Hi
@tbo350,
Thanks for sharing your option trading strategy, it has been an interesting reading and enlightening.
I understand basic concepts of put and call options, but much of the information you have shared is new to me. In my mind, you seem to be effectively selling insurance to FMG share holders, who want to insure against the event of a rapid share price fall. If you are doing very well doing this, then it seems to suggest to me, that it is expensive insurance for the FMG share holders who are buying these short term puts. Presumably, there are other people that buy these puts e.g. people that are gambling on a quick fall in FMG share price (shorters, speculators etc.), however I would imaging the long FMG shareholders are the majority of purchasers of these puts.
I don't imagine that you want to see FMG share price fall (as others have suggested on this thread), as you don't want the put options to be exercised, and then you, the insurer, simply collect the premiums without having to pay out any "claims". In the perfect world for you, FMG continually increases in SP, and you continue to collect the premiums, without having to use your $1.5 mill capital to have to actually buy the FMG shares. Is my understanding correct?
If you don't mind, I have a few more questions I would like to ask about your strategy;
1. Can the put options you sell, be exercised before the final expiry date?
2. If you sold put options over $1.5 million of stock, and say the exercise price is 10% below the SP at the time of selling the option, and then the share price falls 20% with an immediate effect - presumably you need to buy the clients shares at the exercise price, which is 10% more than the current share price. So under this scenario, you lose 10% of your capital i.e. $150k in a month. If this scenario did play out, what do you do then? Sit and hold the shares until they get back to a SP that you are happy with and then sell? Or sell immediately, accept your 10% loss by selling the shares back on the market straight away, and then start using your reduced capital to underwrite and recommence selling your put options?
3. Do you sell these put options on other companies? Presumably you only write these options on companies, you feel their SP won't fall within the next month. What other companies do you sell put options for (if you don't mind me asking)?
4. Given FMG share price seems to be the most volatile stock in ASX200, wouldn't this be the last stock best suited for selling put options over, or does the volatility mean that you can get a better premium margin because it is such a volatile stock? You must have a very high conviction and positive view of FMG share price to sell put options over this stock. I would have thought this strategy may work better for say bank stocks which may be a little less volatile then FMG in the short term.
5. Finally, what is the actual process of selling these put options. I thought this would be more the domain of investment banks and broking houses etc. Honestly, I didn't even know that individuals could sell these options. Presumably when you sell these options, you need to have sufficient capital to be allowed to sell these put options. How is that enforced? Presumably there is also an institution (bank, broking house etc.) that is somehow linked to these options you are selling, and who must ensure that you have the capital if the put options come into the money and are exercised? Do they require you to deposit the $1.5 mill in a bank account held with them? If so, do you earn interest? Do you need to partner up with a share broker that offers such a service for their clients i.e. allowing their clients to underwrite and sell options?
I hope you don't mind all my my questions, and understand if prefer not to answer them. Thanks for the information shared so far.
(20min delay)