I posted a question for you but have not been able to find it myself (these mb really could use a redesign), let along your answer... i found your discussion of puts very illuminating - thank you for it. what you are doing is a lot like what i have started doing with mREITS... i'm new to the field and a little afraid to make a mistake... i have two questions:
1) how do you decide which puts to sell? do you look for highest premium or for lowest buyin price (strike - premium = this is the cost at which you commit to buy)
2) how do you manage the risk of getting exercised? (I am guessing you got exercised on line, didn't you get exercised on CCJ?)
Finally your fist question, which puts to sell.
That's a harder question to answer as it is like asking which stock should I buy.
I don't really like giving stock recommendations.
However stuff like the highest premium is not what I use to decide (although some people might), although if the premiums were too low on a certain security I might not sell puts on it for that reason.
I can tell you why I use mostly MLPs for the purpose:
a) they are high yield and since the yield is factored into the premiums, I do tend to get decent premiums on most of them. The more volatile the security, the higher the premiums will generally be. So from the MLP universe, if you are interested in high premiums, the variable distribution ones will likely fit the bill. You have already seen how volatile these refiners NTI, ALDW, CVRR are, so the options premiums are also going to be pretty good.
b) I invest in MLPs, have a portfolio full of them, follow them and know what is going on. So it makes sense for me to choose MLPs as options candidates. Use what you know and understand. Also just in case you do end up having to own it (although I explained elsewhere why it need never come to that) choose something you wouldn't mind owning. For example, one thing I think of when I sell options on a new MLP is this: given the current distribution and the strikke price of the put I plan to sell minus the premium I get for selling it, what would be the yield on the cost basis (strike price minus premium) were I to end up owning it and would I like to own it at that yield.
I'll leave it at that because there are any number of reasons why people would pick certain MLPs and stocks and this is really personal investing preference.
thanks for the education
Is their a book that one can buy to further educate one self with!
AS I understand you, I could do the following:
Buy naked puts, on say NTI --my guess is at least 90 day time frame
And my guess is that they are not in the money?
ANy way I am to tender footed do do any thing at this point
Stagg is well please with your put analysis and so am I! amazing stuff it is the execution that baffles me
thanks in advance
might i pick your fine brain one more time? i only dabbled in the refinery mlps way back when they were cheap and on a tear... (but they are so volatile, i mis-traded them and ended up making hardly anything at all). prices are back down, which is great for those outside, but things seem to have cooled off significantly -- the crack spread has jammed shut?... do you have any clues/gueses why it has closed and where it might be headed in the future?
thank you, liz. you're a true princess. this education was worth a ton of gold for me.
as for most commentators on your strategy... i got the same criticism/abuse/disbelief/disinterest/ridicule/name-calling when I tried to explain my strategy of shorting a stock into a public rights issue (i made a mountain of money shorting $10 strike calls on NBG and covering the day new stock was issued). people have this encoded in them that "options are risky" like they have it encoded in them that "higher yield is riskier than lower yield" (which is totally idiotic: if a stock with a high dividend goes up it somehow becomes **less risky!)
i owe you and hope to pay you back one day.
For the second question I have already written a detailed explanation (on investor village MLP board) on why the assignment does not happen so long as you keep sufficient time premium in the option. I didn't sell puts on line as I already own units. I did buy more units recently however. No, I was 50% in the money on CCJ at one point and never got assigned.
I will try to paste my explanation from my Investor Village post below:
Let's say LINE was $30 and you sold $25 puts.
LINE crashes to $20. Your puts do not expire for some months with one distribution between now and then so the puts have significant time premium remaining. The puts trade at $6 ($5 intrinsic plus $1 time premium).
The $25 puts are $5 in the money and you are worried about being assigned.
But consider the holder of those puts and that he wants to get rid of his units. First of all, since he is guaranteed to get $25 for them he is not likely to want to get rid of them yet. First, he will likely wait for the distribution and plan to dump the units after that. Second, he may be waiting to see if they recover to a price higher than $25. But let's say he wants to get rid of them now.
He could assign them to you and get $25 per unit.
On the other hand since those puts still have time value and are selling at $6, he could sell his units for market price of $20 and sell his puts for $6.
So instead of $25 he gets $26. So why would he assign the units to you when he can get an extra $1 simply by selling the puts and the units on the market?
continued in next post
But say this guy doesn't consider that and decides to assign his units and they are assigned to you. You have to pay $25 per unit for what are currently trading at $20. Disaster? Not at all. Just 'unassign' yourself: sell the assigned units for $20. Then resell exactly the same puts you sold before and which were just assigned. They are trading at $6. So after all this you end up with $20 for the units and $6 for the puts = $26 and you have exactly the same holdings you did before the assignment. Hey, you made $1 per unit on the deal (minus trading commission).
So rather than fearing assignment, you should be thinking 'Bring It On - Assign me please'. However since the market generally does not gift money like this, it is extremely unlikely to happen. The upshot is that if there is significant time premium remaining in the puts, you are very unlikely to get assigned (it never happened to me) and if you do then you benefit. So what's to be scared of?
Do you honestly believe she can tell you what to do?? There is NO reason to use options. I've invested for 30 years without using them. If you want to reduce risk sell some of your shares. Pseudo sophisticated people love options but there is NO evidence that most people make money with them.
Sentiment: Strong Buy
"Do you honestly believe she can tell you what to do??"
actually, she just did. liza is one of the five or so well informed and helpful people on yahoo message boards while you... you clearly belong to the noisy, rude, useless rest. i am putting you on ignore and so should everyone else
P.S. hedging risk is done buy BUYING options not selling them.
Think of it as insurance. The person who buys the insurance policy does so to reduce risk, right?
But that is not the motivation of the seller of the insurance. The insurance company is not in the business of selling insurance in order to reduce their risk, right? They are in it for the income (insurance premiums).
It's a very good analogy. People who BUY options are possibly doing it to hedge risk (there are other reasons but I grant you that is a reason). But I am a SELLER of options. For me it is nothing to do with reducing risk, it is to do with generating income. Just like the insurance company who sells insurance to generate income not to hedge their own risk.
I am the insurance company, not the policy holder.
Or in casino terms, I am the house while the option buyers are the gamblers.
Surely you can get this analogy? Or is even this too many words for you to take in?
Duh, the discussion wasn't about reducing risk. Didn't you get that much? It was about using them to generate an income stream. Sure you don't have to use them. You don't have to trade stocks either. No need to work to earn money, I guess. But if people want a simple way to make money, I have explained one way I am doing it. To the tune of $100,000 cash income per year with minimal effort (1-2 hours per month), and have been doing so for years.
"there is NO evidence that most people make money with them."
Duh, as you've said you've never used them, don't understand even the basic terminology and don't understand them. Yet somehow you are sure it's not possible to make money with them. Whereas I have been using a system I explained in a lot of detail and getting $100k into my account in cash every year for the last 4-5 years.
Do you wonder at the negative comments you've been getting from a number of posters when you make dumb comments like the above. Before you can conclude whether one can make money with them, it is necessary to learn what they are and how they are used. Your comment about reducing risk shows that you missed the whole point as this is nothing to do with reducing risk.