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Comment by trianglem | Hacker News Reader

Selling puts on a reputable stock is a great way to enter a position though. Anecdotally it has worked for me. But am I stupid or naive? Genuine question.

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If the alternative was going to be buy and hold on the same underlying anyway it’s a perfectly ok strategy, certainly not a stupid one. Worst case is you get assigned a stock you wanted to own anyway, but at a discount to the original face value + you’re paid to do it.

Actual worst case is the underlying pops and you “only” get the premium you collected and not the full upside.

So definitely not a profit maximising strategy but still a reasonable one. Especially if the market/underlying are generally moving sideways.

but when you sell options you are betting that the stock won't move towards the direction described in the option because if it does you are going to be margin called by your broker.

I don't know exactly how it happened but someone on wallstreetbets a while ago said he woke up to find he was -250% and asking what to do. I assume he wrote bunch of options which ran against him.

It's disturbing because I talked to this kid literally a week before I told him I blew up my account buying far OTM puts (I was right about the price but SEC froze the stocks far past the expiry).

If you have enough cash + leverage to buy the underlying on the puts you won't get margin called, you'll get assigned.

This is an over simplification and generalization of what the underlying motivations might be.

I will semi-regularly sell puts with a reasonable expectation of being assigned. It is in effect the same as putting a limit order in, with the upside of getting paid for doing it.

There are two failure modes of this strategy.

1. New information comes to light, the stock crashes, and you realize you were wrong and the stock is a dog. You no longer want to own it at the strike price. Oops. You effectively bought it above your updated estimate of its worth.

2. The stock keeps rising and rising, you collect the option premium but you could have made a lot more money if you just bought the damn thing outright.

These are more subtle failures than the usual "Oh my God, I blew up my account!" but they're real.

It's perfectly fine to keep doing what you're doing if you're comfortable with this risk. There is no strategy without a downside.

here's the thing you simply don't know when CNBC will start shitting on it and then cause a dip that would put you in the red. So you could be eating for 200 days and then blow up your account and this does seem to happen to traders.

but I am thinking what if you were writing LEAPS. We've been in the longest bull run in history since 2009, so you could've made a lot of money selling LEAPS until maybe 2020 where you would blow up your account and end up owing more than your balance.

Also another area that I could never find an answer on: i was told most traders never excersie their options. so if you sell puts and they never exercise you don't have to deliver the stocks right? you just end up paying what the options market price is on the day the reputable stock dips?

> i was told most traders never excersie their options

What you were actually told was probably that most options expire worthless.

How do you feel about covered calls? From a risk perspective they are equivalent positions, limited upside and big downside risk.

They are not equivalent positions. Selling covered calls has unlimited loss potential.

Do you mean selling uncovered calls? With a covered call your potential profit is capped, but you aren't exposed to the infinite risk of buying the stock (since you already own it) at a bananas price if it exceeds your strike.

Selling covered calls can be a fine substitute for limit sells if used carefully. Assuming one is comfortable selling at the strike price, the covered call trickles a little profit in the meantime.

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