Source
r/thetagang•
bigbrainplayplayer

What could go wrong with selling a naked put on something like $DAL?

New to option trading, especially this type of strategy, but since Delta Airlines (as well as other airlines) took a huge hit the volatility is high thus the premiums are high. My plan is to sell a naked put a month out at a strike price that I'm comfortable paying for like 18 dollars, I collect the premium and if I get assigned then I would gladly hold 100 shares of Delta airline stock due to their high dividend yield and rebound potential compared to other airlines. If I don't get assigned, then well, easy money. I really don't believe that they will go bankrupt due to fed bailout and their low debt to equity ratio, but then again I'm new to this so if someone could explain why I'm wrong and the reasons for that I would appreciate it. Seems like a win-win trade to me.

Edit 1: Since I have the cash to cover my position, this is a cash covered put not a naked put, my bad.

Posted Apr 2, 2020, 8:47 PM UTC · edited

2244
veratisio•

What could go wrong is they go bankrupt or way below your strike and never recover. That’s exactly the risk you’re being paid for.

37
bigbrainplayplayerOP•

Thats what I thought, just learned about this so I was wondering the risks associated with it, I think it's good odds in my favor. I'll look more into it though before I pull the trigger. Thanks

4
satireplusplusMod & created this place•

Risk / reward is probably better with a lower strike than 18. I'm probably going to sell 10 or 5 strike puts for that bankruptcy insurance money. These will likely only pay out for the buyer if they go bankrupt.

2
BannerPilotAlum•

I will also be doing something similar. I don’t mind owning 100 shares of one of the top airlines. And you could always sell covered calls once you’re holding. I guess it comes down to whether you believe after this is over, everything will go back to the status quo, or this virus has changed everything in the travel industry. I’m a believer of the former. (Worth noting I’m biased as I am a pilot)

15
bigbrainplayplayerOP•

That's right, I briefly forgot about covered calls, was tunnel visioned on just holding, but since I believe there's a good chance that the travel industry will be under for a bit selling covered calls if I get assigned makes this play sound even better, thanks.

1
OrangesAreOrangeHa•

I assume you're looking to sell 30-45 DTE, as usual?

1
bigbrainplayplayerOP•

Not OP and I'm new and retarded (came from WSB), but I'm thinking May 15 so 45 days

4
ignatzami•

Welcome to the sane side of things.

5
kashflowz•

WSB is who we steal from

4
PeterGriffinClone•

I like to say I'm like the old Kix cereal commercial. "The kid in me likes WSB, but the adult in me likes thetagang"

Good simple strategy you got there

3
bigbrainplayplayerOP•

Thanks, I just found out options existed 3 weeks ago from WSB and since then I'm down 12% total lol, so I was like "I'm just gambling with no idea how this works, and thats what 90% of WSB do, so how do I short WSB" and now I'm here haha.

2
Buktrides a big wheel tricycle•

I am in the middle of the wheel with DAL now. I figured it won't go bankrupt, because bailouts, and will eventually recover enough for me to make a decent profit in a decent timeframe. It's not a huge payout but it's very low risk in my opinion.

Things you should know:

DAL may not return to $60 per share for a long time due to the restrictions on buybacks and dividends they are subject to, having taken the government grants (1 year restriction). However, out of all the airlines, DAL is one of the few who did not take advantage of the loan portion of the stimulus bill, just the grants, which is good. DAL will come out of this even stronger than it's competitors which could offset the restrictions. Lastly, those restrictions could be quietly lobbied away once COVID-19 fades. I imagine with Berkshire owning so much and buying more, the lobbying is likely.

7
xcomv01•

Literally nothing can go wrong with this play. Just make sure its within your own personal risk tolerance.

7
bigbrainplayplayerOP•

Yes i will make sure I'm sufficiently leveraged for my personal risk tolerance

9
Scalermann•

Lmao someone watches Kamikaze Cash

1
bigbrainplayplayerOP•

Lol I like Kamikaze Cash's videos, do you know the general r/thetagang opinion of him? Positive/negative? Trying to find someone to learn from and he makes it entertaining and educational.

1
907bob•

Check out the theta gang podcast

2
philmustang•

Wouldn’t it be a cash covered put not naked

7
bigbrainplayplayerOP•

Yeah, I'm new, I thought a naked put just meant you didn't own the underlying security, which I don't is why I said "naked", but this would be a cash covered put

2
philmustang•

No prob bob just learning too so I thought I’d ask

3
averagejoey2000•

The difference between short naked and short cash covered, and covered put is this buying power reduction.

XYZ trades for 100 dollars, you are bullish. You are in a margin account with lv4 options. You write an XYZ put, collecting 4 dollars per share, and you put up 20% of the underlying, minus the premium. Your BPR is 1920 dollars. That's short naked put.

XYZ trades for 100 dollars, you are bullish. You are in a cash account, like your IRA. You write an XYZ put, collecting 4.00*100 shares. You put up enough to buy the shares outright, because you are wheeling. Your buying power reduction is 9600 dollars. That's selling a cash secured put.

XYZ trades for 100 dollars, you are bearish. You are in a margin account with lv4 options. You short 100 shares of stock, 1:1 BPR, because you are borrowing the shares to sell. Reduce your buying power by 10k, and then write a put for 4 dollars per share. Your buying power increases by 400 dollars, so a net reduction of 9600. That's selling a covered put, you are synthetically short a call. Your risk is to the upside.

3
bigbrainplayplayerOP•

Appreciate the descriptions of each, ty

1
Buktrides a big wheel tricycle•

Yes. Alot of people use them interchangeably for some reason.

0
philmustang•

Maybe naked put sounds more intrepid

2
PoliticsRealityTV•

short covered put sounds cooler

1
desolat0r•

Alot of people use them interchangeably for some reason.

They don't, actually. In most option forums/subreddits the terms naked put and covered put have 2 completely different meanings.

2
Buktrides a big wheel tricycle•

They always mean different things. Not just in most forums. You seem to have misunderstood what I said.

1
MrTallGreg•

What could go wrong...

I mean, they drop below $18 and never recover.

But if you have a long term belief in DAL and are happy with buying them at $18 (and have the cash to do so), this is a great way to buy the stock.

2
Roadhouse1337•

Why do you feel 18 is the point of no return?

1
averagejoey2000•

That's just the strike price op chose.

1
MrTallGreg•

OP listed 18 as the strike price they were considering

1
averagejoey2000•

The risk is exactly the same as buying shares, but a little bit less because you get premium. It could go to zero tomorrow. Buying shares is more risky than selling a put, but there's more potential upside.

2
satireplusplusMod & created this place•

Seems what can go wrong is warren buffet selling starting to sell his one billion worth of shares

2
907bob•

Dropped in to say prepare to be assigned

1
EatTacosGetMoney•

Just means it cant go any lower...right?

1
907bob•

We will know Monday morning, dropped to $19 something after hours on Friday. Who knows these days.🤷‍♂️

1
cameron9980•

You could get a lot more money to sell spreads but yes this is a more safer less profitable option.

1
mgj6818•

If you've got the cash to buy the stock if you get assigned it's not a naked put...

1
swolkingsteam rolled while playing with a chicken•

I was thinking of doing this with Southwest if they hit $30. They have a solid balance sheet and I believe they will come out of this in a far better position than AAL or UAL. DAL would be my other choice.

1
Scalermann•

I have a cash covered put for AAL but it prints tomorrow. $9 strike price so I’m feeling confident, especially after looking at futures prices.

1
careless223•

The bid ask spread on the $18 puts is ridiculous. You may not get a fair price.

1
bigbrainplayplayerOP•

Your right, the $17 puts look better

1
bigdrum88•

Airlines will long long time to recover, with or without bailouts. So if you are willing bag hold it for 2-3 years then go do the wheel on airlines. Because we are recession, right now supply side is hammered, later this year demand will be hammered. International travel will remain heavily restrictive because of countries fearing the second wave of virus from other countries and domestic travel will be bad because of public fear and low incomes. Try to wheel something that is liquid and will have a shorter and stable recovery period. So no leveraged, debt ridden, capital intensive companies, like cruise ships, airlines, steel, oil, auto, hotels, etc

1