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     spider
Member
Username: spider
Post Number: 641
Registered: 10-2002Rating: N/A
Votes: 0
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| | Thursday, May 15, 2003 - 02:26 pm: |  
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This is from Sanford's Derivatives newsletter............
"Put Writing and Buy Writes Compared
In the last edition of the Derivatives newsletter we looked at an indepth example of put writing.
Comparing that strategy to the buy write strategy might sound strange at first but the market outlook of both strategies is identical even though the construction and mechanics of each strategy is completely different.
How are the strategies constructed?
A buy write involves purchasing stock and immediately writing a call option over the stock. (For example buy 2000 RIO @ $30.00 and sell 2 RIO $30.00 calls for $1.00.)
A put write involves selling a put option. (For example sell 2 RIO $30.00 puts @ $1.00)
What is the market outlook?
If trading a buy write the market out look should be neutral to mildly bullish for the life of the option. (If you are strongly bullish, you shouldn't be writing calls!) You must be prepared to sell the shares for the strike price of the options you have written. In the example above, you must be prepared to sell RIO @ $30.00 at or before the expiry of the option if RIO is above $30.00.
If using a put write, your market outlook should be neutral to bullish for the life of the option. You must be prepared to purchase the underlying shares at or before the expiry of the option if the share price falls below the strike price (in the example above $30.00).
How do I make a profit?
If using the buy write strategy the highest profit is achieved when the share price at expiry is above the strike price of the option. In the example above the maximum profit is reached if RIO is above $30.00. In this case the profit would be $1.00 per share. If RIO closes below $30.00, you would still own the shares which are valued at the market price plus you would have locked in the premium of $1.00 per share when writing the option.
The put write also has a maximum profit if the share price is at or above the strike price of the written option. In the example above if RIO is above $30.00 at expiry, the option expires and you keep the premium received when writing the option.
Where is the breakeven?
When the buy write strategy is used, the break even is the share price paid for the shares minus the option premium. In the example above, that would be $29.00. Even if RIO is trading at $29.00 at expiry, you have still received the premium of $1.00, so although you have lost $1.00 on the shares, you have also received a premium for writing the calls.
In the case of the put write, the break even is the strike of the option minus the premium received. In the example above, again the break even at expiry is $29.00. If at expiry the share price is $29.00, you will be assigned (eg buying RIO @ $30.00) and the shares will be valued at $29.00 on the market, taking in to consideration of the premium earned, this is the break even point.
What is the Maximum possible loss?
Theoretically if the share price fell to zero, the maximum loss is the share price minus the premium received when using the buy write and the strike price minus the premium if using the put write. In the examples above, this extreme case would result in a loss of $29 per share.
Other factors to consider
With all options trading is important to consider factors specific to the option you are trading, for example time to expiry, delta, how far in/out of the money the option you are writing.
What happens at expiry?
With the buy write, if the share price is above the strike price of the option, you will be called upon to deliver the shares at the strike price. You will sell the shares. In the example above, you would sell the shares at $30.00. If the share price is below the strike price, the option expires and you keep the shares, which are valued at the market price.
Similarly with the put write, if the share price is below the strike price at expiry you will be called upon to buy the underlying shares. You will then own shares at a value below the price you paid for them, however your entry price is lower when taking into consideration the premium received.
If at expiry the share price is above the strike price, the option expires and your obligation to buy the shares ceases.
What are the Risks?
In both cases there is the risk that the share price falls below the break even point and your strategy results in financial loss. On the other hand there is also a risk that the share price rises sharply and you may need to buy back your position to close your obligation by the written position. There is always a risk of early exercise particularly with put writing and call writing when the stock trades ex dividend. It is extremely important that you are prepared to buy or sell the shares at the strike price of the contract.
More information on each strategy can be found in the ASX books Understanding Options Trading and Understanding Options Strategies. Both of these free books can be downloaded from the Education Pages of the Sanford Website.
http://www.sanford.com.au/sanford/Public/Education/Education.asp"
The fool doth think he is wise,
but the wise man knows himself to be a fool.
- William Shakespeare: As You Like It.
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bindaz
Member
Username: bindaz
Post Number: 7
Registered: 08-2003Rating: N/A
Votes: 0
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| | Thursday, October 16, 2003 - 05:35 pm: |
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Spider,
Firstly thanks a ton for all your informative posts I am sure novices like me who are reading posts by the likes of you greatly appreciate all the things that you have to say and share. I can see that you have a spot for writing options ( I have only recently seen the potential side of that and have been trying to learn as much as i can about writing options and how to start about finding a broker/system for prices etc.
Ok, the reason I am writing this is I have just yesterday gone for seminar by a guy called Jon Cox who introduced his index trading options system (which is purely based on writing options) and I must say though I must be a beginner in this trade, I am a good judge of character and this man looked very honest and his strategy/ system looks very good to me. As you say it ..it was all about small profits consistently. Though the workshop that he is selling is priced at a steep end (for me atleast!!) I am very much inclined to know if you or anyone out there have been a student or member of jtcservices.com
Also, will greatly appreciate if you could tell me how does one get live prices for options? and how much does it cost to write an option, who sets the prices for the premiums etc? I know these are very basic questions and if you could refer me to a website / recommend a book that would be much appreciated.
Thanks,
Happy Trading
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spider
Member
Username: spider
Post Number: 1124
Registered: 10-2002Rating: N/A
Votes: 0
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| | Friday, October 17, 2003 - 12:34 am: |
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Yo bindaz,
Chris Tate has an excellent section in his 'options' book, on writing.
Louise Bedford has written a book specifically on option writing.
Read both of these, then ask me (and others) a few specific questions.
All questions are good questions.
Hopefully we can get 'scalper' to chime in here, as I know that he is a very experienced option writer.
I get my option quotes from Sanford.
I don't know of John Cox, but that does not mean much, there are a lot of people that spider does not know.
If you feel that you are getting value for money then that is all that counts.
But, i would encourage you to do your own research rather than shelling out good money for a course. You will need that money to 'pay your trading dues'.
Have faith in your own ability to learn what you will need to know.
You are young and have plenty of time.
Good reading, good luck, and let us know how you are getting on.
spider.
.
It is said an Eastern monarch once charged his wise men
to invent him a sentence to be ever in view,
and which should be true and appropriate in all times and situations.
They presented him the words: 'And this, too, shall pass away.'
How much it expresses! How chastening in the hour of pride!
How consoling in the depths of affliction!
~ Abraham Lincoln: September 1859
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zx12
Member
Username: zx12
Post Number: 8
Registered: 09-2003Rating: N/A
Votes: 0
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| | Friday, October 17, 2003 - 08:04 pm: |
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Some other points traders may want to consider regarding Buy/Write versus Naked Put Writing:
With a buy write you have to consider the cost of funds, i.e if you are purchasing shares on margin, the related interest costs. Also once you do a CC, the shares are lodged with the OSC as collateral and you will need to buy back the options before you can sell the shares if you plan to unwind the position.
Naked Put writing achieves the same result with less funds required to enter the position and the entire position can be unwound very easily, i.e buy back the put options.
The only time I do CC's is when I have written OTM naked Calls and the shares continue to rise in price. At this point I have 2 options, buy the ETO's back resulting in a loss or buy the underlying shares and convert the naked Call into a CC. Normally I find it more profitable to convert the position into a CC, only if my view is that the shares will continue to rise in price.
Just some points to consider.
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scalper
Member
Username: scalper
Post Number: 8
Registered: 03-2003Rating: N/A
Votes: 0
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| | Friday, October 17, 2003 - 10:40 pm: |
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Bindaz
Spiders comments are spot on. Before doing any course read,read and read some more. If you do the course you will get a lot more out of it if you have a jump start, especially in options.
Work out if this is the area you want to go down now, as it seems that you are just starting out.
Otherwise try the CFD's, go very, very small while finding your feet, it is a very low cost entry into this wonderful world we have found.
I only write covered calls on leveraged stocks, so can only comment on this particular area.
Yes it is small profits, but regular monthly profits compound this over 12 months and throw in 2 divi's and you have a nice little cash cow.
However you still need to learn TA or whatever takes your fancy to ensure you know where the stock is heading. No use picking up 20c a share in premium, if the stock then plummets.
You need a reasonable bank roll, or be comfortable with leverage to make it worthwhile, as contracts are sold in 1000 lots and you are only looking at a handful of blue chip companies due to liquidity.
So if you have the experience in TA and the bank roll it is really an excellent income generater.
The only negative is if the stock looks like its on rocky ground, but since you will have a trading plan in place you simply close out the option position and sell the share. The gain on the options position will lesson the loss on the share position.
If the stock skyrockets, you don't have to sit round and be exercised, you buy back the option and rewrite at a higher strike price, this is only if you think the stock is going to hold at that level or go higher.
The potential of this area has been overlooked by so many, but if it is where you should be heading now only you will know after doing some research, especially the books spider mentioned.
Come back with a few curly questions.
Regards
Scalper
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bindaz
Member
Username: bindaz
Post Number: 8
Registered: 08-2003Rating: N/A
Votes: 0
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| | Thursday, October 23, 2003 - 05:20 pm: |
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Thanks Guys,
I have indeed being reading a lot and to my surprise have found a lot of information which i am still trying to grasp. Spider, I did have a look at Bedfords book and was indeed good, the only area I still need to brush up still is the margins area, as I am developing a strategy to write options on the DAX I need to be sure where and at what prices my margin calls will hit me. I am also doing a lot of excel probabilities based on volatility etc. As my trading capital is limited, I have worked out a deal with one of the brokers to start small, which is a big relief as everyone wanted $10,000. I know it is imperative that I have more capital in order not to burn out if the market made a move against me but to start with i am not looking to trade more than 4-5 contracts.
If all goes well, shall trade my first option soon and will keep you posted.
Wealthy Trading
Bindaz
(Message edited by bindaz on October 23, 2003)
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palace
Member
Username: palace
Post Number: 198
Registered: 06-2003Rating: N/A
Votes: 0
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| | Saturday, December 06, 2003 - 02:21 pm: |
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QUESTION
In he FIN it mentions a percentage return figure
am i right in assuming its based on the fair value price ,but what else ?
is it what he writer will collect for the premium
against the value of the share
and if it is ,is it the same criteria for put options
confused \
by the way
anyone looked at the free 14 day trial on offer at optionedge.com?,interesting but i wont be signing up
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palace
Member
Username: palace
Post Number: 199
Registered: 06-2003Rating: N/A
Votes: 0
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| | Saturday, December 06, 2003 - 02:31 pm: |
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i meant to add
assuming it is based on the price and time decay
and it is for the writer ,does it take into account you only need 50% equity to write a put option?,and if it doesnt, shouldnt the percentages be doubled for put options?
mick
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