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Thoughts on writing puts
Was asked about this by @WealthRemedy and figured I share my view with everyone. Sorry if I misjudged public interest in this.
For those that care about my opinion on the topic, read on
(1/n)
Was asked about this by @WealthRemedy and figured I share my view with everyone. Sorry if I misjudged public interest in this.
For those that care about my opinion on the topic, read on
(1/n)
1) I think most people shouldn't write *uncovered* calls or puts, but there are rare circumstances where it can make a ton of sense
2) Covered calls / puts can make a lot of sense depending on the situation (I hardly ever do it but I understand why someone would)
(2/n)
2) Covered calls / puts can make a lot of sense depending on the situation (I hardly ever do it but I understand why someone would)
(2/n)
So why did I write uncovered puts on $QRTEA?
Read "You Can Be a Stock Market Genius" if you haven't already. Page 229: Options and Special Situations Investing
Options can be extremely mispriced in situations where there is corporate change, this is a good example
(3/n)
Read "You Can Be a Stock Market Genius" if you haven't already. Page 229: Options and Special Situations Investing
Options can be extremely mispriced in situations where there is corporate change, this is a good example
(3/n)
Writing a put is like selling insurance. The best you can hope to get is your premium. But at worst, you can lose a ton. For this reason I dislike insurance and put writing at a fundamental level (I prefer the opposite of this setup)
(4/n)
(4/n)
However, occasionally insurance pricing can become wildly inefficient, and the premiums become exorbitant relative to the risk. In this case selling insurance becomes a gold mine (but again, this is VERY RARE)
(5/n)
(5/n)
Here is the example:
In August I wrote $10.00 puts on $QRTEA. The premium was $2.30 and the term was 15 months. Thats ~18% annualized interest. Historic volatility in the common suggested that was a fair price - I had no view on that.
(6/n)
In August I wrote $10.00 puts on $QRTEA. The premium was $2.30 and the term was 15 months. Thats ~18% annualized interest. Historic volatility in the common suggested that was a fair price - I had no view on that.
(6/n)
What I did know is that historic pricing of those options didn't apply to the future. Of that $10.00 strike, $1.50 was about to convert to cash and $3.00 was about to convert to a pref yielding 8%.
The way I saw it, I was not insuring $10.00 of common but $6.00.
(7/n)
The way I saw it, I was not insuring $10.00 of common but $6.00.
(7/n)
Using that thought process, $2.30 of premium to insure $6.00 of common for 15 months, or about ~30% annualized interest was an attractive price, particularly with my view that more cash would be coming back over the insured period.
(8/n)
(8/n)
Sure enough another dividend has now been announced and the insured common strike has dropped from $6.00 to $4.50. That has increased the interest I was paid to take the risk from 30% to 40% annualized.
(9/n)
(9/n)
At 30-40% interest with a strong view on the underlying, I think writing way OTM puts can make a ton of sense. Generally you don't get those chances unless there is some major change that options models don't account for. They are rare but they exist.
(10/n)
(10/n)
Questions? Comments? Pushback? Fire away.
