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mostly agree with you there, though i personally take a slightly more relaxed definition, i don't just restrict myself to selling cash covered puts only if i "want" the stock, in my book they also ok if i "do not mind" taking delivery at the strike. especially when IV is consistently high, as it has been for RIO - i've collected some tidy premiums over the last 18 or so months and the stock hasn't really gone anywhere.when you do want the stock though, cash covered puts can be good if IV is high - just make sure you don't get too carried away and sell so many contracts that your capital base (and margining facility if you use one) can't comfortably absorb a potential assignment.used this way, a cash covered short put isn't really an "options trade", it's more of an "options investment" as a trader on CNBC said once.i think the problem there is that you tried to get too cute by entering the position as a spread, but exiting it as individual legs, trying to finesse out a quick gain. generally the rule i follow is that if i enter into a position as a spread, i exit it as a spread. by taking off your bought leg and leaving your short leg with a near ATM strike active on expiry day, you left yourself massively short gamma. a short gamma position is not necessarily bad, but a *massively* short gamma one is playing with fire IMHO. except if you do not mind taking the assignment, and have the capital base to absorb it, then massively short gamma can actually be quite good, as it probably also means excellent theta.the difference between your situation and my earlier QBE scenario was that i had july calls protecting the short leg, so risking the assignment was not as hazardous - if i got assigned on the may calls, to reload the calendar spread, i simply sell june puts to get a synthetic short call position, instead of selling june calls to get an actual short call position. though as noted i still took a bit of a risk letting it run to expiry, as had the may calls expired OTM, a big gap down overnight would have meant a lower premium on selling the june calls to reload the calendar spread. but being long gamma on the july calls would have mitigated that somewhat.i avoid trying to leg into spreads as well, if i want to buy a vertical put spread for example, i'll look to buy the high strike and sell the low strike at the same time. i won't buy the high strike first, then wait a bit "to see if the stock falls and i can get a better price on the low strike". i used to do that when i first started trading options but quickly found that it bit me more often than it worked in my favour, so i don't do it anymore. if for some reason you feel as though you must leg into a spread, at least leg into the long gamma position first... if you get into a nasty habit of legging in by shorting gamma first, then waiting a while because "i think XYZ is going to move up/down (strike out where appropriate) in the next few minutes and i can get a better price for the long gamma leg", sooner or later the market will teach you a very painful lesson!although sometimes i will leg out to transform a position into another type of position - i had to do this recently with my bought 30-28.50 NAB put spread. in hindsight i was a fool to have not closed it out when the stock hit 28 - if a vertical spread has reached 80% of its max payoff as a general rule i will almost always close it out. but the MMs were being idiots that day and the bid/ask for the 30 puts was something like 1.98/2.26. i didn't even get a bite at 2.05. fuming, i stubbornly refused to give in and took my offer off the market, thinking to myself "well it's below the low strike now, there's a good chance they'll both expire OTM and i'll deny the MMs the satisfaction of forcing me to cross such a ridiculous spread".dumb dumb dumb. it proceeded to rally strongly immediately after. so after a minor pullback to the low 29s, with time running out, i decided to sell off the 30 puts and leave the short 28.50 puts open, to try and pinch some quick time decay. but i had 100 contracts open, and even if i wanted to take delivery of NAB (which i don't right now - i need to stay delta negative on NAB as it's part of a pairs trade where i'm long CBA) i'd only be comfortable with taking delivery of 5000 of them. 10000 - no way. too big for my liking. so i protected it by buying july 28.50 puts to transform it into a put calendar spread and maintain a bearish bias, then once the june 28.50 puts expired OTM, i sold july 27.50 puts to transform the position into a july put spread, at least recouping some premium. partially salvaging a less than ideal situation that i had brought upon myself thru my own stubbornness.the stupid thing about all of this is that even if i had hit the bid at 1.98 on the june 30 puts AND hit the offer on the june 28.50 puts, i still would have collected about 80% of the max payoff! a somewhat painful lesson to stick to your rules rather than getting mad and making irrational decisions just for the sake of trying to spite the MMs!
mostly agree with you there, though i personally take a slightly more relaxed definition, i don't just restrict myself to selling cash covered puts only if i "want" the stock, in my book they also ok if i "do not mind" taking delivery at the strike. especially when IV is consistently high, as it has been for RIO - i've collected some tidy premiums over the last 18 or so months and the stock hasn't really gone anywhere.
when you do want the stock though, cash covered puts can be good if IV is high - just make sure you don't get too carried away and sell so many contracts that your capital base (and margining facility if you use one) can't comfortably absorb a potential assignment.
used this way, a cash covered short put isn't really an "options trade", it's more of an "options investment" as a trader on CNBC said once.
i think the problem there is that you tried to get too cute by entering the position as a spread, but exiting it as individual legs, trying to finesse out a quick gain. generally the rule i follow is that if i enter into a position as a spread, i exit it as a spread. by taking off your bought leg and leaving your short leg with a near ATM strike active on expiry day, you left yourself massively short gamma. a short gamma position is not necessarily bad, but a *massively* short gamma one is playing with fire IMHO. except if you do not mind taking the assignment, and have the capital base to absorb it, then massively short gamma can actually be quite good, as it probably also means excellent theta.
the difference between your situation and my earlier QBE scenario was that i had july calls protecting the short leg, so risking the assignment was not as hazardous - if i got assigned on the may calls, to reload the calendar spread, i simply sell june puts to get a synthetic short call position, instead of selling june calls to get an actual short call position. though as noted i still took a bit of a risk letting it run to expiry, as had the may calls expired OTM, a big gap down overnight would have meant a lower premium on selling the june calls to reload the calendar spread. but being long gamma on the july calls would have mitigated that somewhat.
i avoid trying to leg into spreads as well, if i want to buy a vertical put spread for example, i'll look to buy the high strike and sell the low strike at the same time. i won't buy the high strike first, then wait a bit "to see if the stock falls and i can get a better price on the low strike". i used to do that when i first started trading options but quickly found that it bit me more often than it worked in my favour, so i don't do it anymore. if for some reason you feel as though you must leg into a spread, at least leg into the long gamma position first... if you get into a nasty habit of legging in by shorting gamma first, then waiting a while because "i think XYZ is going to move up/down (strike out where appropriate) in the next few minutes and i can get a better price for the long gamma leg", sooner or later the market will teach you a very painful lesson!
although sometimes i will leg out to transform a position into another type of position - i had to do this recently with my bought 30-28.50 NAB put spread. in hindsight i was a fool to have not closed it out when the stock hit 28 - if a vertical spread has reached 80% of its max payoff as a general rule i will almost always close it out. but the MMs were being idiots that day and the bid/ask for the 30 puts was something like 1.98/2.26. i didn't even get a bite at 2.05. fuming, i stubbornly refused to give in and took my offer off the market, thinking to myself "well it's below the low strike now, there's a good chance they'll both expire OTM and i'll deny the MMs the satisfaction of forcing me to cross such a ridiculous spread".
dumb dumb dumb. it proceeded to rally strongly immediately after. so after a minor pullback to the low 29s, with time running out, i decided to sell off the 30 puts and leave the short 28.50 puts open, to try and pinch some quick time decay. but i had 100 contracts open, and even if i wanted to take delivery of NAB (which i don't right now - i need to stay delta negative on NAB as it's part of a pairs trade where i'm long CBA) i'd only be comfortable with taking delivery of 5000 of them. 10000 - no way. too big for my liking. so i protected it by buying july 28.50 puts to transform it into a put calendar spread and maintain a bearish bias, then once the june 28.50 puts expired OTM, i sold july 27.50 puts to transform the position into a july put spread, at least recouping some premium. partially salvaging a less than ideal situation that i had brought upon myself thru my own stubbornness.
the stupid thing about all of this is that even if i had hit the bid at 1.98 on the june 30 puts AND hit the offer on the june 28.50 puts, i still would have collected about 80% of the max payoff! a somewhat painful lesson to stick to your rules rather than getting mad and making irrational decisions just for the sake of trying to spite the MMs!
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