Fri, Aug 22, 2014, 1:29 PM EDT - U.S. Markets close in 2 hrs 31 mins

Recent

% | $
Quotes you view appear here for quick access.

Krispy Kreme Doughnuts, Inc. Message Board

  • mikem789789 mikem789789 May 17, 2002 11:00 AM Flag

    Expiration Friday once again the

    KKD specialist is being a complete pig. Usually he takes the options down to .50 or so and let's folks have a few pennies left for next month, not in May. This time he wants the whole thing!! 5,000 puts and calls at 40 are now at zero. Nada, nothing, both completely wiped out by this greedy pig of a specialist. Obviously the 40's were set up long ago to expire worthless and probably written as naked calls and puts by the option market maker and the KKD specialist working together to maximize their profit's. At 1.50 each they pocketed $750,000 for their troubles this month. It's a license to steal.

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • <<They don't make sure you have enough margin in either the simple long position, or the covered put. While the margin requirements for a naked put are rather long-winded, it amounts to the same thing. If the stock falls to a point a margin call is triggered in both cases. In either case, a fast drop to zero will require an infusion of funds.>>

      While I agree with all of the above, I still think it's more likely that an average investor would sell a put on minimal margin as opposed to buying stock with minimal margin. The stock has an easily understood purchase price and value, while the liability resulting from a $300 put sale may be far more nebulous and less obvious, especially in a well-populated account. JMHO.


      <<I know "average investors" who insist on using naked puts to accumulate stock.>>

      Sorry if I'm beating a dead horse, but there's just one more point I wanted to make about this strategy of accumulating shares via selling puts. This strategy greatly increases the probability that you will be buying into negative technical trends, and minimizes the probability of buying into positive trends. Basically, it amounts to the antithesis of technical trading.

      If you are lucky enough to be accumulating a channeling stock, you will probably come out ahead, but you will likely be giving up a large percentage of your potential gains when compared to picking buy points only when technicals are favorable. On the other hand, if you are trying this strategy on an upward trending stock, it will likely run away from you before you can accumulate many shares. Even worse, a downward trending stock will eat you for lunch by saddling you with a relatively large number of shares which would become worth less and less over time.

      The only scenario I can envision where the strategy might make sense would be on a stable stock with little volatility, resulting in few exercises and allowing you to pocket the premiums over and over. But if there is little volatility, there is probably also little premium, and this really would no longer be a strategy for accumulation.

      IMO, a dollar-cost-averaging strategy would be a better vehicle for accumulating shares at minimal cost, and would at least allow for a better chance of buying at technically advantageous points. Of course, this is assuming that the investor chooses not to use the technical indicators to find the optimal buy points, which I believe would be a better strategy than any of the above.

    • <<I open a margin account with $2000.00. I buy 100 shares at 40. I sell the August 40 call for $300.00.

      You open a margin account with $2000.00. You sell the naked august40 put for $300. The broker insists that you DO have at least $2000 in the account which is 50% of the price of the stock.

      Would you tell me under what circumstances the value of the covered call position is different than the naked put position.>>


      Here's the difference. After our transactions, in addition to our option liabilities, you've got $300 and 100 shares of stock. I've got $2300. Our accounts may have equivalent values, but not equivalent compositions.

      If we assume that we are both "average investors", which of us do you think would be more tempted to find a use for our "collateral"? You might be relatively complacent watching your stock rise and fall, perhaps hoping that it will end up a couple of bucks up before expiration so you can buy back your calls at a profit. In the mean time, every time you look at your account you will have a constant reminder that your shares are balancing your short option.

      I, on the other hand, will only have the value of the short put affecting my account value. I will have already realized as much gain as I am ever going to see with this investment (not counting the fractional percentage interest I may realize), and I will be looking forward to spending three months watching the grass grow, hoping the stock doesn't fall too much because my available balance would just keep getting smaller. Meanwhile, I might be watching other opportunities slip away while the cash is just burning a hole in my account, tempting me every day of those three months.

      Sorry if this sounds melodramatic, but I do think the psychology of these two positions is dramatically different. The value may be similar, in fact slightly favoring my position because of the interest and commission as you suggest, but I believe the level of discipline required for me to leave my all-too-liquid capital alone is greater than that required for you to hold onto your shares. And if we add the complexity of lots of positions and overlapping margin requirements, I think this becomes even more true.

      In other words, we both may need the same initial cash or margin to initiate our positions, but this does not equate to an equal chance of us each having sufficient cash or margin to cover us a few months in the future. It is the relative liquidity of the cash vs. the stock that makes the psychological difference, IMO.

    • "When you think about it, if the brokerages always made sure you had enough margin to cover you in all eventualities, there would be no such thing as margin calls."

      They don't make sure you have enough margin in either the simple long position, or the covered put. While the margin requirements for a naked put are rather long-winded, it amounts to the same thing. If the stock falls to a point a margin call is triggered in both cases. In either case, a fast drop to zero will require an infusion of funds.

      I know "average investors" who insist on using naked puts to accumulate stock.

      You can also get into a nice rythm. Sell the naked put. If the stock then falls and you acquire the shares you can then sell the covered call. If the stock rises and gets called away, sell the naked put...

      The main reason brokers don't tell you about the naked put option compared to the covered call is that with the covered call you have to buy the stock and (perhaps) pay margin interest. With the naked put, you don't necessarily buy the stock, and you EARN interest on the encumbered money backing your naked put.
      Hence the positions are not equivalent. The Naked put writer is avoiding commissions and interest.

      "In any case, I don't disagree with your main point, only in the message to be sent to the average investor. "Writing naked puts is a risky endeavor for the average investor." Can we agree on that?" "

      If by "average investor", you mean "schmuck", I can then agree. The concepts aren't that hard. It just takes a little thought. Not beyond the scope of the average investors that I know.

    • 30% of the market value, +/- in or out of the money, minus the premium you receive. ie, .30 times 40 = 12,000 - say 1500.00 (10,500) - out of the money (in the case of puts) -800, = 9800.00 in requirements for 10 40 dollar puts. this is marked to the market as the price fluctuates, but that is your initial requirement

    • <<No, the naked put writer has to put up cash or margin to cover just such a scenario.>>

      Actually, it is not that simple; I believe brokerages have a complex calculation to determine how much margin is required to perform specific transactions. Your scenario would probably be correct for a simple account with cash plus one equity and accompanying options, but when you have 50 different positions which include a wide variety of long and short shares and options, the requirements tend to be more lenient (presumably they have some sort of "averaging" element in their calculations which allow an investor to extend beyond what you might expect). I asked Schwab about it once and they explained their formula to me, and it was quite complicated. I don't remember the details (I don't tend to get close to my margin limits in any case, so it's not very important to me.)

      When you think about it, if the brokerages always made sure you had enough margin to cover you in all eventualities, there would be no such thing as margin calls. But as we all know from the recent tech bubble debacle, they will definitely give you enough rope to hang yourself.

      In any case, I don't disagree with your main point, only in the message to be sent to the average investor. "Writing naked puts is a risky endeavor for the average investor." Can we agree on that?

    • Incidentally, you may be aware of restrictions on IRA accounts which allow selling covered calls, but not naked puts. This is not because the risks are different in principle; it is because they are different in practice. Psychological differences do affect risk for the average investor. (If all investors were supremely disciplined, we probably would not need those restrictions.)

    • I agree. You have to understand what you're getting yourself into. From that perspective, it is not equivalent, i.e. it takes some incremental education to understand the dynamics of the options market.

    • "but the difference is that the stock buyer obviously had the CAPITAL to cover the loss in the first place (often not true for option players)"

      No, the naked put writer has to put up cash or margin to cover just such a scenario.

      I open a margin account with $2000.00. I buy 100 shares at 40. I sell the August 40 call for $300.00.

      You open a margin account with $2000.00. You sell the naked august40 put for $300. The broker insists that you DO have at least $2000 in the account which is 50% of the price of the stock.

      Would you tell me under what circumstances the value of the covered call position is different than the naked put position.

      If the stock WERE to fall to zero, both parties would have to pony up $1700.00.

      )

    • <<5,000 puts and calls at 40 are now at zero. Nada, nothing, both completely wiped out by this greedy pig of a specialist. Obviously the 40's were set up long ago to expire worthless and probably written as naked calls and puts by the option market maker and the KKD specialist working together to maximize their profit's. At 1.50 each they pocketed $750,000 for their troubles this month. It's a license to steal.>>

      Well, they didn't write ALL of those 5000 contracts - I wrote a few of those puts myself last Friday. (I only got $1.35 for mine; I had orders in to sell twice as many at $1.60, between the spread at the time, but didn't get filled.) If you can't beat 'em, join 'em...

      (Note: Writing naked options is one of the riskiest things an individual investor can do. Don't be tempted to do it unless you fully understand the concept and are prepared for the worst case scenario, which can include huge percentage losses, margin calls, etc.)

    • "Obviously the 40's were set up long ago to expire worthless and probably written as naked calls and puts by the option market maker and the KKD specialist working together to maximize their profit's."

      Mike, why don't you put a tattoo on your forhead that you don't have a clue as to how the markets work.

      Do you also believe the moon landings were a hoax?

      Do you believe that the specialist and the option market maker are part of the Illuminati Mason conspiracy?

      Have you been seeing black helicopters spying on you?

      Do you believe that Big Oil has bought all the carburator patents so cars will continue to guzzle gas?

      I believe that you are a dweeb.

    • View More Messages
 
KKD
16.71+0.04(+0.24%)1:27 PMEDT

Trending Tickers

i
Trending Tickers features significant U.S. stocks showing the most dramatic increase in user interest in Yahoo Finance in the previous hour over historic norms. The list is limited to those equities which trade at least 100,000 shares on an average day and have a market cap of more than $300 million.