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Old 08-27-2015, 05:19 PM   #21
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@ utrecht, thanks and I agree w you both in terms of strategy and what I would do as experienced trader, but in giving info to the OP who is just starting out, I would say start with things you would be OK to own.
A fair point ... but it's fun for those who do it and unless you get to a very advanced level, you can do well in options for a few days' time per month -- particularly here on the west coast where you can be 'done' when the market closes at 1 pm PDT.

That said, my FIL trades nearly full time, though he's 75 and retired. IMO, he likes the activity and it appeals to his logical, techy math brain. I don't do quite as much, but we still have teens at home. YMMV, but I've been able to more or less exceed my gross annual expenses in gross trading receipts the past 5-7 years on probably 10-20 hours a week. It beats working at WMT!

I'd be FI w/o the trading income, but it provides a nice RE expense cushion on the upside for fun diversions
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Old 08-27-2015, 06:54 PM   #22
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At Utrecht suggestion I opened an account with OptionsHouse a couple of years. Their commission were lower than Schwab $5 for 5 options,but they've raised their price now $5+.50/contract (for new customers) that I don't really use them very much anymore.

I find their trading platform to be vastly inferior to Schwab's StreetSmart Edge and their end of year reports pretty hard to integrate with Turbotax. So for the $7-$10 /trade I save in commission for roughly 3 options I write a month most of which are in IRA. It just isn't worth the hassle.

Interactive Brokerage rates appear to be the cheapest out there, so if you end up trading options a lot than look at opening an account with them. However, assuming you have an account on Schwab, Fidelity or TD starting with them is just fine.

On the forum there really 3 schools of thought on option trading.
A. No Options. Options are too risky, too hard; no thanks: the majority.
B. Mostly stocks investors, but we will write calls or puts to generate income or getting paid to wait. Plus its fun. This includes myself, NW, Senator and fair number of other long time forum members.
C. Active option traders. Trading options (primarily writing) is a significant source of income.Utrecht is the main person who does this. A couple of years he posted a pretty comprehensive breakdown of his option trades. I was able to mostly replicate his success, but ultimately I decide that modest gains weren't worth the time and hassle.

Finally there is 4th group, which isn't seen very much at all on the forum and that is the speculators. The think they can become rich quickly. By spending $500 to buy 5 Apple 100 puts,they can easily turn that into $10,000 when Apple collapses to $80. These people are mostly young and male and are convinced they are gifted traders. This was me when I was in my early 20s. My belief is that since so many folks on Wall St. fit this profile that options are systemically over priced.So even though options are zero sum game I think they are slightly more profitable to write than buy. Note data on this is hard to come by and far from definitive.

What is true is a retiree survival rates are enhanced if writing covered calls transforms a 2 year stock sequence of +35%, -15% into +30%, -10%. Reducing volatility is good for retirees.


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My rather simplistic questions:
In this situation, wouldn't I be better off selling puts and getting paid to wait?
For those of you who do sell puts (especially on widely held ETF's), how do you decide on appropriate pricing?
.

I write two kinds of puts, on individual issues that I am happy to own at a specific price. So this week I wrote Jan. 2016 puts Apple @90, Exxon at 60, and Procter Gamble at 65. Regardless of the state of the market, I think those are fair prices. In the case of PG and XOM the dividend yield at those prices is higher than my 4% HELCO that I might need to temporarily use to buy them. I try to make sure I'm getting a 10% annualize return but I am more concerned with picking a price which to me is an bargain.

In the case of ETFs like SPY. I require a minimum of 15% annualized return for at the money options and 10% for out of the money options.
The annualized return is calculated by Premium/(Strike Price- Premium) X 365/(number of days remaining for the option.)

So today with the SPY at 199.27 I can sell at Oct 16 Put at 199 strike price for about $6.25. There are 51 remaining days on the option. This works out to be 23.2% on an annualized basis. Now remember this a cap on your return, and if the S&P finished below 193 you lose money. But for most of the year the returns were far lower because the VIX (volatility index) was between 10 and 15. It shot up to 40 on Monday and still is at 26. Which is well above average.
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Old 08-27-2015, 07:04 PM   #23
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What is true is a retiree survival rates are enhanced if writing covered calls transforms a 2 year stock sequence of +35%, -15% into +30%, -10%.

Reducing volatility is good for retirees.
I did not think of this side effect.

In the past, when my stocks got called by covered calls, I was upset to lose the stock and leave money on the table. I forgot that when I wrote the call, I did not believe the stock was going to be worth that much. "Losing" the stocks actually forced me to "sell high". The problem was I often forgot that it could have meant that the market was frothy, and I should not plow that money back into the market or into that same stock.

I believe in "Tactical AA", meaning lowering stock AA when the market is high, and raising stock AA after a market crash. The above would jibe with that philosophy.
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Education about Selling Puts
Old 08-27-2015, 07:09 PM   #24
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Education about Selling Puts

@cliffp

Good insight and agree w your assessment of the types here. IMO I would fit into 3, but started as type 2. Type 4 either make so much $$ (our anon $100mm windfall guy from a few months back comes to mind) that they buy an island and a plane and disappear or they lose tons and work forever -- in neither case would they post here.

I like your recent trades and have put similar ones on this week as well. Given the high volatility several strong dividend payers were real bargains in terms of yield.

To the OP Q about why Puts vs Calls, yes you can make $$ buying calls as well but it ties up a lot more capital. Plus, Puts are always priced slightly higher from a seller perspective b/c of the options pricing models -- so more return for a given level of risk and investment from Puts vs Calls in a normal environment.

As for price selection on an index or ETF option, cliff has summarized it well with his example. All of the trading platforms also have fairly powerful screening tools that allow you to search option positions by various criteria including annualized return, ROCE, probability of the expiring 'in the money' and many others. You can apply the screen to a ticker symbol and see what it provides or bounce a set of criteria against a whole index of stocks (S&P say or Russell) or all ETFs or futures and it will spit out a list of trades you can then consider and evaluate.

Finally, and w/o getting too technical here there are a number of measures (so-called Greeks) that you can use just looking at an option chain screen to pick an option position that meets return or risk criteria you have already set.

Hope all this helps. Again, as I said before its worth paper trading a bit or starting with small lots, especially in index funds or futures as the dollars (/ES, VIX, SPX, RUT, or NDX) can be higher



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Old 08-27-2015, 07:31 PM   #25
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Not to be a nit picker, but selling a naked call has potentially unlimited liability since a stock could go to infinity. A naked put is limited since the stock could potentially go to zero which is the limit of loss.
Excellent point. Thanks for the correction. It has been a while since I have traded options....

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Old 08-27-2015, 09:27 PM   #26
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Covered calls and selling naked puts have the same profit profile. The problem with covered calls for a trader is needing to tie up huge amounts of capital to buy the stocks so you can sell the calls. When selling naked puts, you can use collateral from the rest of your portfolio to sell the puts. You dont tie up any money at all.

Now, if you already own stocks for the long term and want to sell calls for additional premium thats a different story.

It was when I first started working, doing tax returns... there was a client who had sold his company to a listed company and held about 10% of the outstanding shares... It was not a huge company, but pretty big...

He made over $100,000 per year in selling covered calls... it was part of his sale strategy to sell stock on a regular basis.. if he had to cover the call, no big deal as he had planned to sell shares anyhow.... if he did not, then he kept the money from the call...

I was pretty shocked at how much he could make doing the options...
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Old 08-27-2015, 09:33 PM   #27
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If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.
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Old 08-27-2015, 10:57 PM   #28
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If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.
He had about $150 to 200 mill at the time... early 80s...

He also had a 100 ft yacht when that size was big....

Never got to get on the yacht... but the partner did....
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Old 08-28-2015, 01:43 AM   #29
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The Options Industry Council has lots of excellent free webinars on all kinds of options trading.

Several strategy's using puts and calls to make money and protect against unlimited downside. "Straddles" , Strangles ". A lot like work if you ask me.

Naked cash secured puts are a dangerous thing for a casual trader, kind of like catching falling knives, IMO.
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Old 08-28-2015, 04:21 AM   #30
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The Options Industry Council has lots of excellent free webinars on all kinds of options trading.

Several strategy's using puts and calls to make money and protect against unlimited downside. "Straddles" , Strangles ". A lot like work if you ask me.

Naked cash secured puts are a dangerous thing for a casual trader, kind of like catching falling knives, IMO.
A cash secured put is not risky and is slightly less dangerous than holding the security.

Since the end of 2014 I've had ~105K in cash in one of my IRA. Rather than buy at 500 shares of SPY at about 208 on 12/30/2104. I've written cash secured puts .I've written a total of 6 different puts slightly out of the money at prices ranging from 200 to 208. I've collected a total of $7,253 in net premiums including commission which have averaged about $12.80.

Last Friday (Aug 21), rather than buy back my short 205 put position, I let it get exercised. So I ended with 500 shares of SPY which is at a loss. If had just bought the share at the end 2014, I'd be in exactly the same situation, except for I would have lost out on the $7253 in option premium but collected ~$1,000 in dividends.

The only risk I took was that if SPY had gone up to say 240 I might have collected ~$8,000 in premiums but lost out on 16,000 in gains in SPY price appreciation.

Now a flat to slightly down market is about as perfect a time to write cash secured puts. But as a said one of the best things about this strategy making bad years slightly better.
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Old 08-28-2015, 07:34 AM   #31
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A cash secured put is not risky and is slightly less dangerous than holding the security.

Since the end of 2014 I've had ~105K in cash in one of my IRA. Rather than buy at 500 shares of SPY at about 208 on 12/30/2104. I've written cash secured puts .I've written a total of 6 different puts slightly out of the money at prices ranging from 200 to 208. I've collected a total of $7,253 in net premiums including commission which have averaged about $12.80.

Last Friday (Aug 21), rather than buy back my short 205 put position, I let it get exercised. So I ended with 500 shares of SPY which is at a loss. If had just bought the share at the end 2014, I'd be in exactly the same situation, except for I would have lost out on the $7253 in option premium but collected ~$1,000 in dividends.

The only risk I took was that if SPY had gone up to say 240 I might have collected ~$8,000 in premiums but lost out on 16,000 in gains in SPY price appreciation.

Now a flat to slightly down market is about as perfect a time to write cash secured puts. But as a said one of the best things about this strategy making bad years slightly better.
The amount of money Ive made this year selling weekly SPY puts in this flat market is ridiculous (relative to other yrs). Last wk I took a hit when the market tanked but it was a small hit compared to what Ive made already this year.
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Old 08-28-2015, 10:27 AM   #32
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If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.
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He had about $150 to 200 mill at the time... early 80s...

He also had a 100 ft yacht when that size was big....

Never got to get on the yacht... but the partner did....
Then the $100K is pitiful. He must be too busy with his yacht to make his money work harder.
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Old 08-28-2015, 12:00 PM   #33
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Then the $100K is pitiful. He must be too busy with his yacht to make his money work harder.
He got great dividends.... plus, I think he only did options for the shares he actually wanted to sell, not a big percent of his holdings...

But I guess that it is small change for that amount of assets...

There was one client we did their return who was getting north of $10 mill in dividends each year... also tried to keep cap gains at about the same amount... again, early 80s so many years ago...
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Old 08-28-2015, 01:13 PM   #34
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I do not personally know anybody with that kind of money, but I suppose that there are a lot of them. Looking around me at mansions, airplanes, and huge yachts, I am sure that the owners must have the kind of net worth that you describe. Yet, they are still peons in the stratosphere, and do not get mentioned in Forbes or the media.

Many years ago, I picked up a boat magazine at my dentist office to read. It described a humongous yacht being built in Italy for a guy who flew his personal 727 there every month to monitor the progress. I did not recognize his name at all. How many people like that in the world? Amazing.
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Old 08-28-2015, 04:34 PM   #35
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My step daughter's boyfriend's father is one of them. The boyfriend lives on the dividends of his share of the trust fund daddy set up for the four kids.

I figure the kid does well as he has 7 motorcycles, two built Mustangs and doesn't have a job. I think the fund kicks out $40K per quarter in earnings. The kid also has a house in Anchorage that he rents out, but lived there for a few years.

Dad had a large chemical distributor business in Houston (30 years in business) and sold it 10 years ago. Rumor has it that he cashed out for over $100 mil. The Dad is always on some far away vacation. I've met him once....a pretty nice, down to earth fellow with one lazy son we know.
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Old 08-28-2015, 04:48 PM   #36
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The Dad is always on some far away vacation. I've met him once....a pretty nice, down to earth fellow with one lazy son we know.
In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.
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Old 08-28-2015, 05:21 PM   #37
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In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.

I wonder if retirement would be as sweet if you never worked?
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Old 08-28-2015, 05:22 PM   #38
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In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.
I could write a paragraph about his shortcomings, but not worth it. Let's say he doesn't show any sense of responsibility and is flighty. He said to me one day, he "can't wait for his ship to come in" (meaning the inheritance when dear old dad passes). I suspect step daughter will become one of his cast off toys at some point in time. Her Mom (my DW) feels like I do.

Found money is not the same as earned money.
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Old 08-28-2015, 05:35 PM   #39
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In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck...
On a much smaller scale, yes. And we had to create our own means.

But if I had a rich daddy, would I be so gun ho to decline his money and go make my own fortune? Probably not, as I am too laid back.

When visiting the Hearst Castle, I learned that the castle builder, William Randolph Hearst, had a rich father but his fortune was self-made. He did get some initial help from his father, but his eventual riches far eclipsed that of his father. Many billionaires are like that, not the type who hangs around this forum.
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Old 08-28-2015, 05:36 PM   #40
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I could write a paragraph about his shortcomings, but not worth it. Let's say he doesn't show any sense of responsibility and is flighty. He said to me one day, he "can't wait for his ship to come in" (meaning the inheritance when dear old dad passes). I suspect step daughter will become one of his cast off toys at some point in time. Her Mom (my DW) feels like I do.

Found money is not the same as earned money.
I think you are right. I thought Buffett approach give your kids enough money to do anything they want but not enough to do nothing makes a lot of sense.

I hope your step daughter sticks around long enough for his ship to come in.
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