Which Is Better, Naked Options or Spreads?

puts and return on capital from capital used to standpoint the return on capital generated from the trades that we place has a dramatic input has a dramatic input on our overall strategy selection and our overall portfolio return we're always looking to maximize return on capital right with the least amount of capital it's kind of the game we play we just you know we make our own games that's our game that's right um so we ask the guys hey go out there and let's see let's compare this at least we can make an interesting we can articulate a very interesting discussion right a potential strategy that has the means to capture a high return on capital selling naked puts this can be this can act as a high probability strategy in lieu of buying the stock outright and the reason we're doing this is because the market has been soft as of late so in lieu of potentially buying stocks here you can sell high volatility out of the money puts maybe it's a good return on capital correct we may look to sell a put when we have a bullish assumption especially after an extended down move do I consider this to be extended down move no not at all but it's a down move that's current if we get any kind of an extension to this maybe that opportunity pops is rears its head in fact yesterday we did sell naked puts yesterday and um naked put yes yeah we still make a put yesterday in uh was it xrt what do we do an xr2 we sold put spread put spread I'm see yes hmm so I'm sorry we sell to put spread xrt by the way is up with dollar 35 today yes that would spread maybe we may take it off who knows that's correct um can you check on that mm-hmm um but I thought we thought we still Nick it puts then the day before yeah I'm just spacing out right now which one it was me to XR t we sold a put spread at 63 cents its trading for around 33 cents so you've got 50% when it probably in there a 50% we're a little less it's trading for around 35 cents 36 cents sorry okay and also you might want to take a look at cliff we have a position there where we're short some puts and they're trading just over 40 cents we've sold the 18 puts at 71 cents yeah and we're going to be a 42 cent bid just to take those off and making about 50% um anyway so make a long story short we do use this all the time so assuming a bullish position that we know that puts put spreads generally have a high return on capital from a capital useless standpoint we wanted to test how naked puts compared to put spreads specifically does the lower buying power reduction on put spreads significantly outperform the naked put on a return on capital basis sent us order sorry bet you know we're not so does that happen again this whole market measure study is specifically does the lower buying power buying power reduction it should be B PR that's what messed me up on put spreads significantly outperform the naked put on return on cat on a return of capital basis let's take a look our study consisted of using the following ETFs Excel U which is a utilities ETF for X R T which is the one that we traded yesterday eeehm USO and Excel e going back five years we look for periods of high IV rank over 50% as our entry points we stick to that game plan all the time we enter the trade closest to 45 days as possible it held to expiration of course you can manage your winners in everything sure the trades we placed were selling a naked put at the 68 percent chance of being out of the money which is a little different than we usually use which is the 84 percent chance but since we used much lower priced ETF's general like Excel you and stuff we couldn't even generate enough at so it went for a kind of a deeper put in this example and we also did looked at the short put spread two points wide short strike at 68% out of the money and here are the really interesting results so in AM bat um the P&L the naked put was $642 the P&L in the put spread was 242 dollars now there's some there's some there's some important takeaways this is during a bull market that's why the results the number of winners is so high also we picked our spots with respect to implied volatility percentile they had to be over fifty percent so over 50 percent IV rank and what we're learning is over 50 percent IV rank and a very good um a price extreme and you end up with this ridiculously high percentage of winners the the difference here was the return on capital was exactly the same or I'm sorry 22 21 but the put spread returned 1/3 as much cap 1/3 as much in PL now just bank that for a second the naked put 634 dollars the put spread 242 dollars the return on capital almost the same but you made 3 times as much money on the naked put this is interesting it just starts to begin the discussion correct so the next slide takes us to USL in u.s. oh the P&L is plus 725 for the naked put plus 2 ninety eight out of eight winners the the return on capital is exactly the same with an IV rank of 69 so okay so now we get down to this critical stage of learning which were which were which were which is really helping us I mean listen what we've learned in the last two and a half years I can't even I can't even describe how important it's been but apply that over like come this mass audiences it's incredible the IV rank has to be high when it is the percent of winners is ridiculous 69 percent eight out of eight the other one was sixty-two percent seven out of seven the return on capital which I had no idea I would have guessed the put spread was so much higher is actually the exact same as the naked put right I know on a percentage basis guys went to a little bit bigger naked put okay they sold a 68 instead of the 84 but what we did was we tried to use the same short strike that we would use in the put spread that's why they did it so the same storage strike the same short strike we using the put spread and the same short strike for the naked put and just look at again return on capital exactly the same but two and a half times the amount of P&L now if you can arm yourself with this it's extremely powerful because you can reduce your size to generate more P&L sure so we went to XLE which is the next slide and look at this 71% was the IV rank same thing number of winners was a hundred percent but the naked put in this case even though it was a couple percentage points lower than the then the return on capital of the put spread it returned almost four times as much so and the difference isn't isn't um it's not the minimus but it's it's not important in this case it's not big enough to make a difference so the difference between 18 and 23 and yet the difference in PL is four times greater okay I love this study because it's extremely powerful and it makes the argument that if you're not if you want to get long okay if you want to get long and you want to sell put spread like we did yesterday in xrt that's cool because that that should be part of your diversification process but if you want to really go after making money and you have the available capital for return on capital we shoulda sold it they could put 100 percent here's X Lu which doesn't move that much 68.2% um 68.2% IV rank the naked put two hundred and sixty two dollars to put spread a hundred dollars this case same 92 percent winners and the return on capital was actually greater for the naked put by just a couple pennies excel you doesn't have a great return no matter what you do so it's four percent or six percent i guess there there's a gigantic take away from here which is the amount of P&L difference relative to the return on capital difference it doesn't if you're if you're playing an income game you have to go with the naked put correct if you're playing the income game it not only does it show you that the net net winners are basically the same but your money is so much more and the amount of capital that you're using isn't significantly that much more if you have a margin account now if you don't have a margin account it makes it a little bit of a different story um if you look here the naked put this is xrt this is one we did yesterday the put spread is three hundred eighty six dollars and the naked put is one thousand it's again it's two and a half times as much and if you look at the return on capital it's only a four point difference i think this is an extremely powerful study you'll see it used archived and used all over the place um the argument here in the IV rank is seventy one the argue tears consistency with IV rank and for people that go with IV ranks not perfect I saw some yin yang and Shay write something Summers is well you know their IV rank I can prove that it's not pairs correct go I don't care if you can I don't care what difference does it make doesn't make any difference in my point it doesn't have to be perfect okay that's the beauty of this thing this is not some down well it didn't touch the line gives a crap that's right okay it's 71% is close enough I don't get care and the point is it's not - correct the point is it's not 16 okay it's close enough average to 71 and however you want to define that 71 and the difference is it creates a high percentage of winners in this case virtually a hundred percent because you're a price extreme and you're also doing things that from a directional standpoint where the payout is greater on the naked put that it is and the return on capital is almost the same so it's extremely strong argument to make for people that say I don't sell make it put because I don't want the risk so I'll go for a higher return on capital especially money managers and things like that it's actually not it's not fair it's correct you're not getting it correct you

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Id: Jyfkbpz6ml4

Length: 10min 19sec (619 seconds)

Published: Thu Feb 06 2014