Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I was wondering if anyone had ever thought about writing puts on margin. I've been working through what appears to be a bit of a hack that I hadn't considered before.
My thought is to write puts on shares of companies I would like to own if the price came down (like limit orders) and use the premium to buy a few shares right now.
My rationale:
1. Puts on Margin cost nothing. They are interest free because it is just collateral.
2. I keep ~ $20k in savings accounts earning basically nothing in case of emergency.
3. I have future earnings from my employer that I can't access, but if I look at ~3-4 months the probability of me not receiving this income is basically 0%. This can also be considered a perpetual wheel because every time I receive a paycheck the probability of receiving the next one in the chain becomes the same. Example if I have 24 paychecks in a year. If I work under the assumption that I am considered safe for 4 months before I have received paycheck 1 paychecks 1-8 are considered safe. When I receive paycheck 1 paychecks 2-9 are safe and so on.
I've done some basic math and under these 3 premises I could reasonably garner ~$7-$9k/yr in premiums. If we look at that as a return on my cash in savings account that can be considered basically a ~35% return on my savings account (plus future earnings, but I couldn't reasonably invest those anyway).
Worst case scenario is that all puts become ITM and I don't currently have the cash. But you can almost always roll down and out for several months and while you wouldn't be earning much in premium you'd be protected from assignment until you get the cash and borrowing interest free for longer than intended just hurts my returns and at the end of the day these are stocks I wanted to own anyway. If something changes I can just eat the loss by BTC the derivative contract.
Anybody ever done anything like this to leverage their future income to make them money today?
I assume you're discussing selling a naked put rather than a covered put? (a covered put would be simultaneously selling a put and shorting the security in equal numbers)
I assume you're discussing selling a naked put rather than a covered put? (a covered put would be simultaneously selling a put and shorting the security in equal numbers)
It's naked in the sense that I currently don't have cash to cover it. I'm using the margin provided by my broker as the collateral, but margin as collateral isn't really margin in that they don't charge you an interest rate for the collateral. But per my example above it's not technically naked in that I could cover it if the derivative ended up ITM. I may just need to roll down and out a month or so to accept assignment with cash.
It's naked in the sense that I currently don't have cash to cover it. I'm using the margin provided by my broker as the collateral, but margin as collateral isn't it really margin in that they don't charge you an interest rate for the collateral. But per my example above it's not technically naked in that I could cover it if the derivative ended up ITM. I may just need to roll down and out a month or so to accept assignment with cash.
It’s technically naked because you are not short the security you are writing puts on.
It's naked in the sense that I currently don't have cash to cover it. I'm using the margin provided by my broker as the collateral, but margin as collateral isn't really margin in that they don't charge you an interest rate for the collateral. But per my example above it's not technically naked in that I could cover it if the derivative ended up ITM. I may just need to roll down and out a month or so to accept assignment with cash.
Sure, there is no interest paid since you are not borrowing money. There are still commission on option trades, AFAIK. Of course there is always the risk of a margin call in situations like you describe. In a market decline your liability increases and your collateral decreases (assuming long positions).
Do a web search on "Victor Niederhoffer" to see what can happen if write too many naked puts.
It’s technically naked because you are not short the security you are writing puts on.
I mean sure, yes it's "technically" naked at the time of writing the contract, but I will have the cash to cover it. I won't need to actually borrow money from my broker.
Quote:
Originally Posted by hikernut
Sure, there is no interest paid since you are not borrowing money. There are still commission on option trades, AFAIK. Of course there is always the risk of a margin call in situations like you describe. In a market decline your liability increases and your collateral decreases (assuming long positions).
Do a web search on "Victor Niederhoffer" to see what can happen if write too many naked puts.
$0.50 to write a contact. I'm not talking about leveraging myself to the gill here, I'm talking about a way to leverage a bit of my future earnings for a small return. I'm talking ~$60kish. I usually have $20-$30k in cash anyway and our HH income is ~$305k/yr and have $300k in my brokerage, mostly in conservative stuff like index funds and BRK.B.
I mean sure, yes it's "technically" naked at the time of writing the contract, but I will have the cash to cover it. I won't need to actually borrow money from my broker.
Sure, then there's no risk of insolvency. Some investors refer to these as "cash covered" options.
naked put means you dont have a short position .
say I short 100 shares of TSLA at $930,and I have a put option on TSLA expiring 2/11/22 ,strike price $925,thats covered put.
In your case,you are talking naked put,you need to review your broker's margin requirement on options.
It is not free,what do you have in your margin account?
Sure, then there's no risk of insolvency. Some investors refer to these as "cash covered" options.
Yes, but my main point is that in typical accounts if you are cash covered you literally have the cash to write the put today. I won't have it until a future date (near expiry).
Quote:
Originally Posted by mojo101
naked put means you dont have a short position .
say I short 100 shares of TSLA at $930,and I have a put option on TSLA expiring 2/11/22 ,strike price $925,thats covered put.
In your case,you are talking naked put,you need to review your broker's margin requirement on options.
It is not free,what do you have in your margin account?
What do you mean it's not free. Margin as collateral in a margin eligible account doesn't accrue interest, at least not in my margin eligible brokerage. I understand how to write puts and calls. I've been doing it for over a year. I'm asking if anyone has leveraged the margin as collateral to basically take a "forward" on your income and as a way to squeeze a bit of a return on cash that usually sits in a savings account earning 0.5%. I've done this before where I had out about $20k more on puts than I had cash in my account, so I know I can do it, I'm just wondering if others do it regularly.
I was wondering if anyone had ever thought about writing puts on margin. I've been working through what appears to be a bit of a hack that I hadn't considered before.
My thought is to write puts on shares of companies I would like to own if the price came down (like limit orders) and use the premium to buy a few shares right now.
My rationale:
1. Puts on Margin cost nothing. They are interest free because it is just collateral.
2. I keep ~ $20k in savings accounts earning basically nothing in case of emergency.
3. I have future earnings from my employer that I can't access, but if I look at ~3-4 months the probability of me not receiving this income is basically 0%. This can also be considered a perpetual wheel because every time I receive a paycheck the probability of receiving the next one in the chain becomes the same. Example if I have 24 paychecks in a year. If I work under the assumption that I am considered safe for 4 months before I have received paycheck 1 paychecks 1-8 are considered safe. When I receive paycheck 1 paychecks 2-9 are safe and so on.
I've done some basic math and under these 3 premises I could reasonably garner ~$7-$9k/yr in premiums. If we look at that as a return on my cash in savings account that can be considered basically a ~35% return on my savings account (plus future earnings, but I couldn't reasonably invest those anyway).
Worst case scenario is that all puts become ITM and I don't currently have the cash. But you can almost always roll down and out for several months and while you wouldn't be earning much in premium you'd be protected from assignment until you get the cash and borrowing interest free for longer than intended just hurts my returns and at the end of the day these are stocks I wanted to own anyway. If something changes I can just eat the loss by BTC the derivative contract.
Anybody ever done anything like this to leverage their future income to make them money today?
Your brokerage company will need to approve the higher level for options, which allows naked calls or puts. Why not just buy the stock you really want, and just sell weekly covered calls? But if this is being done with emergency savings, I wouldn't be doing any of this. Emergency funds are there for a reason, right?
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
