thanks for the kind words mate but I don’t think I’m at the level of conducting a master class. Options are just one way that you can do things with shares, I’m certain that there will be much more sophisticated people than me playing the options on PLS.
the way I see the use of options is to reduce risk, not increase it. By using bought puts you can protect the downside of the investment so that’s a risk reduction strategy there. Selling covered calls is a good thing to do to lock in an exit price (assuming the target is hit) and generating some income to allow for the puts to be purchased. Upside and downside are capped in that scenario. Today I sold $48.00 Jan 2024 BHP calls against some shares for $1.82 or so, then I bought them back at $1.61 or thereabouts. That profit allowed me to buy out some August 3rd $5.26 PLS puts that I had sold last month. By capping the upside on BHP I reduced my risk profile to PLS. Effectively that’s a recycling of volatility in a portfolio from high to lower so again it’s a risk reduction strategy.
The key risk to selling Puts is that you are assigned those shares at expiry, that is to say that you have to buy the shares for the exercise price. When I sell a put I buy a corresponding put to create a spread. If the price increases then the spread can roll up and you collect premium along the way while keeping a floor for your position should it all go wrong. If you are happy to take delivery of the underlying securities then it really doesn’t have that much risk. If PLS moves against all my positions and I have to buy another 60,000 shares then I’m happy with that. I have 6 PLS positions open at the moment so my risk is taking delivery of 360,000 shares at a nominated price. I can afford that and I don’t mind owning more PLS so there isn’t really much risk for my side, however I can participate in collecting income in either direction. Because I have bought puts as well I can in effect be assigned those shares at whatever price and then instantly sell them as well. Selling Call options over shares that you don’t own is called a naked position and that’s how you can end up financially exposed. I don’t do that as the risk is too high.
Check with your broker as to how much you need to create these sorts of positions as it’s different at different brokers. Westpac used to be a market maker but I don’t think they still do much in that space. Buying out of the money puts or calls and hoping that the market tanks or rallies isn’t using options properly, you really need underlying stock to use against a created position. If you don’t have the stock then you need to lodge cash.
hope that all makes sense. Maybe if you start an options thread you’ll see lots more ideas that people have to structure positions?
PLS Price at posting:
$4.95 Sentiment: Buy Disclosure: Held
(20min delay)