As promised answers below to your questions in your post last week.
I suggest making a coffee or grabbing a glass of red before you proceed, its pretty long.
Response to your second paragraph.
Yes I am effectively selling insurance to fmg longs that want protection for a rapid fall in sp. What are their reasons I don’t know exactly they are several and varied. Yes again, the insurance premiums I receive are fairly expensive in comparison to other blue chip stocks like say your 4 major banks, however for obvious reasons. Correct again there is also a group that buy my puts that are simply bearish speculators, they buy my puts hoping sp will tank which will see the options contract value rise significantly, at which point they can on sell the contract at a profit, hence they make excellent returns off minimal equity outlay, hence the many spruikers selling seminars to learn options trading, or advertising headlines like 1000% returns from buying options.
For example at the start of a given month an options buyer buys a FMG contract from me at say 15k, the sp drops dramatically in say the middle of that month, that same contract is now worth say 35k, the options buyer has now just on sold the contract at a profit of 20k from an outlay of 15k.
To be honest I don’t know who the majority of the options buyers are, one would assume longs looking for protection, in saying that there a large amounts of professional options buyers out there that make good money.
Response to your third paragraph.
Correct again, no I don’t really want the FMG sp to fall despite the owner of this forum thinking that is my MO and im a big furry bear. I actually hold a slightly bullish sentiment on FMG at the moment(but within that longer term bullish sentiment I always have a view that there will always be pullbacks, or short term bearish events within a bullish trend), so I obviously look for decent pull backs in FMG sp before I sell a put, as this drop can create more liquidity, higher premiums and less chance of me being exercised and the sp dropping further on me, common sense really. Despite what I’ve just said I can’t stress enough, you don’t sell puts on stock you’re not happy to own, that is just madness in my view regardless of how lucrative the premiums may appear at the time.
Ideally it would be great to constantly sell premiums without ever being exercised or getting close to your strike price, however it doesn’t always work that way. In addition being exercised is not the end of the world. Ive only been exercised like once in the last 3 years. It happened back in December 2016, I got exercised on about 625k worth of stock at my strike of 6.25, rather than buy the contract back, I allowed myself to get exercised, I then sold the stock in February 2017 for 6.77 making a 50k profit, combined with my other premiums from December and January options it still turned out to be a very profitable couple of months. So like I’ve disclosed in previous posts im more than happy to buy FMG at the strike prices I set every month on my options trades.
Furthermore if you get exercised you can then sell a covered call on your FMG stock, you convert yourself from an insurer to renting out your shares. In addition if you’re adamant that you never want to own the stock, then if the exercise day is approaching and it’s looking likely that the sp will remain under or at your strike price then you simply buy the options contract back. Ive also done this before, if you’re lucky enough to get good premium at the very start of the month, then if the sp goes against you slightly at expiry day more often than not the time decay effect on the options value can allow you to purchase the contract back or close out your position at less cost than your premium and still return some sort of profit without having to purchase the stock.
Response to question 1
Yes my options contracts can be exercised before final expiry day; however that has never happened to me when sp has been below my strike price. It appears very unlikely, most of it occurs on the expiry day. If you’re concerned about being exercised through the month then perhaps one can consider European options rather than American.
Response to question 2
I’ve pretty much answered this in my above example of when I got exercised last December.
Response to question 3
Yes I do sell put options on other companies, only ever companies that I am happy to own and that I have neutral to slightly bullish view on. Regarding specific companies well I mainly focus on the top 20/50 stocks on the ASX. Stocks that will generally see you maintain your capital, even though that’s never guaranteed and on Stocks that return dividends in the event of exercise. Some may include 4 major banks, WPL, CSL, RIO, BHP, QBE, TLS, WOW, WES at the risker end perhaps STO. Whatever stock or stocks you choose I can’t stress enough that you have to know these stocks day in day out like you know your children or wife. You have to follow them daily, you need to know absolutely everything about them, you need to know their history and you need to know their potential future outlook, don’t just jump on a Bluechip because it’s a Bluechip and think it’s that easy. For example look at traditional Bluechip’s like TLS from 5.60 down to 3.80, look at the pressure CBA is under at the minute, point is selling puts is no different in my view than buying the stock outright, the wrong stocks at the wrong time can prove disastrous, you have to develop the art of picking the correct stocks at the correct time.
Furthermore like any share trader you need to follow on a daily basis, macroeconomic events, political events, currency events, interest rate events, military events, what’s gold doing, what are bonds doing and so on, it’s a holistic approach, without a holistic and objective approach you will fail.
And more importantly don’t fall victim to the psychological pitfalls of trading and the up ramping that goes on, for example don’t be afraid to miss out on FMG going to 13 bucks in a straight line, don’t be afraid to take profits when they present then you can always buy back in on a dip. The long game is over in my view; nothing goes up in straight line regardless of what stocks you pick you have to learn to take profits and cut losses. There are always opportunities out there in different sectors and different stocks, it swings in roundabouts and expert fund managers are often rotating money from sector to sector or stock to stock. Don’t be crippled by the fear of missing the up ramping view that FMG sp is going to 7 bucks in the next month, there is always something around the corner to destroy these speculative fairly tale views.
Response to question 4
Selling puts on FMG all comes down to risk appetite or peoples own perception of risk reward. Yes the volatility of FMG is what attracts me; it creates better premiums than other stocks. Yes obviously with 1.5 million on the line, I do have a very high conviction and positive view in selling insurance on FMG despite what the lord of these forums says about my motives. Like I’ve mentioned in older posts the FMG premiums have been great, I sold puts on FMG from some 6.50 down to 1.50 which to be honest did test the nerves a bit, I then sold them again from 1.50 up to the 7 buck range which to be honest was just as bad a psychological struggle until we started seeing some balance sheet strength, did I miss the run from 1.50 to 7.30, yes I did, however I didn’t lose money on the way down but rather made money on one of the worst iron ore down trends in history and then I made money all the way up again without even owning the stock, so that may even compare to a long that lost money on the way down to then recoup some on the way up, but let’s be realists here, you will probably be hard-pressed to find one person that sold their stock at the highs to then buy back in at 1.50 that then sold at say 7.30. There will be a large amount of scenarios and not many would reflect the huge run up.
Bank stocks are certainly less volatile than FMG however the premiums return perhaps 0.7% per month as opposed to say 2-3% from FMG. In saying that 0.7 x 12 is still an 8.4% annual return which is still not a bad return by any means, the best of fund managers will struggle to get their clients these returns. Obviously if one had say 3 million worth of capital in a SMSF then they could choose more stable stocks such as the banks and still at 8.4% return a very tasty 250k per year, some would argue it would be easier to buy outright and set and forget and collect say a 5-6% annual dividend from the likes of say CBA, well tell that to current shareholders that have seen their CBA stock value drop by some 12% in only a few weeks as a result of how hard the regulatory agencies are looking at them at the minute.
Response to question 5
Some 15 plus years ago when I first started dabbling in options you had to go through a full service broker, well I did anyway when I first started, I wasn’t aware of any online platforms for retail plebs like me . It was certainly not a main stream form of trading for retail mum and dad investors like me. However now options trading is much more prevalent and there are many online platforms that can be used. I have accounts with both CBA and Westpac and find them good to use and very convenient especially when all you’re personal banking and share trading are on the same online platform.
When you sell options you do have to have sufficient capital and that’s probably why you don’t see or hear many people doing it, however I’m sure you’ve heard of several people doing speculative options buying as it requires very little capital.
How its enforced im not entirely sure, I can only speak about my own experience with CBA and Westpac. There are different tiers of options trading, if you want to trade the highest tier and sell puts and the like you will probably need highest tier clearance. In my case that required filling out a basic assets and liability disclaimer, how they proceed to check or confirm this im not entirely certain, I guess in my case with all my banking being with CBA for example then I guess it’s not too difficult for them to confirm. As far as im aware there is no requirement to have say 1.5 mil locked into a specific account which they have complete control over.
Obviously the minute you enter an options trade an initial margin is withdrawn from your nominated account and then throughout the month depending on which way the sp tracks, if it drops they will take further margin from you and if the sp rises well above your strike price then they will refund margin back into your account, for example they may take 150-200k as an initial margin on a 1.5 mil trade, then throughout the month this may vary from the initial 150-200k to say 100 – 400k, many variables will dictate this such as sp action, which type of stock your trading(CBA would require less margin than say STO), how much time has passed to provide time decay in the options value and so on). Ultimately the majority of your funds not needed as margin just sits in a high interest bearing account of your choice, but in my experience there is no requirement for the broker to have strict control over all your funds.
Too be honest I don’t really know how they deal with someone that doesn’t meet their obligations of the options contract, perhaps someone else on here has that answer, ive never been in that position so I wouldn’t know. I guess the entire situation wouldn’t be much different to standard share trading, you make a commitment to say buy 1 mil of FMG outright and you don’t have the funds then I’m sure the bank or trading company you use would take you to task.
In addition I was required to complete a series of multi choice questions/exam regarding the technicalities of options trading to test your knowledge before they will allow you to open an options trading account. However if you know your stuff then this is easy.
I guess you can sort of compare it to forex trading, there was a day were this was only done by the big investment banks and the like, people like you and I had never even heard of it, however these days you can open an account from the comfort of your home in no time and be trading large amounts on worldwide currency markets 24/7.
Furthermore I think the advent of all the spruikers that for many years and even currently sell expensive options and forex trading education courses and 3-4k one off weekend seminars has certainly been monopolised on by many corporates to set up online trading platforms for retail mums and dads. Consequently there are now endless options available to trade these derivatives.
Ok There you go, I trust that answers your many questions. Good luck with whatever strategy you use.
Disclaimer, all the above is not advice, I can’t stress enough that all the above is my own personal opinion and experiences, I strongly suggest anyone that reads it does their own due diligence and educates themselves accordingly or seeks professional advice before even considering trading options.
Do your own research.
Expand
(20min delay)