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Oxford Resource Partners, L.P. Message Board

  • moneyonomics moneyonomics Feb 13, 2013 8:30 PM Flag

    Lisa-yahoo will not let me reply to your reply but thank your for the great response

    it was very informative

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    • That is only less than half the response. I have 3 more paragraphs typed (and saved in a file), but yahoo would not let me post it. It must object to some word in there but darned if I know what.
      Since it wouldn't let me post the whole reply, I tried the first two paragraphs and that worked, but when I try the rest, it's no go.

      • 1 Reply to lizahuang54321
      • see if I can post the rest now...

        "lisa with the dividend /distribution paying stocks do you sell puts ITM to force the dividend/distribution to you or OTM and let the dividend/distribution go to the other party?"

        Don't quite follow you. I roll forward each quarter so never actually get assigned. And since I never get to own the units I don't collect actual distributions. However the distribution amount is baked into the put premium - for example when I roll forward by one quarter, it is the same as allowing the holder of the puts (who I believe is usually the market maker rather than another investor) to collect one more distribution before they get rid of their units. So that extra distribution is factored into the premium for the puts. So, in effect, I collect an amount similar to the distribution however in the form of put premium (capital gains) rather than as an actual dividend or distribution. Whether the puts are ITM or OTM has no bearing on that.

        As for whether I use ITM or OTM, I usually start out slightly OTM (10-20% depending how volatile the underlying is) and then keep rolling forward with the same or higher strike price. If the unit price crashes, my OTM put may become ITM, however I have found that so long as I keep rolling forward well before expiration (ie. keep significant time value in the option) I never get assigned, even during mini panics like the 2011 debt ceiling debacle. I have had two cases where I temporarily was as much as 40% ITM (NRGY and CCJ, both back to a much lower ITM % now) but never got assigned and had no trouble continuing to roll forward. And it's not a bad thing to get assigned as I could easily unassign myself by selling the assigned units and reselling the puts, and if the assigned puts has significant time value then I would be better off than if I never got assigned due to capturing the same time premium twice (and since no one is going to do something which will make me better off, I guess that is the reason why I never get assigned).

        I have found that the best roll premiums are when the price is close to at the money. If it gets too far ITM then you don't get a good premium. So in case of stocks which rise in value I sometimes raise my strike price at roll time (and sometimes let a few of the contracts expire so as not to increase my exposure too much). On the other hand, I typically don't reduce the strike price when the underlying has fallen because I don't like paying back money I already received and these MLPs often have wide strike price increments (sometimes up to $5 increments). When starting a new put position or rolling forward and adjusting the strike I have typically been trying to keep it 10-20% OTM, however I have been thinking that my overall returns would be higher if I went to the highest strike that is still OTM. After all, if I keep rolling forward so as never to get assigned then it doesn't really matter what my strike is, so long as I manage my margin requirement.

        The caveat is that this strategy has worked really well in generating income for the last 3 or 4 years I have been doing it. A repeat of 2008 would be a different story and that's why it's important not to overdo it and to calculate your leverage in a worst case scenario of 50% (or whatever) market drop.

        Final point is that although I collect 'distributions' (in the form of put premiums), the premiums will be taxed as STCG (no nice tax deferrals). I started out with big tax loss carryovers from 2008 but as I have used those up, I've started to become more active in harvesting tax losses to use as offsets for my options premiums. To that end, I've been 'lucky' to have a bunch of ex-Canroys which have gone down a lot (PWE, ERF, Petrobakken and a few others). So I've been harvesting tax losses by doubling my position then selling the original position 31 days later to avoid a wash sale, thus turning unrealized losses into realized losses and resetting my basis to a lower level. Then I use those losses to offset my options premiums. By doing this, I figure I can keep going with options selling a few more years without paying taxes. However once I use up all carryover losses and have no opportunity to create more, then I may stop or significantly reduce the put selling. If I had to pay full STCG rates on the premiums it would change the reward to risk ratio too much.

 
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