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Well, did you sell those AAPL puts?

By: StudioCity'98



If so, they went out yesterday at $6.70

When you sell Options that for out [213 days] you're getting very little -t/e [theta] price decay, which is the whole point of selling Options, until the last 25days of an Options life.  So, you're taking huge +v/e [vega] risk. As you can see AAPL hasn't moved all that much since 12/11 but +dt//de [implied volitility] has jumped about 30% since your post.

The $VIX is trading at about 25%, and looking like it wants to trade at elevated levels for the foreseeable future. 2016-2017 were periods of extreme, abnormally low levels of Imp Vol. 2018 has kicked Imp Vol back up into normal and elevated levels. Imp Vol is "mean reverting" but no one knows exactly when it will revert. It's like to stay at these levels, or higher for most of, or at least the first half of 2019 too. 

I used to be a Floor Trader on the CBOE, and spent many years on the Derivatives Desks of a Pension Fund and two Hedge Funds. All the successful Option Sellers I've ever met did so only, and almost exclusively with options with 25 days, or less of life left. They do this exactly because the Theta decay accelerates at an exponential rate as Options approach expiry.

The idea is to sell Options with quick decay and then do it as many time per year as possible. Just like any business with thin margins you make more over time when you turn your inventory over as much as possible. In this case, that's all Options are is inventory.

I'm sure you know that there are easier [less risky] ways to collect Theta decay than selling Puts against cash right?  You can do Verticals, Calendars, Ratio Back Spreads, Diagonals ...etc, all can be structured to collect price decay that are less exposed to spikes of Imp Vol, +dt/de 

Question: do you like Covered Calls?  They have the exact same profit/loss profile as selling Puts against Cash.  You collect a small, limited upside in the form of the premium in exchange for potentially catastrophic losses. Covered Calls have the same P/L but are safer in that your likely worst case is only that stock can be called away.  Puts against Cash you can lose everything and more.

Puts sold against cash are "Widow Makers." You can easily go debit. That is you can lose all your trading capital, PLUS go into debit position. You could end up owing the clearing firm MORE than your account value. When you sign the Option Agreement with the OCC, you acknowledge this risk, and you acknowledge that you will make good on that debt one way or another. In those cases losses do not end at merely losing your entire trading account, they extend to everything you own.  The OCC doesn't forgive Debit positions. When that occurs they pursue people for those debits. You further agree that debt cannot be charged off in BK proceedings. Thus, the Widow Maker moniker.

If you recall back in Feb 2018 when Imp Vol jumped 300% in one day, that was due in large part to forced selling out of Hedge Funds on others who got caught on the wrong side of the low Imp Vol environment.  Margin Desks were blowing accounts out to cover at any price. Many Funds were liquidated to point of total and complete losses, even to the point of putting all of their clients into personal Debit with OCC [Options Clearing Corp].

Puts sold against Cash are great in Bull Mrkts.  And they always seem to come back into vogue among Marketing types after long periods of nothing but up days. It's easy to show option trading systems that trumpet misleading marketing headlines to novice traders [not that you are] like "My Options Trading system has 91 straight winning trades without a losing day."  Or something that effect.

People seem to forget Bear Mrkts. And it's easy to forget the market can go down too when we're 10 years into a Bull Market.  Marketers take advantage of this.  I've seen it over and over again with each business cycle.  They portray options trading as an easy way to riches.

You admitted that you're extended and had to roll out and down just to try to stay even. You admitted that you feel like this may be a gamble.  Your post here is a reflection of your subconscious mind knowing that you're taking a risk you're not totally comfortable with and you're chasing losses.  But your conscious brain is rationalizing, seeking approval that taking this uncomfortable risk is okay.

Your analysis of the risk of this trade is backward. Instead of think about the possibility of making $14,000, the successful trader is thinking about what could go wrong and $AAPL drops in some quick fashion and your asymmetrical risk/reward profile rips your face off.

Speaking of risk/reward: margining $420,000 to make $14,000 is only a 3% return (not even counting your margin interest cost)...if all goes perfectly. After interest cost, transactions costs, slippage and six months of mental anguish... That's not the type of risk/reward profile that I seek.

Sometimes, no, most of the time your best move is to take your losses. This gives you a chance to clear your head and regroup to fight another day.  An old Floor Trader saying is: "Your best loss is your first loss."  Meaning taking the pain all at once and moving on to the next set up.

Successful trading is rarely about the X's & O's. The numerical, technical, maths side of the pursuit of trading profits is important, but in reality, it's only a very small fraction of one's success.  The real gift that all successful traders have, or they've developed over time is about quieting all that noise going on inside your head.

I don't want to get all woo-woo on you here because I could go on and on about this requirement for a proper mentality.  I've written and spoken volumes over the years on the mental side of successful trading.  I'll stop here by saying that successful trading requires a Zen-like balance in mind, body & spirit. 

I'm not criticizing your trading ideas.  I take the time to write all of this with educational intent.  I hope you find it useful.  

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