This afternoon I sold WMT Mar 40 puts for .71 ($71) each in a client account. WMT was trading at $51.22 at the time of the trade and down 7.75% on the day. The Dow was down 60 points after being down 245 the day before. I like to sell puts on down days and when fear is present.
With the stock trading at $51.22 this was a very conservative trade. That is consistent with the risk appetite of the client. This is a typical play of the wealthy to sell multiple options very far out of the money.
Many investors think that this trade doesn't have a great enough return to be worth their time or money. I would point out that since the puts were written so far out of the money that margin requirements are down in the 11-12% range. In fact, TD Ameritrade only set aside $442 per contract for the maintenance requirement. The return on margin (ROM) is 16% for 71 days ($71 divided by $442 maintenance). I believe that that's a great return for such a conservative investment.
Many times when blue chips get beat down after a warning or quarterly report they drift back up to prior levels. If Wal-Mart drops below $40 in the next 71 days then most of us are in for a hurting. This trade is basically a bet against us being in a nasty Depression and that things don't go to hell in a hand basket during the next 71 days.
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Hey,
Thanks for sharing all this with us. I have a question as I am new to writing options. My broker charges me $10 + $1/per contract for option trading. Now, my question is, if I write a very out of money option at a low price, lets say a contract for $0.1, my cost would be $11, while my potential gain is only $10 if the option goes worthless. This would only work if I write 1000 contracts or something. Am I missing something? Specially if I want to write a covered call, I need to have a lot of money to be able to own 100000 shares of the stock begin with. Is that right? Thanks.
Thanks for stopping by.
One option contract is usually for 100 shares. It would not be worth writing one contract for .1 ($10) if it costs you $11, that's true. If you wrote 10 that would bring in $100 minus $20 in commissions. I think a good rule of thumb is to make sure you'll clear at least $100 on a trade, after commissions.
You only need to own 100 shares of a stock to write a covered call. I option contract is for 100 shares.
Thanks for your question. We look forward to hearing how you're trading is going. Good luck.
Thanks. Another question: Why is that I see different prices for options with same strike price (look at palm strike $10). One is 0.05 and the other is $3 !! Thanks.
Most options are standard which means 1 contract equals 100 shares. Sometimes there are non-standard options which include 100 shares plus more or different shares or money. Your broker can tell you what is included in a non-standard option. Your broker should have an S or NS next to the option matrix so you don't make a mistake. If the option premium seems to high than it is probably non-standard.
I really like your analysis! I am employing a very similar strategy - any time I want to buy a stock I just sell puts instead and if I get assigned I get a really good price otherwise I just collect the premium.
Quick question if you don't mind me asking - what is your broker that allows you to write cash-covered puts on a margin?
asenski, thanks for stopping by.
In taxable accounts I write uncovered puts on margin. There are adequate assets to buy the stock but not necessarily cash covered.
In Roth IRA's with TD Ameritrade all put writing has to be cash covered.
Good luck with your trading. Keep us posted.
Hey, I bought WMT at 52.23 and wrote the Jan 52.5 calls for .95, with 6 days left to expiry. After Expiry, will write at the money or slightly in the money calls again and roll every month if not called away.
haxen, that's a nice trade. Keep us posted and good luck.
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