About 25% of one of my IRA is now fully committed to cash secured puts.
I was doing this, and one day I got frightened.
If I own stock, fund, or ETF and something wonky goes on at my broker, they just hold the paper records for me, and I should be fine. I still own the stock, fund, or ETF.
But when the put is cash-secured, I ended up having a lot of cash sitting in the account. I started to get worried about the level of FDIC, XYZZ insurance. It scared me to think that I'm in 'risky' equities, but might lose a big chunk of money that was sitting in 'safe cash'. Maybe paranoia on my part, but with the problems in banking and other financials, I was concerned. I've switched to doing covered calls (synthetic equivalents IIRC), so most of the account is in equities (plus I earn divs).
So my question to ERD and Utrecht is do you guys actually own SPY? The reason I ask is that SPY has the highest expense ratio of the ETFs because the structure is oldest. I own SCHB, and VB (large cap) and VTI but no SPY. If I wrote a call on SPY would that be considered a covered call? I am guessing not.
Yes, I own SPY and sell covered calls against it. I occasionally buy a call, depending upon my gut feel and testosterone levels.
However, the other reason was I found that if I wanted to have exposure to 120K worth of puts that I was better off writing puts on 3 or 4 big names stocks than SPY despite the higher transaction cost.
However, when I just looked at the premium for SPY I realize this is no longer the case at least for at the money options. People are desperate for insurance I am happy to write contracts at for the right premium.
I used to do ~ 10 stocks rather than SPY. It seemed to make sense mathematically (something about the sum of the variance of ten stocks versus the sum of the variance of 500 stocks, but I had wine with dinner, so that's as far as I'll go). It seemed to work, for a while... then it just seemed getting hit by one mis-behaving stock here and there was driving the averages down. Maybe that would regress (progress?) to the mean after a while, but I didn't want to see my profits dwindle away. It's also a lot more work to trade 10 stocks than one index.
Plus with the liquidity of SPY options, I'm more open to a market order, which saves a few bucks. Spreads are pretty low, and though I usually do a limit, sometimes it goes the wrong way, I back up and reset my limit and would have been better off with a market order. Probably averages out.
-ERD50