Selling Covered Calls and Naked Puts

[Fermion]

A return of 300K on a million of capital at risk is easily doable with the returns I have seen, as long as you are selling covered calls and puts. I have several puts I own now, which I would be quite ok with having stock put to me that are returning 40%+ annually. The downside is you must have this as a quite active hobby. The risk is really lower than investing in the stock market, the rewards are lower in upside, but the offset is consistent income.

Had I been interested in TESLA I think you could easily earn 40% of the share price in a year if you are willing to own the stock.

Ok, so do that consistently for 20 years.

1.4^20 = about 837x your investment.

So by selling covered calls you could turn 1 million into 837 million in 20 years.

 

[Running_Man]

When you sell a put on a stock that you wouldn't mind owning, what is the strike compared to the stock's trading price at the time you write the put option?

First if I like a stock I would buy a position in it, usually 1/2 of what I am normally am willing to own or 1% of my portfolio. Then assuming I would be willing to own the shares, then I look at recent pricing action to buy the shares where I think it would turn up on a dip, and that varies by stock. I have sold puts on a stock trading at 91 at 89 and also sold puts trading at 105 at 95. So I look at bit at the tradding ranges and what price I would like the stock. If I can make revenue on the wait to get to a price I like I take it. I use to put in orders, or alerts to wait for the stock to fall to my price.

For instance let's assume I was going to sell a put on TSLA (i would never but this is what I would look at). TSLA is in a slump to me technically and TSLA back in Sept built a long base between 780 and 800 so I would sell a put for 790 strike price for $320. That is an annualized yield of 14.8% on $79,000 of capital for putting in basically a 10 day order to buy TSLA 130 points lower than it is trading today. A call for 10 days 30 points over the present selling price is paying $2,250 or 99% Annualized. At that point your breakeven on TSLA is going to be 735 if you got put the stock on a fall in TSLA price. In the meantime TSLA options are paying you dividends via options at a ridicoulous expensive rate.

 

[Running_Man]

Ok, so do that consistently for 20 years.

1.4^20 = about 837x your investment.

So by selling covered calls you could turn 1 million into 837 million in 20 years.

Correct that should tell you how overpriced options are and why you should be selling them

 

[Fermion]

Correct that should tell you how overpriced options are and why you should be selling them

I think they are overpriced on meme stocks (Tesla is a meme stock btw).

On stocks I would actually consider owning, like Gilead, I don't see quite the premium.

Here is an example:

Gilead trading range over past year $61.39 to $74.12.

Current price $63.83

April 14, $65 call sells for $2.05

Dividend pays out on March 14 of $0.71

Say you do a covered call here, getting the stock for $63.83 and selling the call for $2.05. Your cash required is $61.78.

If the stock stays flat until April 14, you earn $2.05 + $0.71 = $2.76 with $61.78 at risk, or a return of 4.47%. Annualized that is a 30% return.

Ok, nevermind, covered calls do look pretty good lol.

 

[NW-Bound]

A return of 300K on a million of capital at risk is easily doable with the returns I have seen, as long as you are selling covered calls and puts. I have several puts I own now, which I would be quite ok with having stock put to me that are returning 40%+ annually. The downside is you must have this as a quite active hobby. The risk is really lower than investing in the stock market, the rewards are lower in upside, but the offset is consistent income.

As I often mentioned, my total portfolio return for the last 3 years is about the same as if I invested 100% in the S&P, except that my stock AA varies between 60-80%, depending on the market condition.

The extra return from writing OTM covered calls on just a portion of my stock holding plus writing OTM covered puts on a portion of my cash gives me that extra edge.

The stocks and the cash at risk total about $2M to generate that $300K. You can call it an extra return of 15% on that $2M.

Yesterday, I generated about $1150 cash from writing 15 contracts, expiring this coming Friday 2/11.

Today, I got $1207 for writing 14 contracts for Friday 2/18.

 

[NW-Bound]

I do not unconditionally sell calls or puts on any stock.

I own more than 110 stocks in various sectors. I sell options for a contrarian play to the observed sector rotation.

Today, all semiconductor stocks go up, while all energy stocks go down. I sell calls on the 1st group, while selling puts on the 2nd group.

If I set the strike price right, I will end up not selling any of my stocks, nor having to buy more. I just want to keep the option premium, and my stocks, and my cash. And I will do it again next week, and the week after that, ad infinitum.

Well, it does not work out like that all the time, hence I got a bunch of puts assigned in Jan 2022, and ended up having to buy more than $600K worth of stocks.

I am trying to unload some via covered calls right now, and not selling any more puts no matter how tempting.

 

[Running_Man]

Interesting thing is in last year Tesla has a low of 650 and a high of 1200 but is only up 50 points overall or about 5% for a buy and hold operation.

 

[joesxm3]

I sold one Put contract SQ $95 March 4 and got $740 premium.

Last Friday I was happy with SQ at $108. Today around $102 I suppose biting nails is in order. My thesis is that $100 is support.

We shall see how things go. SQ has dropped much more than I expected. I have 215 shares at average cost $160. Wish I had been more patient nibbling on the way down.

 

[NW-Bound]

The market surged up today, and the NASDAQ went up 2.08% while the S&P was up 1.45%.

So many of my stocks went up 4% to 7%. And nearly all of the covered calls I sold are now in the money. And if the prices hold, I will have to sell so many shares below market price. ARGHHH! Fear turns into greed in a matter of minutes, right after the market opens.

Well, the above happens quite a few times in January. On the Wednesdays of 1/12, 1/26, 2/2, the semiconductor sector surged, and many of my covered calls got in the money and I thought I was going to "lose" many shares. Came Thursday, the market tumbled hard, and I did not have to sell anything. In fact, by Friday, so many of my puts got in the money, got assigned and I saw my cash hoard dwindling down and down. ARGHHH!

Well, let's see what happens tomorrow and Friday 2/11. Whichever way the market goes, I can take it. If the market crashes again, and I don't have to sell anything, I am fine. If I have to sell some shares, well my stock AA is now 78%, and it's OK if it gets reduced some. I don't have too many puts outstanding, so the risk of having to buy more stocks is small.

PS. Premium collected from option selling YTD: more than $27K. I don't know exactly, because there are a couple of dozen contracts not yet settled and Quicken has not gotten them reported by the brokerage. Too lazy to track them down to add to the total.

 

[gregorit]

Don't get assigned, roll the option into the next week or month. These last few months have seen the money printing machine go "brrrrrrrrrr" for those writing options. If the market crashes - big deal, calls I write expire worthless. Any puts I wrote were way OTM on stocks I wanted to buy. If the market soars, great: The puts expire worthless and I roll my calls.

OTOH: To be fair, I limit myself to 10-15 individual stocks and follow them like a hawk follows a baby bunny. Greater risk but life is too short to spend it tracking a broad portfolio and settling for a market index return is like taking an Uber home after sipping halfheartedly one lite beer.

 

[NW-Bound]

With the market going crazy as it has been, I have found that with some stocks it is better to let the calls get assigned, then sell puts to buy them back at the same strike price or even lower.

And I often get them back!

This means the market has topped out, and just goes up/down in a trading range without making real headway.

And when that happens, alternating puts and calls is the way to make money. Heh heh heh...

 

[gregorit]

In taxable accounts I *never* want the assignment as the tax implications make me more than irate.

In non-taxable accounts I'm a bit more ambivalent but I generally view my core holdings as grand-children who have great promise. Would you sell them? Nevah! But I don't mind having them work to earn a little extra money to broaden their 'options'. (I'm looking at you, NVDA, AAPL, MSFT, AMZN...)

 

[NW-Bound]

Yep. Call options are extra divvies.

Have I said I made $250K-300K/year the last few years, just on option premium on top of the stock gains?

And if they happen to get assigned, hello put options.

I just love option premium, which is just extra money, or some call it cash. Heh heh heh...

 

[NW-Bound]

Hmmm... Quicken tells me in the last 12 months, I got $75.8K from dividends. This plus SS (yet to claim) will let me live reasonably comfortably.

But how can I pass up not getting more from selling options? It's just a fun thing to do, while I cannot travel, or tend to garden, or fooling around with my solar+battery system.

 

[NW-Bound]

Again, a bullish Wednesday that turned into gloom and doom the next days.

Once more, my shares are retreating, and the covered calls I sold are dropping back into out-of-the-money, but not all of them. In fact, some material stocks such as energy and mining are advancing, and I will "lose" some shares there.

Never a dull moment.

 

[aja8888]

I sold puts in FCX, XOM, F, JNJ, OKE. All expiring 2/18. Then I picked up some shares of DIS in my small Roth as they are going up due to good earnings.

CPI of 7.5% and mortgage rates near 4%. Spooked the market.

 

[Winemaker]

I have sold covered calls in the past and have done okay with them, but I was employed back then and didn't follow a continuous strategy back then.

Currently, I have a small dilemma or dilemna. We moved about $220,000 from DW's 403b to a tIRA with a firm that has the majority of our holdings.. It was supposed to be an in kind transfer, however, the old firm liquidated the mutual fund and transferred cash. Now I have cash to invest, but I don't want to jump in all at once with all the volatility. What would be a good strategy using puts to get back invested? Or to take advantage of the volatility? This is money that is not needed to live on, or needed in any short time. It will most likely be more legacy money.

 

[NW-Bound]

On Friday, while I was on a road trip most of my shares went down with the market, except for energy stocks. Most the call options expiring that day got wiped out, except for the ones on fertilizer, metal, and agricultural stocks. It is obvious which stocks investors think will do better in a high inflation era.

I am down -1.59% Friday, vs. -1.9% for the S&P and -2.78% of the NASDAQ.

I may have to wait things out a bit before selling any options. I am traveling anyway, and do not check on the market as often as when I am home.

I have sold covered calls in the past and have done okay with them, but I was employed back then and didn't follow a continuous strategy back then.

Currently, I have a small dilemma or dilemna. We moved about $220,000 from DW's 403b to a tIRA with a firm that has the majority of our holdings.. It was supposed to be an in kind transfer, however, the old firm liquidated the mutual fund and transferred cash. Now I have cash to invest, but I don't want to jump in all at once with all the volatility. What would be a good strategy using puts to get back invested? Or to take advantage of the volatility? This is money that is not needed to live on, or needed in any short time. It will most likely be more legacy money.

I dunno. Obviously, you can use puts to buy back the stocks or ETFs that you like, and get a few % lower than where they are now. Of course if the strike price is set too low, you may never get back to the market.

A lot depends on execution, but if the long-term goal is to stay invested, if I can get any gain over the immediate repurchase I call it a worthwhile gain.

 

[gregorit]

I have sold covered calls in the past and have done okay with them, but I was employed back then and didn't follow a continuous strategy back then.

Currently, I have a small dilemma or dilemna. We moved about $220,000 from DW's 403b to a tIRA with a firm that has the majority of our holdings.. It was supposed to be an in kind transfer, however, the old firm liquidated the mutual fund and transferred cash. Now I have cash to invest, but I don't want to jump in all at once with all the volatility. What would be a good strategy using puts to get back invested? Or to take advantage of the volatility? This is money that is not needed to live on, or needed in any short time. It will most likely be more legacy money.

Seems like a no-brainer to me. Look at a set of stocks you already have or like and write slightly OTM puts against ones you feel have been unduly hammered. Lots of good choices this week, doubly so if you *really* want to take advantage of volatility with a company reporting earnings. (Alternatively, buy the stock and write the calls but your question specifically referenced puts.)

Working example:: NVDA, currently at $239, you could write ten 220 Puts expiring in a week, and net $5K+. Alternatively, if you feel it's worthwhile buying at it's current price, write ten Puts at $240; that's $13K of income or an annualized return >280%!

Timing is for suckers, let option buyers play that game. (Yes, that means invest at once, don't try to DCA in, especially given that this is a non-taxable account and you indicate you have no near-term need for the cash.)

This has been a good year for those writing covered calls against their long-term positions.

 

[Fermion]

I know this thread is about selling puts, but reading that some intelligence reports indicate Russia is going to invade Ukraine on Wednesday, Feb 16, what if you bought weekly S&P500 puts that expire Friday, Feb 18 when the market opens tomorrow?

Looks like a Feb 18 SPY $410 put was trading for around $0.58 on Friday.

If it opened Monday and you bought, maybe $5,000 worth at $0.55, that would be 90 put contracts.

Then Ukraine is invaded two days later and SPY (temporarily) drops by 10% (circuit breaker) and you sell the puts for $15 each, pocketing a profit of $130,000.

 

[aja8888]

I know this thread is about selling puts, but reading that some intelligence reports indicate Russia is going to invade Ukraine on Wednesday, Feb 16, what if you bought weekly S&P500 puts that expire Friday, Feb 18 when the market opens tomorrow?

Looks like a Feb 18 SPY $410 put was trading for around $0.58 on Friday.

If it opened Monday and you bought, maybe $5,000 worth at $0.55, that would be 90 put contracts.

Then Ukraine is invaded two days later and SPY (temporarily) drops by 10% (circuit breaker) and you sell the puts for $15 each, pocketing a profit of $130,000.

Well, at least Russia is waiting until Valentines Day and the Super Bowl winner's parade is over.

 

[Fermion]

Well, at least Russia is waiting until Valentines Day and the Super Bowl winner's parade is over.

It is interesting how telegraphed stuff is. I wonder if they really don't want it to be a surprise so we don't get into some accidental world war situation...both sides want to show their moves so the other side can be careful.

Looking back at the invasion of Crimea, it was Feb 20, 2014. They really like February. But also looking back, the market really shrugged that off, so maybe the puts would just expire worthless. My gut says there will be a drop this time, I just am always a little off on timing. I was off by about 1 month on the COVID drop...I had screamed about it in early Feb 2020 and the market kept climbing for another 3 weeks, making me look stupid lol.

 

[tutan]

I know this thread is about selling puts, but reading that some intelligence reports indicate Russia is going to invade Ukraine on Wednesday, Feb 16, what if you bought weekly S&P500 puts that expire Friday, Feb 18 when the market opens tomorrow?

Looks like a Feb 18 SPY $410 put was trading for around $0.58 on Friday.

If it opened Monday and you bought, maybe $5,000 worth at $0.55, that would be 90 put contracts.

Then Ukraine is invaded two days later and SPY (temporarily) drops by 10% (circuit breaker) and you sell the puts for $15 each, pocketing a profit of $130,000.

That is tempting. Or if it doesn't happen, you lose $5000.

 

[aja8888]

That is tempting. Or if it doesn't happen, you lose $5000.

It's just like putting your money on black or red in Vegas.

 

[Fermion]

Yeah, I did it in 2020, found my post:

" 02-06-2020, 01:06 PM #22
Fermion
I bought 50 march 2020 $325 puts today for $3.3

I just have a feeling that we have not quite seen the full extent of the wu-flu and things could pull back a tad over the next week or two as cases pop up in the USA.

I am not looking to make a fortune here, but even a 5% pullback would make those puts go from $16,500 to about $50,000."


Unfortunately the market tricked me and waited several weeks to drop by 30% so I sold out too early lol.