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If you could forecast stocks that were going to split, but had not announced
the split yet .. the strategy would be very successful. The risk
of put selling is equal to the risk of owning the stock, except put selling
allows much greater leverage. In reality no one has consistently
demonstrated a good ability to forecast splits. If your friend is
attempting to sell puts when splits have been announced, but the split
hasn't occurred yet, he would benefit from the increase in volatility that
generally accompanies the announcement of a split. He would be hurt,
though, by the general price action that occurs when splits are announced
and the public goes into the stock like sheep on that day. The key
to successful put selling is to not sell when volatility is too low.
So your friend needs to believe that the implied vol. at the time of the
sale is at or near the top of the range of vols. for that stock.
They also need to avoid over leveraging he position. So in his own
personal balance sheet he should margin the put at a minimum of exchange
minimum margin(not initial .. but no less than exchange minimum for stock)this
is a margin requirement higher than the requirement for puts set by the
fed in reg-T. If you maintain exchange minimum AND KEEP TO IT you
avoid margin calls unless the stock gaps down at the opening.
<P>In terms of the comments you got about selling put spreads instead of
outright put sales it is absolutely true that this clearly limits the risk
and prevents an ARMAGEDDON for your friends portfolio, the concern is that
split candidate(when announced)have an enormous amount of volatility skew(generally)which
makes spreading less attractive. If your friend is really good at
forecasting split candidates(prior to announcements)he would make MUCH
MUCH more money buying ITM calls or if he was willing to take the same
risk as the put sale, buying the stock synthetically(+call - put).
The synthetic trade would make you a fortune(with the full risk of stock
ownership)if you could be really good at forecasting splits. The
brokerage community spends a lot of research dollars forecasting splits
and also identifying new candidates for inclusion in the indices when they
adjust. If you had really good ways of doing these you could make
a bundle with options ... a few people/firms do it well ... most don't.
<P>Dennis L. Conn wrote:
<BLOCKQUOTE TYPE=CITE><STYLE></STYLE>
Hello all, I'd appreciate some
input from those experienced in the strategy of selling naked puts on stocks
that are about to split. A friend of mine is convinced that he can pursue
this strategy with almost no risk to his account - hey, it worked on paper,
right? After all, stock splits make the price go up, right? Apparently,
this is the assumption on which the premise is based - I can't seem to
explain why a twelve-year bull market (let's not quibble) might skew his
back-testing. He has no experience in trading (naturally), and I've
never done stocks - so I can't seem to convince him that his idea of "rolling
out" to the next month's options and selling more, may entail not only
some risk, but possible account devastation, given a prolonged downtrend. Now
he's convinced himself to give up twenty-five years of building an insurance
business in order to daytrade his way to wealth by year's end! At least
he's using one of the better systems for online trading that I've seen
recommended here lately, but come on! Today he found himself forced to
roll out to June options, and tells me he never loses! I remember when
I thought the same way at first, and how quickly retribution followed... Can
someone please give me something I haven't thought to say that might make
him wake up? Or is this automatically going to fulfill his widest get-rich-quick
fantasies as he believes? I mean, hey, if it's that easy, I'll give up
commodities and sell a passel o' puts tomorrow! What happens if the
holders of those puts exercise them? I'm pretty sure it's going to do the
same thing to him as selling silver calls in the Buffet rush did to me
when I first tried writing options (duh). Anyone out there with some practical
advice they'd care to offer? Dennis C.dlc@xxxxxxxxx</BLOCKQUOTE>
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</x-html>From ???@??? Tue May 25 18:01:07 1999
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From: Don Roos <roos@xxxxxxxxxxxxxxx>
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Subject: Re: you people are losers...
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<<COME ON BIG BOYS.....put up or SHUT UP>>
What pushed your button JR? If some in the group piss you off, does
that mean we're all a bunch of smucks?
Don't get too confident with the good month. I was up 75k one month and
my account blew out 2 mos later. You have not been guaranteed success!
I hope you find what you're looking for, but the user group is not your
enemy. Most would support you if you asked for help. Most would also
say good riddance to a statement of condemnation or blame. Throw the
baby out with the bath water if you must, but the blame is yours and no
one elses.
Take care,
Don
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