Q and A. Trading Options: Married Puts vs. Calls

Thanks Mark.

When we start off on a process of
study/education to improve our financial status, the difficulty is that we don't
know what we don't know. We try to have a healthy skepticism to certain claims
but we hope that within the strategies put forward there is reasonable kernel of
truth. So if claims of Married Put and selling Calls strategy producing 3-6%/month
are unfounded we do not really mind. As long as somewhere around 1% per month (or
annual equivalent) is feasible once adept in the strategy then we would be
comfortable with that-provided that the capital preservation aspect of the
strategy is valid. We have up to £500K available but that forms a significant
part of our assets.

Many thanks for you assistance,

Regards
Roy

Roy,

Knowing that 'you don't know what you don't know' puts you ahead of so many gullible investors who just assume that everything they hear or read is the gospel truth. 

I try to keep things as simple as possible, and leave the part of option trading that can best be handled by the quants to those with advanced degrees in math, physics or perhaps some other discipline.  My chemistry degrees are of no help.

The strategy you describe is a collar.  Sure it can be called 'married puts with selling calls' – but it can just as easily be referred to as 'writing covered calls with long puts.'  Nomenclature isn't the issue.

With the collar strategy, the purpose of the puts is to gain the peace of mind that comes with knowing your assets are protected.  The purpose of the call sale is to pay for the puts.  Otherwise buying those puts – without the call sale – is very costly and it would be difficult to overcome those costs and earn any profits – without a huge market surge.

The call sale limits profits, but to me, that's a good trade-off when your major objective is to avoid large losses.

Your skepticism is necessary because option trading is one of those fields in which it's easy for anyone to make any claim.  After all, it's statistically possible to double your money every month with option strategies.  But the chances of that happening are so minuscule that for anyone to claim that as a possibility is essentially not telling the truth. 

Some who promulgate those untruths are using hype to make money by selling educational materials.  Others are simply misinformed, and mean no harm.

I can tell you that if you own puts that are only 5% OTM, then you can be certain the capital preservation aspect of your strategy will work.  Of course, if you lose 3% every month, that's not so good and your capital will disappear.  But that is also statistically very unlikely. 

When you sells calls and collect enough call premium to more than offset the cost of those puts, then there's an excellent chance of increasing the value of your portfolio on a consistent basis.  Obviously, if your underlying asset declines by 2% or more every month, you will not be profitable.  But the collar strategy will lose less than if you held the portfolio unhedged – and it certainly performs much better in a significant downtrend – by limiting losses.

As to the claims of 3-6% per month, that is really going to depend on market movement.  You cannot expect to earn those profits if your investments don't increase in value on their own.  Part of your profit comes by collecting more premium than you pay, but part must also come from the fact that your portfolio holds its value.

The collar offers inexpensive, or free, insurance, but cannot guarantee a profit when your portfolio declines in value.

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