Basic informationI’m a complete newbie here, so if I missed what I am looking for I apologize.
I am looking for information on selling naked puts. Basic information. Like – is there a minimum size transaction – what on-line brokerage houses allow this – how much money is actually needed? Stuff like that.
Thanks for any info.
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The CBOE has some good basic tutorials on options trading that you might find useful — they describe cash-secured puts here (it would be “naked” if you didn’t have cash backing it up, which would mean you would have margin — or borrowed money — backing it up, so the rules for that will depend on your broker)
http://www.cboe.com/Strategies/EquityOptions/CashSecuredPuts/part1.aspx
You can also do put spreads, buying a put below the one you sell at the same time, to limit your exposure a bit (that way, if the stock craters you know how much you’d stand to lose). Of course, that limits your income and potential return.
The only basic limitation is that you have to sell at least one put contract, which represents 100 shares, so your margin or cash must be enough to cover buying 100 shares at that price (or whatever portion your broker says you have to put up), and you also have to cover commissions — commissions can be an issue when you’re selling one or two puts on pretty steady blue chippers, because the income won’t be huge (the premium you get for selling the put isn’t that high, because everyone else also agrees that Intel would be a bargain if it fell 15% by September, for example, and probably won’t pay you much more than 25 cents a share ($25 per 100 share contract) to take that risk off their hands). With most brokers you get less of a commissions bite for options trading if you do larger amounts, so the per-share impact is smaller for 10 contracts than for one, but if you promise to buy 100 shares of Intel at $22 you’re putting up some portion of $2,200 in collateral to earn your $25 so the potential capital requirement is large. That doesn’t mean you necessarily have to have $22,000 in your account to sell 10 puts on that contract and generate your $250, but your broker needs to know you have the wherewithal — so either cash or a portion in cash and a margin line for whatever their calculation of your risk level is.
There’s a pretty good brief article from Investorplace here on the margin requirements, though it differs by broker and I haven’t checked the specific numbers they use: http://www.investorplace.com/2010/04/margin-requirements-for-selling-naked-puts/
Wow, thanks!
So, judging by what you are saying, if I want to buy a solid dividend paying stock like Altria, selling a covered put (where I have the funds in the account if I end up with the stock) then selling the put may not earn very much because the brokerage fees will eat up the small earnings from the put. Funny how that part gets left out in all those teaser articles out there.
Well, off to do my homework. Sure am glad I decided to buy a membership here!
It can certainly work well in many cases, it’s generally most lucrative when volatility is high (which makes sense — volatility is really just an expression of the premiums paid for options) and, of course, you get paid more for taking on more perceived risk — so if you think a company is much less risky than the market believes and you turn out to be right, you make more.
But yes, the “safer” end of selling puts generates relatively small amounts of income and you do have to be careful with commissions — different brokers charge different commissions, so research carefully. My experience is that these kinds of strategies, selling covered calls or cash-covered puts, require discipline and a thought process that has you aiming for reasonable and consistent gains with relatively low risk and not worrying if you miss out on big moves in stocks.
You might want to check out unclebobsmoney.com. They reccommend monthly trades with a very high probability of being successful using options. They talk of returns in the 4 or 5 percent range using a $10,000 acct. Also they have lots of free atricles you can browse. I recently signed up to watch their portfolio and track their success.
I have been selling puts for the past three months and learned some of the ins and outs. It’s a low volatility environment now so I have been choosing rather volatile stocks like CHK and AMRN. Not for the faint of heart. One thing is go with Interactive Brokers for the very low commissions, as low as .31 a contract sometimes. You can adjust these by rolling down and out in time as well. I do this if the stock begins to approach my strike, say within .50-$1.
I pick stocks which are in the 5-20 range and only sell one or two contracts so I am not risking too much on a single play. But ideally you would want to do this in a more volatile market than currently. Only do it on stocks you would want to own too, though I have yet to let myself be assigned.
Rather than focus exclusively on selling puts, I’d suggest looking at what type of exposure you’re looking to get. For example, if you want to profit if the underlying increases in value, then you want to have an options position with positive delta. This can be done by selling puts, buying calls, buying calls AND selling puts (aka a synthetic long) – not to mention lower delta structures like spreads. Whether selling puts is the proper tactic for you depends on a number of things, such as the implied volatility relative to historical volatility and the margin you’re willing to tie up in order to put the trade on.
A slightly more conservative way to sell puts would be to use them as a “paid” limit buy order. For example, if INTC is trading at $21 and you would be willing to buy it for $20, then sell the front month $20 put and collect the credit rather than simply entering a buy order for INTC at $20. If the option gets exercised, you buy INTC for $20 minus the credit you’ve received. If you sell a few months worth of premium before the option gets exercise, you can end up buying INTC at a substantial discount to the market price.
Best of luck with your trades!