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Trading Writing Options on Margin Loans

Discussion in 'Shares' started by Grar Industries, 14th Dec, 2007.

  1. Grar Industries

    Grar Industries Member

    Joined:
    13th Dec, 2007
    Posts:
    9
    Location:
    Brisbane, QLD
    Hi all,

    I have been trading with NAB Online Trading for a few years now (with some success) so I decided to establish a margin loan through NAB Margin Lending. With this facility I wanted to:

    a) buy shares and write covered calls on these shares; and
    b) keep the rest out of the market - instead using it as collateral for writing put options

    However, NAB Margin Lending do not allow investors to write put options (and apparently they're not alone - many of their peers have similar policies).

    Many people cringe when I mention I'm interested in options; but I think there is far less risk in sensible option trading, when compared to share trading. I would write (if I was allowed!) out of the money calls and puts with a short time to expiry. If I was ever exercised, I would not be disappointed because that means I would be selling shares at a price I was comfortable with and locking in a profit (calls) or locking in a bargain buying price (puts).

    In the event of a catastrophe I could always buy back my put options to close out my position and minimise the loss.

    Does anyone know of a margin lender that allows both calls and puts to be written?

    Or better still, does anyone know of an alternative financing arrangement with the following features:

    * the freedom to use the funds however I wish
    * interest only facility
    * low/no monthly fees
    * not secured by property (I don't have one! If I had a property, I would be applying for a line of credit)

    Thanks for reading,

    Grar Industries.
     
  2. The Stig

    The Stig Well-Known Member

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    3rd Dec, 2007
    Posts:
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    Location:
    Central Coast NSW
    I presume you have money to invest already.

    So why not write options on cheap stocks like Telstra and Lihir Gold?

    And just keep adding to your account every week.

    Other than that, you are 100% right. Options are meant to be sold ;)

    I am doing basically the same thing in the USA. I am using ETFs though to eliminate the risks associated with trading a company's stock.

    Cheers
    The Stig
     
  3. crc_error

    crc_error The Rule of 72

    Joined:
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    Location:
    Melbourne, VIC
    comsec allow me to write put options... I didn't think this is a big deal?

    Writing a put option is the same risk as buying a stock..
     
  4. Grar Industries

    Grar Industries Member

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    To The Stig: Yes - I have approx $21k of my own shares. It's just a psychological thing. I had it in my head that the higher the share price, the more volatility (i.e. the higher the premium I could earn) but Lihir is a good example of the opposite!

    To crc_error: I agree - it's not a big deal. Thanks for pointing me in Commsec's direction!
     
  5. DaveJ

    DaveJ Well-Known Member

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    Have you ever traded short PUTs?? If so have you ever had a Short PUT position go against you? I am talking about 100%, 200%, 500% loss before the option market even opens (options market opens around 1030 while the stock market opens around 1000).

    Have a look at some of the options from todays market?? HUGE LOSSES if you were short PUTs. (Tradingroom Homepage - can do 'course of trades and show % P/L on option codes).

    Writing a PUT option is not the same as purchasing stock... The payoff diagram looks similar but a short PUT has a much higher price movement due to volatility and time decay... Payoff diagrams usually show the position 'at expiry' not what happens before expiry day.

    Writing PUTs in a 'Toppy' or 'Topping' market is a VERY dangerous strategy in my opinion.... You may get it right for 7mths+ but that one month will take away ALL your profits and then some!... Google 'LTCM' for what happens when 2 noble prize winners started writing PUTs....:rolleyes:

    Just my opinion of course.
     
  6. The Stig

    The Stig Well-Known Member

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    Location:
    Central Coast NSW
    DaveJ, selling puts is a great way to get into a trade and is the only reason why I would sell naked puts or recommend to trade them.

    example for those that need a lesson.
    Lets say you do your homework on Telstra and you think it is the best company in the market. Say you think it is worth no more than $4.50

    You can buy Telstra 2 ways. Put in a limit order to buy 1000 Telstra shares and wait and wait till you are filled. Once Telstra hits $4.50 you will get filled. This could take a few months.

    Or you could sell 1 naked $4.50 Jan 08 put. You get a credit while you wait for Telstra to hit your $4.50 strike.

    If you are scared of the downside you can buy a $4.00 put for protection under neath your short $4.50 put.

    Options are a great tool when they are liquid LOL.
     
  7. DaveJ

    DaveJ Well-Known Member

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    I agree... If you have the $$$ to keep the stock if you get exercised the strategy does work well. But what happens if the stock keeps going down? After all by thinking it will go down you are buying a potentially 'downtrending' stock. Why not wait until there is some support of buy in an uptrend? Make more sense to me?

    Yes it can work well but it is not without risk... Its the old Higher reward Vs higher risk...

    Interesting to see what the numbers would have been had someone thought CNP(Centro Properties) was worth about $0.50 cheaper then what they traded last week... :confused: The losses would have been HUGE!

    I agree... Works for me too but i prefer Spreads (two options) instead of naked. To much risk for me (Yes i have learnt the hard way!:eek:)
     
  8. The Stig

    The Stig Well-Known Member

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    Central Coast NSW
    I am just reading the announcements from Centro now. Interesting.
    I wonder if Westpac will buy these guys up too LOL. I hope so if the numbers work out for them :)
     
  9. Grar Industries

    Grar Industries Member

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    Brisbane, QLD
    Hi DaveJ,

    I've never actually traded short puts before but I've been watching (with spreadsheets) from the sideline for a while now. I agree with The Stig - being prepared to buy the shares if exercised is half the fun. And if you are assigned the shares you can immediately write a covered call for more income (albeit at a low premium if the share is downtrending).

    If suddenly the shares don't look like such a bargain at the strike price, closing out your position may incur a loss and it may be a HUGE % on the premium but I'm only a small player, so the actual $ loss will never be disastrous (unlike LTCM! BTW thanks for the history lesson - I've never heard this riches to rags story ;))

    Just one thing on being assigned though - I'm interested to know how much your broker charges you? I've asked Commsec and NAB and I think they both said $0.55. Does this mean $550 per contract? If so, this sounds pretty hefty and may completely negate any benefits obtained from locking in your buying price. Please let me know!

    Thanks again.

    Grar Industries
     
  10. DaveJ

    DaveJ Well-Known Member

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    Exercising is a stock trade so it will depend how big a position it is and what your broker charges you.
     
  11. Ol School Skata

    Ol School Skata Well-Known Member

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    I use commsec and have had shares assigned through automatic exercise/assignment via an options contract. I am sure the 55c is 55c per option contract.

    eg you wrote 5 option contracts - charge for exercise/assignment is 5 contracts x 55c = $2.75.

    Hope this helps.

    OSS
     
  12. Grar Industries

    Grar Industries Member

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    It does.

    Thanks Ol School Skata.
     
  13. DaveJ

    DaveJ Well-Known Member

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    Plus brokerage... So per option price * number of options.... PLUS Brokerage

    Well that is how i get charged.
     
  14. DaveA

    DaveA Well-Known Member

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    Location:
    Sydney, NSW
    and brokerage kills you if your hedging something small...

    Comsec fees are like $60, so it costs you $62.50 to hedge your 5 contracts.... its just difficult...
     
  15. thomsg2

    thomsg2 New Member

    Joined:
    31st Dec, 2008
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    Location:
    Perth, WA
    Writing Puts

    I have been writing options in the US market for 2.5 years with modest success - i am still learning. The market is much more liquid - OptionsXpress or ThinkorSwim are very cheap brokerages.

    My view is i would never, never, never write naked calls - far too risky.

    I write naked puts at historical lows and/or below support on fundamentally strong companies- if it then breaks support I choose to buy back the option or be exerciesd and buy the stock and write out of the money calls.

    Graham