What cash secured puts look like when it goes the wrong way
Most people promote cash secured puts as being a fool proof way to make money and I believe 80% of it because there are events such as this that doesn't get published much in trading schools or learning materials
With such a high win rate associated with selling puts, its easy to think you will never ever get assigned or lose a trade.
But this is the exact time when traders can get burnt, is that they chase a company without regard for the companies they are selling for, or even the tail risk that sometimes markets can correct like this
Whilst it is not constructive to look at this scenario as one that happens frequently, it is a way to look back in time and be humble about the market sometimes doing things we don't expect
Imagine at the time in the tech book, CSCO was touted as the king of the tech world and it would change everything forever, only to see it burst in the next few months and wipe out all their gains. Prior to the crash you could have convinced yourself what an incredible company CSCO is and you wanted to own it via cash secured puts and take ownership of shares. Look how that would have turned out
If selling the 57$ puts allowed you to collect 4$/contract, look how long it would've taken to breakeven on your position. We can ignore the cost reduction from selling calls at the time because I think the frustration would've made you give up on managing the position.
The only way out would have been to average down and sell the next pop, or take a loss, or better yet - at the offset, not allocate such a huge amount of put contracts and take on more risk than your cash secured account could handle - but money and greed can make people do crazy things so its easy to look back now to avoid selling puts. When the news is saying we are ushering in the next wave of innovation, how can you not be apart of it - if you aren't apart of it then you are missing out. And what better way to be apart than to deploy a fancy options trading strategy to sound smarter than all your peers?
Sometimes companies we thought we wouldn't mind owning, turn out to be companies we actually want to divorce eventually. Much like how we sometimes select a partner for marriage thinking we can do this for 20 years. And after 5 years, yeahhhhh I don't know, I'm having second thoughts.
Ask anyone if they have the guts to marry anything, not just a person for even 5 years, I don't think people can plan commitments or imagine their lives 10 years out - in a span of 10 years, if you look at the world, we have had an explosion of iphones and social media - When I was young, we owned a tube TV and I grew up in the dial-up internet era!
Nowadays, 1-2 years is considered long term holding, not the same as 5-10 years. Trends change quickly and if you want to sell cash secured puts on "fundamentally sound" companies, you have to adapt quickly to the ever changing market conditions
With such a high win rate associated with selling puts, its easy to think you will never ever get assigned or lose a trade.
But this is the exact time when traders can get burnt, is that they chase a company without regard for the companies they are selling for, or even the tail risk that sometimes markets can correct like this
Whilst it is not constructive to look at this scenario as one that happens frequently, it is a way to look back in time and be humble about the market sometimes doing things we don't expect
Imagine at the time in the tech book, CSCO was touted as the king of the tech world and it would change everything forever, only to see it burst in the next few months and wipe out all their gains. Prior to the crash you could have convinced yourself what an incredible company CSCO is and you wanted to own it via cash secured puts and take ownership of shares. Look how that would have turned out
If selling the 57$ puts allowed you to collect 4$/contract, look how long it would've taken to breakeven on your position. We can ignore the cost reduction from selling calls at the time because I think the frustration would've made you give up on managing the position.
The only way out would have been to average down and sell the next pop, or take a loss, or better yet - at the offset, not allocate such a huge amount of put contracts and take on more risk than your cash secured account could handle - but money and greed can make people do crazy things so its easy to look back now to avoid selling puts. When the news is saying we are ushering in the next wave of innovation, how can you not be apart of it - if you aren't apart of it then you are missing out. And what better way to be apart than to deploy a fancy options trading strategy to sound smarter than all your peers?
Sometimes companies we thought we wouldn't mind owning, turn out to be companies we actually want to divorce eventually. Much like how we sometimes select a partner for marriage thinking we can do this for 20 years. And after 5 years, yeahhhhh I don't know, I'm having second thoughts.
Ask anyone if they have the guts to marry anything, not just a person for even 5 years, I don't think people can plan commitments or imagine their lives 10 years out - in a span of 10 years, if you look at the world, we have had an explosion of iphones and social media - When I was young, we owned a tube TV and I grew up in the dial-up internet era!
Nowadays, 1-2 years is considered long term holding, not the same as 5-10 years. Trends change quickly and if you want to sell cash secured puts on "fundamentally sound" companies, you have to adapt quickly to the ever changing market conditions