My main goal is to find companies that are good for writing options on! I currently have a November $80 put on Skyworks. I tend to choose low strikes for puts to be careful, and I also would probably buy in the money for a SWKS leap. #1
Some people over at Pro are talking about bull call spread after I brought up the LEAPS idea. I also wonder about synthetic longs, but I have never tried that strategy / might be too complicated for me as a beginner. #2
I am not a member of the MF Options. But I can been using options for a while so I can offer you my opinion on options. In particular, there are 2 separate topics that I can address. I’ve labeled them #1 and #2 above.
I’m assuming that when you say that you have a Nov15 $80 put on SWKS, you have a short position on. Is that right? That is a very low strike price and it also has a lot of time remaining on it. If you believe that SWKS is extremely undervalued as I do, then selling that particular put is not the best approach (IMO). The first problem is that the strike price is too low. I do not know when you sold that put but you are limiting your gain to a very small premium compared to where the stock price could be in November. My guess is that SWKS will probably be somewhere between $125 and $145 in November. You need to come up with your own prediction. If it rises to $125 then you have left $45 per share on the table! In addition, you’ve had to use part of your available margin by having that position open until November. This means that you have the exposure of the short put for a long time without the chance to make substantial returns. The only value left in that option is the time value which decays at a glacial pace that far away from expiration. Thus, you aren’t really reaping the benefit of the remaining time value until expiration is almost upon us.
If you want to sell puts, what you do depends on what you think will happen with the stock price. Using the example of SWKS, I believe SWKS is undervalued. I also believe that the stock will continue appreciate to at least $125 in the next 6 months. Of course, I could be wrong, but this is what I am considering when I select which options I want to sell. One approach is to sell puts with strike prices that are near or slightly above the current stock price. When doing this it is better (IMO) to select expiration dates that are not very far away. I typically select strike that are about 1 week away from expiration. If the option expires worthless, I pocket the premium and repeat it for the following week. If the puts are in the money on the last day before expiration, I buy them back and sell the following week’s expiration (usually same strike) usually for a net credit. I get a net credit because the time value on the expiring option is almost gone while the time value premium on the option that has a week remaining has more value. Remember that time value decays the fastest in the week before expiration. I will keep repeating this every week until the stock price reaches my target. The second approach is to sell puts that have more time remaining. For example, if I believe that SWKS will reach $125 by November, I might sell the Nov15 $130 puts. This is similar to buy the stock outright but it enables me to use my margin without paying any interest. If the price is at $97, I stand to make up to $33 (plus a small amount for time value) if the stock goes to around $125. If in November, the price is far below $130 then I can decide to roll the options forward by buying back the Nov puts and selling a future expiration put. When you compare selling the Nov15 $80 put against selling the Nov15 $130 put, you will see how much you are limiting your upside with the $80 put if the stock rises well above $80. Note: when I sell deep in the money puts, it’s often part of a bull spread. See #2 below.
The call options that I mentioned in my previous post where in fact part of a bull spread. I rarely buy long call positions. It’s rare for me because I stand to lose my entire investment if I am wrong about the timing and the future price. I have to be very confident about the future price to take that risk. In the case of SWKS, I chose Jan17 because it gives me the most time for the company to continue to perform and for people to realize how undervalued the company is. I chose strikes near the money because at the money or in the money gives the best increase in option value per increase in stock price. Then I had to select the expiration and strike of the short put part of the bull spread. I wanted to generate a position with a net even money or slight credit. My choice for SWKS was based on my 2 beliefs: 1) the stock price will be substantially higher in the long run, and 2) the stock price will continue to appreciate in the intermediate term (next 6 months). So I chose the puts that were about 3-6 months away, had strikes near or slightly above my target price for the stock in 3-6 months, and provided a premium that roughly matched the premium that I had to pay for the Jan17 at-the-money calls. There are 2 additional benefits of selling puts that expire a long time before the leap calls. First, I can have the opportunity to roll them forward several times to harvest time value each time. Second, if the puts end up expiring worthless then I am left with the calls and no longer have any downside risk looking from the perspective of the original trade…in other words I would have the calls for free since the puts expired worthless.
Hope this helps.