What Did You Buy Today?

[crimsonghost747]

NilesMike Wrote:Selling a put to buy a stock is always less risky than just buying the stock. If it expires ITM you bought the stock for strike price minus the premium you collected. Now you own the stock cheaper. XYZ stock today=$45.00, sell a 44 put for .62. Your breakeven is 43.38. Yes, you may get assigned at $42.00. Still better than if you purchased XYZ for 45.00

If the put expires OTM, you keep the premium and do it again.

Here is how the math works out, at least the way I see it. There might be a mistake in there somewhere so please do correct me if I'm wrong.
The goal is quite obvious: you want to enter the stock. 

You have option A. Buy XYZ at $45.00 and done, enjoy the growth and dividends for the rest of time.

Now despite the fact that you like the stock for the long term, you obviously see some short term weakness (either in the stock itself or the market in general) because you think that you can get in at a lower price. So you have these options.

Option B. Sell the put for 0.62
Option C. Wait and see

Option A is the most profitable if the stock is anywhere above $45.62 on the strike date. 
Option B is the most profitable if the stock is anywhere between $45.62 and $43.38 on the strike date.
Option C is the most profitable if the stock goes anywhere below $43.38 at any point between now and the strike date.

So it looks to me that you really have to have a very good sense of where the stock will be in the given time frame if you want to enter a position with a put. For the sake of keeping it simple I didn't take into account: dividend payments in option A, cash collateral interest in options B and C, taxes, trading commissions.

Now this doesn't mean that the put strategy won't be profitable, especially if you manage to sell a few of them and then get assigned somewhere close to $45 or below. But it does look like it is the best option only in the case of either flat or slightly declining share price.

[fenders53]

We should have done this in the option thread What you state makes sense if stocks go straight up.  Most of mine don't do that unfortunately. 

Here are a few scenarios that are real world in my portfolio.  

Many DGI Stocks move in a trading range much of the time.  Say $45-50 is typical.  You catch the stock down around 45-46 and at least a bit oversold. You could just buy the stock for $45.  Or you sell a put that day with a strike price around $43. You get a 2% premium typically.          

-The market and your stock corrects rapidly to $40.  You are now in the stock at $42.10 instead of $45

-The  market is in a slow decline.  You may or may not be exercised but your entry basis is still lower than going long, every time.  

-Or the market bounces around with no real direction like it does half the time.  The option is statistically about 70% likely to expire worthless.  The strike and contract duration affect that of course.  Buying options is a losing game for most over time.  The odds are intentionally tilted in the sellers favor. 

-Or the market flies and your stock runs to 55 in a month.  You clearly win by going long.  The put seller only makes 2% this month.  A smart put seller puts the stock back on his watch list and doesn't chase an overbought stock.  I'm OK with the outcome because I'll keep making 2% or more every 3-6 weeks with the same money until I'm long.  And the collateral is making $2 1/2% for now.  Higher than the average S&P500 Div.  

What Mike was stating earlier is WE pick our buy price, and we won't pay more.  If the premium does not meet our risk reward, we simply don't sell the option.  Obviously there is risk in giving somebody a month to decide whether they force you to buy their shares and I'm not giving that away too cheap.    

One final point is we often don't have to buy a stock that falls a few dollars into the money if the story has changed in the meantime.  I probably do that once a month.  Just buy to close the put and sell a new one.  In the end we are just selling time.  If a stock crashes NVDIA style, we all get beat up.  We just get beat up a few hundred dollars less.  Right back to Mike's point.

[crimsonghost747]

(02-16-2019, 02:20 AM)fenders53 Wrote: What Mike was stating earlier is WE pick our buy price, and we won't pay more.  If the premium does not meet our risk reward, we simply don't sell the option.  Obviously there is risk in giving somebody a month to decide whether they force you to buy their shares and I'm not giving that away too cheap.

It's really hard to try and convince you that you haven't found the golden way to happiness and eternal fortune where every trade ends up in a profit. Because you truly seem to believe that in any case this is a winning strategy. I'm just trying to point out that to my understanding there is not a single strategy that is always the winner, and it's definitely not always the best way to do things.

I just did the math for you for shorter term, the one with options A, B and C. And as you can see you need to be pretty good if you want the majority of them to end where option B is the most profitable one. If you look at the past, what percentage of your puts ended with the price in that window? And it's hard to hit that window... like I say I trade with short term options all the time. And it has been very profitable but looking at what I'm doing with some skepticism, I can see that there are times when I would have made a lot more without the option being there to dictate what happens.

My most recent trade is a good example: I made 1.1% in 4 days with a covered call. Pretty damn good huh? Say it took a whole week (because there is no trading on weekends) it would still be over 50% annualized, a number that any sort of a financial professional would have wet dreams about.
BUT. Had I just bought 100 shares and forgot about the call option, I could have sold them in 4 days for a profit of 3.5%, over three times more. 
Yes the trade was profitable but it was a really stupid trade to make compared to my other options. After all, I had a feeling it was going to go higher, I wouldn't have entered the trade if I didn't.

On a longer term... well I guess you will just have to wait and see. But as I said, the general direction of the market over the long term has always been upwards so "leaving the stocks on the table" with companies that you want to own can get very expensive. For example now, despite the fact that you claim not to chase a stock, your put on KO has a 21% premium and your put on SIX has a 30% premium to where they were 5 years ago. We are not talking about ancient history here either, 5 years is a relatively short time frame for investing. If someone was contemplating between buying the stock and selling a put back then, I sure hope they just bought instead of missing out on those gains because their put didn't get assigned.

I am very much a believer in the fact that if you choose your companies correctly, then over the long term it doesn't make a big difference if your entry point was $45 or if you managed to bring it down to $44 with a succesfull option strategy. Sure the latter is better, especially if you can do it consistently, but is it worth potentially missing out completely?


Long story very short: Just because you made a profit it doesn't mean that it was the right move to make.

[fenders53]

(02-16-2019, 03:54 AM)crimsonghost747 Wrote: I am very much a believer in the fact that if you choose your companies correctly, then over the long term it doesn't make a big difference if your entry point was $45 or if you managed to bring it down to $44 with a succesfull option strategy. Sure the latter is better, especially if you can do it consistently, but is it worth potentially missing o


Long story very short: Just because you made a profit it doesn't mean that it was the right move to make.

My last post on this thread.  We can blow up an option trading thread if you wish  

And briefly (if I am even capable of that lol) ....

By the above logic any stock we buy now is a mistake because it was cheaper five years ago?  I have held a number of quality stocks well over 20 years.  In several cases it wasn't a great idea.  MSFT, CSCO and PFE come to mind.  Just depends what 20 years you pick.  And we can cherry pick short term trades all day long.  Entry valuation matters no matter how you buy it.  Sometimes it matters so much that your success is baked in the day you purchase it, even if you hold it for decades.  Sometimes it doesn't matter at all as long as the company truly continues to grow.  I am going to continue to do like Warren and try to buy all my stocks a little cheaper and hold the goods ones a long time.  Part two takes a while to ascertain.  And BTW I regard SIX as a speculative play.  Doubt I own it five years from now.  I rarely have more than 2-3% of my port in speculative stocks at any given time.  I am overweight cashy investments, short term bonds and boring DIV  stocks so I think that is OK.

[crimsonghost747]

(02-16-2019, 06:11 AM)fenders53 Wrote:

(02-16-2019, 03:54 AM)crimsonghost747 Wrote: I am very much a believer in the fact that if you choose your companies correctly, then over the long term it doesn't make a big difference if your entry point was $45 or if you managed to bring it down to $44 with a succesfull option strategy. Sure the latter is better, especially if you can do it consistently, but is it worth potentially missing o


Long story very short: Just because you made a profit it doesn't mean that it was the right move to make.

My last post on this thread.  We can blow up an option trading thread if you wish  

And briefly (if I am even capable of that lol) ....

By the above logic any stock we buy now is a mistake because it was cheaper five years ago? 

No. I'm saying 5 years ago it would have been a mistake to sell a put that didn't get assigned vs just buying the stock. Pretty much any stock. I can't look to the future, otherwise I'd tell you what the price of KO will be on 16th of February 2024 and then we would know if the put was a better idea than just buying at $45.24. (Friday's close) Of course if it gets assigned then it's all good for you, and I certainly hope it goes that way.

If you think KO is a good play going forward then I really hope you do get assigned. Right now you are looking at a difference of $0.24 per share between the current price and your strike. If KO keeps executing well (which you seem to believe in) then it would be a big loss if you missed out on a good run because you wanted to get in with a put at $45 instead of going in straight at $45.24. 

KO is just used as an example. I guess I'm just not a big fan of giving up your options (in both meanings of the word) unless you are very confident on the direction the stock is going short term.

[NilesMike]

All we ever know is TODAY. And selling the PUT is always the right play TODAY. It has the higher probability of success.
That's it. Period.

There are always good opportunities, one need not lament "the one that got away".

Different strokes for different folks.

[crimsonghost747]

What can I say? I'm glad you've found the holy grail of investing. A strategy that is as simple as two or three clicks and apparently ALWAYS THE RIGHT PLAY.
Better just margin it to the maximum and become a millionaire in no time.

Guess you solved the problem of world poverty, congratulations.

[fenders53]

(02-16-2019, 07:59 AM)crimsonghost747 Wrote:

(02-16-2019, 06:11 AM)fenders53 Wrote:

(02-16-2019, 03:54 AM)crimsonghost747 Wrote: I am very much a believer in the fact that if you choose your companies correctly, then over the long term it doesn't make a big difference if your entry point was $45 or if you managed to bring it down to $44 with a succesfull option strategy. Sure the latter is better, especially if you can do it consistently, but is it worth potentially missing o


Long story very short: Just because you made a profit it doesn't mean that it was the right move to make.

My last post on this thread.  We can blow up an option trading thread if you wish  

And briefly (if I am even capable of that lol) ....

By the above logic any stock we buy now is a mistake because it was cheaper five years ago? 

No. I'm saying 5 years ago it would have been a mistake to sell a put that didn't get assigned vs just buying the stock. Pretty much any stock. I can't look to the future, otherwise I'd tell you what the price of KO will be on 16th of February 2024 and then we would know if the put was a better idea than just buying at $45.24. (Friday's close) Of course if it gets assigned then it's all good for you, and I certainly hope it goes that way.

If you think KO is a good play going forward then I really hope you do get assigned. Right now you are looking at a difference of $0.24 per share between the current price and your strike. If KO keeps executing well (which you seem to believe in) then it would be a big loss if you missed out on a good run because you wanted to get in with a put at $45 instead of going in straight at $45.24. 

KO is just used as an example. I guess I'm just not a big fan of giving up your options (in both meanings of the word) unless you are very confident on the direction the stock is going short term.

Please do not misinterpret my tone.  It is not my intent to anger you and your last post gives me that impression.  

I'm not sure why we are talking about KO but KO just blew their quarter.  You may have missed the earnings report details a few days ago?  I do not believe KO is going to run hard for quarters.  But I do believe it remains a Wall Street darling with downside protection.  100 shares is under 1% of my port.  I'll save my real stress for my high beta stocks like APPL and AMZN because those positions are large.  Worth more than my first house.  I took a beating going long in KHC and MO and those concern me as well.  The point is I am not trying to pretend I have a perfectly executed plan, but here are some facts I know to be true personally.  

-I can't speak for Mike but I am not telling you to employ this strategy with all your assets, though I honestly wish I had.  You could end up 100% invested in equities in a severe market.  It's OK if you don't do it at all, but we do believe strongly you should give it a fair try when you have the resources.  It's not because we got lucky once or twice.  After 100 or so put sales in WIDELY varying markets you realize this isn't a bad plan. 

- About 25% of my port is committed to this strategy.  I got real serious about doing it in volume SEP 18.  Not great timing as the market is down about 5% since then?  

-This part of my port has yielded an 18% return since SEP 18.  That works for me annualized.  I'm very OK with that because my cashy stuff yields under 3% and lets not talk about my long positions because they were negative.  

-DEC 18 was horrible. The worst market in about a decade I think.  You would think I would be assigned in most every position.  That's not what happened.  I was assigned shares of MO, BAC, MET, ABT, KHC In DEC.  Some bounced, some didn't, we can't see the future, especially short term so irrelevant.   

-The reality is it's a high monthly income yielding strategy that far exceeds dividend payments, but eventually puts you long so I choose solid stocks.  After seeing the level of income, I will continue to be very patient going long.     

We really should move this to the other thread if you wish to continue.

[crimsonghost747]

Ok I'll just continue in the options thread. See you there. :p

[stockguru]

Added more MO today. Loved the news.

[divmenow]

(02-20-2019, 11:45 AM)stockguru Wrote: Added more MO today. Loved the news.

Nice add on MO

I actually added to another name in that sector. BTI and took a new position in TGRP today. Paying 7.6% yield now. I will take that .91 each quarter.

[Otter]

Added a little to QCOM this morning.