Selling Short Puts and Progression
I've come to the conclusion I want to trade options.
-You can lower cost basis.
-They increase your probability of profiting by giving you 2/3 ways to make money.
-I have a small bankroll and the return on capital is higher than just standard trading, and it's also a way for me to leverage.
The question i have is when selling short puts, say you take on a bad position. You can roll the option, but couldn't you also use a progression to increase you likelihood of success further more?
Blackjack has the martingale, which doesn't work because you can lose 14x in a row even though the house advantage is only 1-7% assuming you use basic strategy.
But you can be conservative in an option and take positions where you have an 80% chance of being profitable, if it doesn't work out you roll your position and double up? Would that work long term?
Isa Palacios said: ↑
I've come to the conclusion I want to trade options.
-You can lower cost basis.
-They increase your probability of profiting by giving you 2/3 ways to make money.
-I have a small bankroll and the return on capital is higher than just standard trading, and it's also a way for me to leverage.
The question i have is when selling short puts, say you take on a bad position. You can roll the option, but couldn't you also use a progression to increase you likelihood of success further more?
Blackjack has the martingale, which doesn't work because you can lose 14x in a row even though the house advantage is only 1-7% assuming you use basic strategy.
But you can be conservative in an option and take positions where you have an 80% chance of being profitable, if it doesn't work out you roll your position and double up? Would that work long term?
Click to expand...
The studies I have seen suggest that adding to a losing trade doesn't help....but rolling for duration or more credit does.
However you can hedge a losing put by selling calls as well. Just select the deltas you want to take off and sell those(this will also reduce the buying power reduction of the naked puts)....then if the position continues to move against your puts you can roll the calls down to maintain the delta hedge. Don't go inverted on the strikes until you learn what that means....and don't roll for a debit....unless it is very small.
Or you can let the puts get assigned if you don't mind owning the underlying at that price and then sell calls against that. Synthetically speaking ...selling a put is basically the same as doing a covered call.
Acstudio said: ↑
The studies I have seen suggest that adding to a losing trade doesn't help....but rolling for duration or more credit does.
However you can hedge a losing put by selling calls as well. Just select the deltas you want to take off and sell those(this will also reduce the buying power reduction of the naked puts)....then if the position continues to move against your puts you can roll the calls down to maintain the delta hedge. Don't go inverted on the strikes until you learn what that means....and don't roll for a debit....unless it is very small.
Or you can let the puts get assigned if you don't mind owning the underlying at that price and then sell calls against that. Synthetically speaking ...selling a put is basically the same as doing a covered call.
Click to expand...
Yeah you lost me... what strategy do you personally use? Do you think trading vertically works long term, the profits are huge but the probability isn't so great, can you roll vertical positions as well?
I watched every video on dough,com its saturday and dont have to much to do. But they went from covered calls, to selling short puts for your first trade, to using verticals to maximize profit, to rolling them. I'm just like woah.
Delta is the options Greek used to describe directional risk. It refers to how much your position moves for every 1$ move in the underlying. So 1 share of AAPL has a Delta of 1. Means if it goes up 1$ you make 1$. And down 1$ you lose 1$. You can measure the relationship an option has with the stock by looking at its Deltas. If you sell a put at -.30 Deltas. (selling a put is bullish...so by selling a negative delta makes you positive directionally) you are synthetically long 30 shares of stock (.30x100 contracts = 30). So if the stock goes up 1$ right then you can expect to make around 30$.
However....as the price changes...so do the Deltas. So if you sold a put at -.30 deltas you would be Out of the Money (OTM) by a couple of strikes or so. And if the price started to move against you (down) your Deltas will rise as well. As the short put started to go in the money (ITM) the deltas might change to 45 or 50. Now your directional risk has increased by 20 deltas. So if you wanted to reduce the deltas back to 30 you could sell a call that was around 20-30 deltas. This would create opposing positions and would not increase your buying power reduction as it actually reduces your risk by how many deltas you sold on the call side.
Most of my trades are defined risk trades. Means vertical spreads and all of their variations. A vertical spread does one of 2 things. If it is a credit spread you are basically selling the more expensive option and buying a cheaper one to limit your risk. If it is a debit spread you are buying the more expensive option and selling the cheaper one to reduce your cost basis.
The problem with vertical spreads is in the fact that you are defining your risk at order entry and the profits aren't huge but you are getting a decent return on capital used. But there really isn't much you can do to mange losses if it moves against you....unless you can catch it in time to sell a vertical on the other side ...basically creating an iron condor.
You can't really roll vertical spreads to another month....you are basically closing one position for a profit or loss and re-establishing a new one. If you have an iron condor you can roll the winning side toward the losing side for more credit in the same expiration. But with a naked put you have a lot more you can do as far as extending duration or managing risk after order entry. But it is an undefined risk trade by definition however the brokerages usually define naked put risk by a 2 standard deviation move....the capital requirements will usually be wrapped around that number.