1. 90% of options expires worthlessly, so you should sell options generally, instead of buy.
2. some people say that I bought 9 options and lost about 9000 dollars, but the next option I bought made me 20,000 dollars, I am making money, that is right thinking, as long as you know what you are doing. Think it backwards, if you sell options, made profit 9 out of ten, you can still lose money, because of the above scenario. So you really need to know what you are doing with options.
3. Stock itself is already very volatile, option is more so, there is another big problem about option, namely big bid/ask spread, so trading option is much more stressful than stock, you have to have great confidence/self control to make option trading practical.
4, for myself, I favor selling options, but I usually do not sell calls, I want all the upside my stocks can bring me, so the only thing left I can do is sell puts. It is very simple theoretically, say I want to buy FMD at 35 and now FMD is trading at 38, you do not want to buy FMD at 38 and you also want to make some money from FMD because you think it is a good stock. what you can do is to sell a Sept 2007 35 put, what it means is that the buyer of puts can sell you fmd at 35 anytime before Sept 21 2007. Current market price for Sept 2007 35 is bid 1.95/ask 2.2 (symbol for this put is FMDUG). If you sold FMDUG for 2, and you are assigned stocks (namely buyer of your puts decide to sell you FMD at 35 per share), then your buying price for FMD would be 33.
Lets analyze a couple of things that could happen after you sell one put:
a) FMD never touch 35 before 9/21/2007, so you make about 200 "easy" dollars.
b) FMD drops below 35 but close above 35 on 9/21/2007, in this scenario, usually, the put buyer would not assign stock to you. But say, between now and 9/21/2007, FMD drop to a low of 20, and buyer of the puts think there is no chance that FMD can close above 35 before 9/21/2007, he/she makes you buy FMD at 35 per share, then if you hold shares, you still win, because FMD close above 35 eventually on 9/21/2007, but you have incurred an opportunity loss, because you lose the chance to buy FMD at 20, if you did not sell put, you would probably buy at 20, then you will make about 1500 dollars instead of 200 dollars. On the other hand, if you did not sell put, you may watch FMD drop to 20 and climb back to 35 and do nothing. A lot of people doing this sort of thing, me too. If you are assigned stocks when FMD is at 20, you can not tolerate the big paper loss, you sell out your shares and incur a real big loss.
c)a real bad news happened to FMD, say, bank of america abondoned FMD, and FMD drops to 20 and stays there, well now you really incur a big loss, there is no free lunch, right. What you do? if you think FMD is a great company, current difficulty is short term. You may choose to sell more puts at lower strike price. This was what happened to me, I sold Sept 2007 50 put for FMD before Sallie Mae was bought out for $10 when FMD was trading around 43. Then suddenly Sallie Mae was bought out, FMD dropped to an intraday low of around 30.5, I paniced, tried to calm myself, regroup, stand backup, sold 4 more puts at 35 and bought 100 shares around 34.
To make profit on selling puts, is like to catch falling knife, when the market is upside down, horror is dominating the market, it is the best time to sell puts if you know what is the fair value of a stock and your strike price is lower than that value. A good example would be a million dollar house in bay area, suppose you are sure a house is worth 1 million, sub prime crisis is erupting, and that house is dropping like 10,000 per month, then it is best time to write a put on this house at a strike price of 800,000 for a premium of 100,000. If you are assigned this house, you effectively buy at 700,000, a discount of 30% from fair price. You can also think about selling puts like selling insurance policy, you are the insurance company selling insurance to people to let them feel better, when insurance price can be the maximum? when katrina is blowing and market is in horror. So it is the best time to sell insurance after katrina, hence best time to buy insurance companys after katrina, or sell puts on insurance companys, just like right now is the best time to buy subprime company survivors, if you know exactly what is really going to in subprime industry, I choose to stay out of it even though I see opportunities but I am not sure which is the one.
selling puts is an extreme form of betting on a good business, I have had success on selling puts, but I am wondering if my success is biased because of recent bull stock markets, I only sell puts for a couple of years, maybe 3 years.
2. some people say that I bought 9 options and lost about 9000 dollars, but the next option I bought made me 20,000 dollars, I am making money, that is right thinking, as long as you know what you are doing. Think it backwards, if you sell options, made profit 9 out of ten, you can still lose money, because of the above scenario. So you really need to know what you are doing with options.
3. Stock itself is already very volatile, option is more so, there is another big problem about option, namely big bid/ask spread, so trading option is much more stressful than stock, you have to have great confidence/self control to make option trading practical.
4, for myself, I favor selling options, but I usually do not sell calls, I want all the upside my stocks can bring me, so the only thing left I can do is sell puts. It is very simple theoretically, say I want to buy FMD at 35 and now FMD is trading at 38, you do not want to buy FMD at 38 and you also want to make some money from FMD because you think it is a good stock. what you can do is to sell a Sept 2007 35 put, what it means is that the buyer of puts can sell you fmd at 35 anytime before Sept 21 2007. Current market price for Sept 2007 35 is bid 1.95/ask 2.2 (symbol for this put is FMDUG). If you sold FMDUG for 2, and you are assigned stocks (namely buyer of your puts decide to sell you FMD at 35 per share), then your buying price for FMD would be 33.
Lets analyze a couple of things that could happen after you sell one put:
a) FMD never touch 35 before 9/21/2007, so you make about 200 "easy" dollars.
b) FMD drops below 35 but close above 35 on 9/21/2007, in this scenario, usually, the put buyer would not assign stock to you. But say, between now and 9/21/2007, FMD drop to a low of 20, and buyer of the puts think there is no chance that FMD can close above 35 before 9/21/2007, he/she makes you buy FMD at 35 per share, then if you hold shares, you still win, because FMD close above 35 eventually on 9/21/2007, but you have incurred an opportunity loss, because you lose the chance to buy FMD at 20, if you did not sell put, you would probably buy at 20, then you will make about 1500 dollars instead of 200 dollars. On the other hand, if you did not sell put, you may watch FMD drop to 20 and climb back to 35 and do nothing. A lot of people doing this sort of thing, me too. If you are assigned stocks when FMD is at 20, you can not tolerate the big paper loss, you sell out your shares and incur a real big loss.
c)a real bad news happened to FMD, say, bank of america abondoned FMD, and FMD drops to 20 and stays there, well now you really incur a big loss, there is no free lunch, right. What you do? if you think FMD is a great company, current difficulty is short term. You may choose to sell more puts at lower strike price. This was what happened to me, I sold Sept 2007 50 put for FMD before Sallie Mae was bought out for $10 when FMD was trading around 43. Then suddenly Sallie Mae was bought out, FMD dropped to an intraday low of around 30.5, I paniced, tried to calm myself, regroup, stand backup, sold 4 more puts at 35 and bought 100 shares around 34.
To make profit on selling puts, is like to catch falling knife, when the market is upside down, horror is dominating the market, it is the best time to sell puts if you know what is the fair value of a stock and your strike price is lower than that value. A good example would be a million dollar house in bay area, suppose you are sure a house is worth 1 million, sub prime crisis is erupting, and that house is dropping like 10,000 per month, then it is best time to write a put on this house at a strike price of 800,000 for a premium of 100,000. If you are assigned this house, you effectively buy at 700,000, a discount of 30% from fair price. You can also think about selling puts like selling insurance policy, you are the insurance company selling insurance to people to let them feel better, when insurance price can be the maximum? when katrina is blowing and market is in horror. So it is the best time to sell insurance after katrina, hence best time to buy insurance companys after katrina, or sell puts on insurance companys, just like right now is the best time to buy subprime company survivors, if you know exactly what is really going to in subprime industry, I choose to stay out of it even though I see opportunities but I am not sure which is the one.
selling puts is an extreme form of betting on a good business, I have had success on selling puts, but I am wondering if my success is biased because of recent bull stock markets, I only sell puts for a couple of years, maybe 3 years.
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