I made two trades yesterday (Friday). I started with Burlington Northern (BNI) from a limit order I had from a day earlier. While BNI was trading at $102.63 I sold one BNI September 95 naked put (BNIUS) and received $259.25 after commissions. I’m already long 100 shares of BNI from the July 105 naked put assigned to me. Since I sold a covered call at the September 95 strike more than a week ago, BNI has rallied. I guess I’m having a little seller’s remorse and decided that BNI is still a good play. Selling the naked put at the same strike as my covered call, making this a straddle, guarantees me to have made the correct decision on one of the trades. If BNI does dip back below 95 before options expire in September I’ll have 200 shares of a good dividend paying stock that Warren Buffet considers worth owning too. I think with gas prices high that it will stay up close to where it is if not better. As luck would have it for me, Barron’s mentions BNI on its cover as a good buy in this weekend’s edition. If BNI closes at the September expiration at 95.00, I win on both in full and I’m clearly a genius. Don’t bank on that.
I’ve lost on NVDIA (NVDA) in the past and thought I should give it another go with my lessons learned keeping me from repeating the same mistakes. (This will remain the worst stock I’ve played since I started blogging more than 15 months ago.) Originally (this round) I sold sold four NVDA August 17.50 naked puts (UVATT) and received $347 and then after it tanked I sold four August 15 naked calls for $187 (UVAHC). NVDA announced they were cutting a product line today after having other troubling issues earlier that started the massive decline and I decided NVDA was dead money and cut my losses by buying back the puts (UVATT) today for $2652.99 while NVDA was trading at 10.92. Essentially I took a loss overall of $2118.99 assuming I don’t have to buy the calls back. I’m staying short the calls to let them expire in August because I don’t see a chance at all that NVDA will recover beyone $15 by then. Apparently most agree with me since I could probably get out for $.05 plus commissions. I won’t be back in on NVDA for a long time as the lesson I’ve finally learned is to find something better than NVDA.
NVDA is another example why stocks should be avoided — only ETF’s. ANY stock can go bankrupt and/or tank 50% overnight — who needs that? I have a few stocks that I’m working my way out of but anything new is an ETF, such as: UYG, DXD, IWM, TWM, XLE, EFA, EEM, etc… Plenty on option opportunity in that list.
While I can’t agree with you about avoiding all stocks, I’m moving a little more towards ETFs too. USO is the only one I’m in now, but I’ve started eyeing more. Thanks for the additional list for further research Mule.
The same thing happened to me with WB. I’m still sitting on paper losses from getting 4 Puts assigned at $22.50. While I think WB will recover, it might be a while. Thankfully, I can hold the position, but it is still painful.
I see what mule65 is saying, and I’m still evaluating a Put strategy that I’m comfortable with. But I have to disagree with selling Puts on short ETFs like DXD. It seems that short ETFs have no long term future. They may be good for capturing current conditions, but can’t possibly (unless I’m overlooking something) creep ever skyward. This removes the possibility of rolling over ITM options on expiration date. With DIA though, there’s pretty much a 100% guarantee that, over time, the DOW will end up. Thus, if you are ITM on a DIA Put at expiration, you know that you can keep rolling it over to eventually capture the upside, all the while capturing time premium.
Take a look at today’s DIA options. You can sell August 111 DIA’s for potentially $1.09. Thus, two weeks before expiration, you’re still able to capture a time premium of 1% (14% cumulative annually). Or you can start a 6 week cycle, and sell the Sept. 111’s at $2.73.
So yes, I’m tending to agree that ETFs might be safer than securities, but Long ETFs seem much safer than Short ETFs due to the almost 100% guarantee that rollovers will pay off sooner or later.
I agree with mule65 on shifting from stocks towards ETFs.
However, as they say, there is no free lunch. The premium you can collect on ETFs by selling naked puts or covered calls is usually less than what you can collect on individual stocks.
So at the end of the day, it really boils down to your own risk appetite and that should help you decide if you should go for ETFs or individual stocks.
Just my opinion…
Cheers
Vikas
That’s the problem with being long theta and short gamma. The black swans kill you. I don’t think you should ignore stocks just because you’ve been burned. That’s going to reduce your investment universe for no good reason. It might be worthwhile to change the thesis though.
!Herbert- If you think the inverse ETF’s “have no future” then you could short them or sell naked calls. IMHO, the short ETF’s used with Options are a great way to hedge a mostly long portfolio and a 2X leveraged ETF like UYG is great in an IRA.
my 2 cents, sorry for the NVDA losses, 1 less stock to consider can’t hurt anything. i don’t know alot about etf’s, but tend to feel anti-etf, much like mutual funds. if we learn to hedge our stock plays, there is much less risk, how? i don’t know, but i’ve started some vertical spreads, and find comfort in high % return possibilities and time management and money management that the spreads “assist” me in…. don’t misunderstand, i got burned in 2007 on a couple stocks, but could have held, and still had some cash, and also had to many eggs in the basket, so i’ve been forced to find a way to hedge my bets, but i refuse to give up ‘dreaming’ of high % returns in stocks and options, so maybe eventually i’d look at the etf world, but currently that is not what i have to do.
If you believe that you generate alpha then over-diversification is your enemy. Company specific risk is what makes you the money. That being said, there’s a lesson in position sizing that you should not let any one of your positions kill you.
True about diversification – I go big (relative % to my total account value) into different positions, but not so big that a wipe out of one equity would kill me. I do hold larger positions than most investors who consider themselves diversified. I believe I tend to generate alpha because I allow myself to sell naked puts on more underlying value than I can afford to own all at once. It increases downside risk too, but I’ve been able to manage that for the past few years.