Amit Chokshi

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  • Selling Bank of America Puts Is As Safe As It Gets
    The title of the article is that selling BAC puts is as safe as it gets. Selling naked puts or naked calls is one of the riskiest plays you can make in markets. As far as the margin for the naked put, you're forgetting that you're marking to market too. The cash requirements will go up but now you're going from havign cash of $6k required to $18k, that's a huge increase in cash that's required. You're also marked to market on those options so that $1300 that you're short, if the stock goes down, that is going to show up as a huge negative value to your portfolio and will constrict your flexibility. Have you actually run the numbers in terms of how the greeks will impact that stock option for every BAC stock move?

    Your strategy is very very risky given how far dated the options you're short are. You have no hedge, if you're going to play the option and it seems you mean to imply you want some income as opposed to "playing it", set up a vertical or horizontal spread where you partially hedge your risk. Takign a quick look at the BAC options it seems you've gone to the Jan options because those are the only ones that have some "meat" to them which to me suggests there's even a bigger problem because you're short volatility. The option premiums for BAC look fairly low, so you're taking on more risk by going further out to get some fatter income but you're doing it at low volatility (relative to most options)

    Everything you say regarding the probability of BAC falling/dividend cut may be true but you're dealing with a skewed return profile. If BAC is down to even $37 or $36 per share and you're assigned, you're paying $38.70 for a stock that is worth $37. If they're down to $35 or $30, you get the picture. And if you look at some of these megabanks back in the early 90s, these stocks has dropped into the teens.
    Aug 10 18:41 pm |Rating: 0 0 |Link to Comment |View article
  • Selling Bank of America Puts Is As Safe As It Gets
    Yeah but if you're long BAC as it is and the stock drops you're taking big losses on the short put position and the stock. Options are marked to market and you're taking a loss on BAC stock and the puts. I have no idea what the delta and gamma on those puts are but if BAC stock falls even to the low to mid 40s you're going to have to put more cash in to maintain margin. So your BAC stock value drops and you need more cash for collateral for the declining put value. Also, dont underestimate what can happen in 5 months, look at how stocks like C and JPM did in the early 90s, a 13% drop is nothing in terms of demonstrating any bottom or stability has been reached. With those puts you're on the hook for buying them at $40 no matter what, if BAC stock is at $30, you're really underwater on that purchase.

    So if that stock is at $30, you're down on your BAC stock holding and are now assigned a stock you have to pay $40 less that $1.30 premium for. Also, you've had to put who knows how much cash into that brokerage account as the short put value has gone the other way on you. Don't forget the opportunity cost of that collateral/margin cash you need too, that just sits there in your account when you could have been investing it elsewhere.

    I think selling puts is an ok at best idea using short dated options if you want a stock at a specific price. That way you have theta decay working for you at a more rapid pace. Most longer dated options under-price volatility and theta decay is nowhere near as pronounced which is why being a buyer as opposed to a writer is preferable for longer-dated options.
    Aug 09 19:28 pm |Rating: 0 0 |Link to Comment |View article

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