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American Capital Agency Corp. Message Board

  • igsteri igsteri Apr 9, 2013 12:57 PM Flag

    Doc- put selling question

    Hi Doc, hope you are well. In regards to consistent income vehicle , I found a post by Liza Huang over at the mlp's boards, here is what she does for income:

    "On top of my portfolio holdings (mostly MLPs and trusts, all high yield), I add income via a systematic method I devised of selling naked puts. I sell puts on a bunch of other high yield instruments (mostly stable pipeline type MLPs) which I don't have positions in and then roll the puts forward on a quarterly basis. Since different ones are on different 3-monthly options cycles, I roll forward one third of my options positions each month for an extra source of monthly income. I sell mostly the furthest month and roll forward when a new expiry becomes available (usually means rolling from 5 months out to 8 months).

    With this system, I just keep collecting time premium indefinitely. On high yield securities like MLPs, the time premium includes the distribution (as someone who would keep the units during that quarter gets the distribution so it becomes part of the time premium). As a result, every month I collect an amount roughly similar to the distribution only without ever buying units. Since I keep far out on the expiry, there is always significant time premium in my positions which means I am never likely to be assigned even if they are well in the money. I have been doing this for years and never been assigned even when a couple of times I had positions which were temporarily 40% in the money. If I was to be assigned, I would simply unassign myself by selling the assigned units and then reselling the puts. "

    So I wonder if this system is polished could It make a significant monthly income, and if instead of naked puts one sells covered puts ?

    You've probably already considered this system. Any thoughts?


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    • Hi Igster,
      I have traded and spoken about short Puts for years here on this and other boards both with Ephort and many others ...where are you Ephort?...
      Lenloc over on the MTGE board has spoken at length about re-cycling short Puts which your poster speaks about.

      It is not entered into lightly. I made much money shorting AGNC and MTGE short Put Leaps(now the 14 and 2015 contracts). You can get over your head quickly with sometimes no good way out.
      ""and if instead of naked puts one sells covered puts ?""
      I suggest you take some basic option courses at the OIC education website as it will help you understand the concepts of shorting Puts much better than my few sentences.

      I will probably just confuse you further but you mistake the idea of covered calls with covered puts. There are two main themes:

      1) Naked Puts, which involve shorting Puts with no Short Share positions. This theme involves shorting the Puts with not enough cash to cover assignment(non-cash secured), and shorting Puts with sufficient cash necessary to pay for assignment.
      2) Covered Puts. This strategy involves shorting the shares of the underlying security and shorting a corresponding number of Puts. Very risky, because there is no limit to the price the stock can rise, eating up the credit you received for the Put and sailing on up to infinity with your short shares in tow.

      There is much , much more to this topic, such as having a 2008 go against a large position and not being able to recycle because of lack of margin and/or cash because of the larger amount of credit you are rolling forward.
      Folks here have told about how they are still smarting from that era. Short Puts are good in theory but they involve much risk and intestinal fortitude when things go wrong. Then we haven't talked about how the bid/ask are very wide on Leaps in MLPs especially in case you wanted to get out. We haven't talked about the PPS moving against available strike prices so you can no longer cover your strike...

      • 1 Reply to reits_r_us
      • Ran out of space...but you must get two main points:

        You need to have a thorough knowledge of options before shorting the same. You must know every conceivable worse case scenario and then plan for it.

        Second it needs to be a very small part of your trading portfolio. I never allowed it to be greater than 5% of mine. I recommend that you always have enough cash to pay for possible assignment. If you short 50 contracts of Goog780Puts and are assigned you need to pony up $3,900,000. That is not a typo(almost 4 million).

        Therefore I like to short low priced high dividend securities. You get, as the poster stated, the forward dividends in the premium and are paying roughly under 45 dollars/share if assigned instead of 780/share for GOOG.

        There are books written on the topic...;-)



    • I can't comment on Lizahuang but she is very knowledgeable on MLP and stays invested in about 38 different MLP investments. But she can be a little grouchy :)

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