Using Protective Put In Swing Trading

[ahmedmobarak 0]

Hello BBT Family,

Doe anyone have experience with using protective put options to limit risk when swing trading? 

I have been reading about it and I get the logic behind it. However, I am struggling with a few points as I am still a beginner:

- If you sell the shares after making profit, do you sell the put option also? Or do you leave it until expiry?

- If the trade goes against you and you want to exit, do you sell your shares then exercise the put option or do you just exercise the put option and it will automatically sell your existing shares at the strike price?

- How to execute it in TWs or DAS?

- Has anyone used this strategy? Is it effective?

 

I hope someone gives me some guidance!

[SA Trader 2]

You seem to be talking of buying PUTS, this is expensive. The cost of such a transaction would only be worthwhile if the IV was extremely low.

Personally I sell covered calls and naked Puts (far out of the money) to reduce the cost basis of the shares I bought. Only downside is that you will loose your shares if the price moves above your strike price at expiration. You could still make a profit if the strike price is above your trade price.

I generally repeat this process every week, sometime I sell the options two weeks out. With the short duration to expiration I will normally leave the options to expire and will rarely roll the options. When selling covered calls you normally have to keep your shares while the calls are active.

For example, I own 100 SNOW shares and have been selling weekly covered calls with strike above my trade price and also naked PUTS at around 9 -12 Delta (10% chance of expiring below this level). This strategy generates a good income (roughly $700 - $950 / week). You could think of this strategy as reducing your cost basis and as a result your risk. 

I use TOS for my swings + options and only day trade on DAS, so I am unable to comment on option trading on DAS and TWs.

If you are unfamiliar with options I suggest you complete the options training on tastytrade.com. It is free and definitely the best introduction training to options available. Please ignore the SMBU options training - it is completely useless in my opinion and actually dangerous for new options traders.

Hope this helps

Edited February 2, 2021 by Deon