Excellent post from toto who pretty much nailed it, he pretty much read my mind and put it in writing, stefans also good input and JGPM input also good, great constructive discussion by all.
Great to actually see that there are other posters that trade options on FMG or other stocks.
If I can I will still just add my perspective to your comments.
I too have found a very limited amount of people that trade options, for me it feels like a lonely world trading options, my personal view is that options can be a very difficult concept to grasp, there are far more moving parts in an options trade as opposed to a very simplistic and traditional buy and sell or buy and hold strategy. I have friends that trade shares or invest in property and anytime we discuss my options investing strategy it just goes over their heads, and more so property investors just shrug it off straight away as far too risky. Options trading just seems to overwhelm a lot of people and they see it as some sort of farcical investment strategy.
Your comment about the risk of selling puts is somewhat surprising considering you buy options and have a great understanding of them. In my view I think this a great misconception held by share investors. Her is a basic example.
Investor A buys 1.5 mil of FMG today at say 5.90 in an attempt to sell in a month at a profit. Which literally millions of people do every day.
Investor B sells a put on 1.5 FMG stock at say 5.50 strike and gets paid say 0.20 cents per share, so im getting some 54-55k to buy the stock at 5.50, which is some 40 cents below the current days sp. Furthermore if the trade was to go against me I have a large margin of error as my breakeven on the trade is like 5.30 which is some 60 cents away from days sp.
Its a 3.6% ROE for the month, granted you could have bought options worth 1.5 million and if your good enough seen say a 50% return for the month, however I personally see more risk in that, or granted I could have bought say 500k worth of puts and still returned say 55k, but the problem I have with buying options is that the very minute you do it, time decay is against you in addition to the sp possibly going against you. The thing that attracts me to selling puts is that it is a wasting asset as other posters have also stated.
Regarding your talk of big drops its no different if you had bought the stock outright, in the above example if FMG drops to say 5.30 who is worse off, not the options seller, furthermore when selling puts there are obviously risk management strategies available to limit losses and so many strategies available to close out the trade.
Another point, all the literature you will read on options states that some 80% of contracts expire worthless, many people say this is BS, in my view I believe it’s close to correct, hence that in itself reconfirms the fact that buying a wasting asset does not make sense. For the last 3 years of selling puts, ive been exercised once, the remainder of it the options have expired worthless, if I have gotten close to my strike at the end of the month, ive managed to buy back the contracts at a greatly reduced cost due to the wasting assets characteristic.
You talk of finding more stable stock to sell puts on, as I’ve explained in the past my mindset is probably different to many investors, in my view the long game is over, volatility is everywhere and here to stay, even in the top 10-20 stocks on the asx, Eg how’s TLS looking today. TLS gives bugger all premiums compared to FMG, FMG may be volatile however I would certainly rather buy 1.5 mil of FMG over TLS. FMG has a nice balance sheet and certainly in my view far better forward guidance than many of your top 10-20 stocks.
I guess at the end of the day we could discuss it until the cows came home, I think are varying views is great, our different mindsets and risk profiles is what creates the markets, without these varying mindsets there would be no market, nonetheless as long as you can make money from your strategy and it works for you and you can comfortably sleep at night then it’s a win.
Nonetheless very interesting discussions and views, I have often contemplated buying options, with the capital I have I could certainly make some damn serious money on a monthly basis, however I just don’t like the fact that they are a wasting asset. I have to ask, what sort of money are you making, what’s your capital per month and what’s your return and is FMG the only stock you buy options on???
Expand
(20min delay)