & u/Dangerous_Contact439 I think these are two quite different strategies. Buying calls you tie up capital and spend it on theta. Selling puts you tie up margin and theta prints you monies. They are not mutually exclusive, either. I should also add that theoretical returns on calls look nice, but leverage is death and when the market turns against you, you’re screwed, and when you lose monies at 100:1 ratio, it really hurts lol.
Most calls expire worthless.