Selling Covered Calls and Naked Puts

[NW-Bound]

I like the ITM scheme better in a falling market. Better to have a risky stock called away than put to me.

In the example above,

1) MOXC is above the strike price of 12.50 -

If you hold the call, it will get assigned, and you end up with no stock, plus your original cash and the gain.
If you hold the put, it expires worthless, and you don't have to buy stock. No stock, plus the original cash and the gain. Same result.

2) MOXC drops below 12.50 -

If you hold the call, your call expires worthless, does not get assigned, you end up keeping the losing stock, plus a bit of cash left.
If you hold the put, you have to buy the stock. You now hold the losing stock, plus a bit of cash left. Same result.

 

[NW-Bound]

Compared to VTI at 100%, I did terrible, a pure VTI was the place to be (in hindsight).

Of course, in a rising market, you will beat even 100% VTI by leveraging using margin or options. You can get 2x the gain of 100% stock AA.

The only problem is knowing if the market will be rising or falling in the near future.

My stock AA usually runs from 60% to 80%. If I beat a 60/40 balanced fund, I pat myself on the back. But there's no guarantee that I always will.

In a bull market, I have had no problem beating my benchmark. In a falling market, I usually fell more than they did.

 

[bobandsherry]

In the example above,

1) MOXC is above the strike price of 12.50 -

If you hold the call, it will get assigned, and you end up with no stock, plus your original cash and the gain.
If you hold the put, it expires worthless, and you don't have to buy stock. No stock, plus the original cash and the gain. Same result.

2) MOXC drops below 12.50 -

If you hold the call, your call expires worthless, does not get assigned, you end up keeping the losing stock, plus a bit of cash left.
If you hold the put, you have to buy the stock. You now hold the losing stock, plus a bit of cash left. Same result.

I agree with you, BUT...... the difference is with the PUT you also need to ensure it's Cash Covered (meaning you have cash set aside / available) vs. Naked.

 

[NW-Bound]

I agree with you, BUT...... the difference is with the PUT you also need to ensure it's Cash Covered (meaning you have cash set aside / available) vs. Naked.

Yes, for the OTM put, you need to hold a cash reserve in case the put is exercised.

It happens to be the same as the cash you pay upfront to buy the stock, minus what you get back from selling call.

In the real-life example in my earlier post, you need to commit $26.31 to buy the stock, then get back $15.22 for selling call. You have $11.09 committed.

For the play using put, you need to keep $12.50 on hand, which is $11.10 of your own money, plus the $1.4 you get from selling the put.


PS. The difference between the two cases is that with the call, you have no cash on hand, after committing $11.09. If the call gets assigned as you hope for, you get to sell the stock for $12.50 in return for the $11.09 that you committed.

With the put, you have to hold $12.50 cash, which is $11.10 of your own money on hand, plus the $1.4 from selling the put. If the put expires worthless as you hope for, it frees the obligation, and you now really own $12.5 free and clear, in return for the $11.10 that you put aside as collateral for the put.

So, it is either you commit cash up front for the call, or hold the same amount of cash for the put until the play terminates.

 

[tutan]

In the example above,

1) MOXC is above the strike price of 12.50 -

If you hold the call, it will get assigned, and you end up with no stock, plus your original cash and the gain.
If you hold the put, it expires worthless, and you don't have to buy stock. No stock, plus the original cash and the gain. Same result.

2) MOXC drops below 12.50 -

If you hold the call, your call expires worthless, does not get assigned, you end up keeping the losing stock, plus a bit of cash left.
If you hold the put, you have to buy the stock. You now hold the losing stock, plus a bit of cash left. Same result.

I see ...there shouldn't be any advantage one way over the other. Thank you!

 

[bobandsherry]

I see ...there shouldn't be any advantage one way over the other. Thank you!

There could be a pricing difference, look at both types of options.

 

[tutan]

MOXC now 8/20 $12.5 strike put for ~ $1.20 premium ...that's greater than 100% APY. very tempting.

 

[NW-Bound]

The VIX is high today. Investors are in "fear mode".

A good day for the daring few to sell puts.

 

[Sunset]

The VIX is high today. Investors are in "fear mode".

A good day for the daring few to sell puts.

Strangely, my Friday puts are still out of the money..

 

[Sniggle]

Another learning day for me. I was looking to sell puts on MSFT, MCD and AMX, and I did, but I moved to early...if I had waited to understand the market movement I could have double my money on them. They are all still OTM, but I would be glad to own all three at the strike price.

I just need to develop patience, better intuition, and tamp down the 'excitement'.

The good news is that I had a few stocks in the green, and almost all the stocks I own did better than the market.

 

[aja8888]

The VIX is high today. Investors are in "fear mode".

A good day for the daring few to sell puts.

All my options expired Friday. I sold one call today on FCX which I would like to have taken soon.

It's not a good time to play around with long dated options (more than a week)!

 

[NW-Bound]

Strangely, my Friday puts are still out of the money..

You either priced your puts better than I did mine, or your stocks held up well in this market decline. My defensive stocks such as consumer staples have been doing way better than my tech stocks, and economic-sensitive stocks such as energy and metal mining stocks.

My planned strategy with option selling has always been this:

1) I write covered calls on the stocks that I want to hold long-term to make some extra money. I want to set the strike price high enough that it will not hit, and I keep the stock to sell options again and again. I do not want to lose my "good" stocks.

2) I write cash covered puts on the stocks that I do not mind having. Often they are the same stocks I own, and suffer a decline that I think is temporary. I normally set the price low enough, so that I do not have to buy and become too overweighed in the same stocks or sectors. I also do not want to lower my cash level.

What has happened this year is that my calls generally expired worthless as planned, but my puts got assigned more often than I liked. I own more and more stocks, and my cash level is dropping.

This is a sign that my stance has been too bullish to execute my strategy of not buying nor selling more stocks via option trading. I need to recalibrate my option price settings. I need to lower the strike prices of both my puts and calls.

 

[aja8888]

You either priced your puts better than I did mine, or your stocks held up well in this market decline. My defensive stocks such as consumer staples have been doing way better than my tech stocks, and economic-sensitive stocks such as energy and metal mining stocks.

My planned strategy with option selling has always been this:

1) I write covered calls on the stocks that I want to hold long-term to make some extra money. I want to set the strike price high enough that it will not hit, and I keep the stock to sell options again and again. I do not want to lose my "good" stocks.

2) I write cash covered puts on the stocks that I do not mind having. Often they are the same stocks I own, and suffer a decline that I think is temporary. I normally set the price low enough, so that I do not have to buy and become too overweighed in the same stocks or sectors. I also do not want to lower my cash level.

What has happened this year is that my calls generally expired worthless as planned, but my puts got assigned more often than I liked. I own more and more stocks, and my cash level is dropping.

This is a sign that my stance has been too bullish to execute my strategy of not buying nor selling more stocks via option trading. I need to recalibrate my option price settings. I need to lower the strike prices of both my puts and calls.

The trouble with getting to "safe" with strike prices, you end up banking less premium. Plus, sometimes too safe means low volume option sales, or no availability.

 

[bobandsherry]

Here's an example of the Poor Man's Covered Call, I closed out the position today (I'll explain later why).

• 
  5/5 I bought SNAP, Jan21@$45 Call for $1,477, I felt comfortable that $45 was deep ITM as SNAP was trading around $65 at the time. That same day I sold a Jun18@$70 for $126. My net investment / capital is then $1,351.

• 
  My strategy was then to write calls until Jan21 and pocket the premium.

• 
  6/9 I rolled the Jun18@$70 to Jul23@$70 for $171 premium. Rolled early based on stock movement and wanted to lock in the premium.

Today, SNAP popped $13, to about $77. A case of too much movement makes this now something I don't want to continue to hold - game was over and it's a "W" on the scoreboard.

Looking out value of future premiums not worth continuing to write, so I decided to close out my position. The net value if it all close out tonight would have been $2,500 (difference between the $45 and $70. But I saw there was still a slight intraday premium to collect, so just closed it out at $2,585.

My initial investment was $1,351 on 5/5. Closed position today collecting $2,585, return of $1,234 or 91% for 79 days.

This isn't a strategy for every stock, but just another tool to consider when doing your analysis.

 

[NW-Bound]

^^^ Nice.

It is possible to make money with option trading, and consistently overall too, I believe. I think the important thing is to not get greedy and keep upping the size of the bet. One faux pas on a large bet may take back all the other wins.

What I have been doing is to make small bets, but lots of them. It took 2000 contracts for me to make the $318K last year. I mostly count on the decay of the time value of the contracts to work in my favor.

 

[bobandsherry]

^^^ Nice.

It is possible to make money with option trading, and consistently overall too, I believe. I think the important thing is to not get greedy and keep upping the size of the bet. One faux pas on a large bet may take back all the other wins.

What I have been doing is to make small bets, but lots of them. It took 2000 contracts for me to make the $318K last year. I mostly count on the decay of the time value of the contracts to work in my favor.

Now that's NICE! And some active trading.

Agree, you can't plan on a grand slam every time, singles, doubles and occasional triple has much better odds.

Since I retired I've had more time to "play" with my investments and learned about options and feel I still have lots to learn. Or maybe I'd just confuse myself vs the KISS approach.

Very selective on positions I take and overall I'm OK with my returns. Over past year it's been an incremental 20% return vs "buy and hold" strategy for those stocks. Has returned more than a part-time job. Good investing to ya!

 

[NW-Bound]

A clarification is in order here.

The $318K I made in 2020 included about $100K I made with puts. And some of the puts resulted in me having to buy the stocks, and some are still in the red. Of course, my hope is that they will recover in the long run, and I also try to make a bit of money by selling calls on these "extra" shares.

All this means that you have to look at the entire game, and measure your performance by looking at the return of the entire portfolio, and not just count the money from option trading.

And as reported in the YTD return thread, I have been getting about the same as the S&P or a bit better, yet only having anywhere between 60% to 80% stock AA. It would suck if all this active trading brought me a return the same as or less than a 60/40 balanced fund. I am doing this for fun, but the fun would not last if it caused me to lose money.

So far so good. I cannot rule out the possibility that there may be a lot of luck involved. I have been in the market long enough to know not to be too complacent.

 

[bobandsherry]

^^^ Ah, OK got it.

On measuring the return on options, I try to keep it simple. I simply take the premium and factor against the capital, it's not annualized either. So if I had a total of $100,000 of net capital "invested" during the year and pocketed $20,000 in net premiums that's simple 20% return on the options (again, not annualized or the XIRR which both would be even higher).

I mostly do covered calls, stocks I either held or wanted to hold. My portfolio could have gains or losses, but I would have held these stocks and realized those gains or losses even if I wasn't writing the calls. I therefore track the premium on options (net) as incremental, consider it more like a dividend collected.

I also track what money I have left on the table. For example if strike was $50 and stock closed at $60 and I collected $6 premium, I consider the $4 difference as being left on the table ($60 - 50 - 6). I always enter a transaction with the thought it may be called and happy with the return if it is. Just then need to find another trade.

 

[NW-Bound]

^^^^ Sounds like a reasonable way to measure, but I like to point out something else.

With covered calls on stocks that one wants to hold long-term, it may cause him to trail the market in a bull market if a stock surges up, and he has to sell the stock cheap compared to the market price. If not careful, I may have to sell all my good stocks too early, and get to keep all my lousy stocks. Result: trailing the market.

About puts, my goal is simply to beat CD and fixed income. Their rate is so low that I keep a lot in cash, and make money writing puts. I am not doing badly here with the put premiums, while never committing all of my cash. Again, I cannot ignore the paper loss when I have to buy losing stocks, but I believe I still have a net gain that far exceeds CD rate. And of the stocks I had to buy, many turned around and made me money too.

It's difficult to measure all the above effects, hence I just look at the return of my entire portfolio, everything included. I do not count just the return of just the accounts where I do active trading. The ones where I do no trading or the I bonds are there to provide ballast to the active accounts. Hence, I looked at the total picture.

I do try to have an rough estimate of the gains from puts vs. calls. It can tell me if my option selling jibes with how the market is trending. Recently, I think I have been too bullish in some sectors, and need to reduce my stance. This year, I keep getting more puts assigned than calls. I don't like it when my stack of cash gets lower. It could be a sign of me buying high instead of staying neutral or selling high.

 

[Sojourner]

About puts, my goal is simply to beat CD and fixed income. Their rate is so low that I keep a lot in cash, and make money writing puts. I am not doing badly here with the put premiums, while never committing all of my cash. Again, I cannot ignore the paper loss when I have to buy losing stocks, but I believe I still have a net gain that far exceeds CD rate. And of the stocks I had to buy, many turned around and made me money too.

This is exactly my goal with selling puts, too. It's such an easy way (well, once you learn the basics and understand the risks) to boost returns on idle cash. And I love the monthly income I'm able to generate... it just feels great. I just wish I'd discovered all this "selling options for income" stuff years ago!

In terms of paper losses when puts get assigned, I don't look at it that way exactly. I tell myself a) the stock is almost certainly going to go back up, b) I'll sell calls on it until that happens to generate more income, and c) I'll happily collect dividends in the meantime, too. It almost seems like a no-lose proposition. Obviously, there is risk and a certain amount of opportunity cost, but IMHO the risks are pretty minimal, all things considered.

 

[Sunset]

I just sold:
Sold 1 ITCI Aug 20 2021 40.0 Call @ 1.45 Total: $144.34
Sold 2 ABBV Jul 30 2021 120.0 Call @ 0.87 Total: $172.67 -> here I purposefully went for the weekly based on the discussion in this thread, previously I've always gone out a month or more.

The previous week I sold:
Sold 1 ABBV Aug 20 2021 110.0 Put @ 0.85 Total: $84.34
Sold 2 ARKG Aug 20 2021 81.0 Put @ 2.92 Total: $582.67

 

[NW-Bound]

This is exactly my goal with selling puts, too. It's such an easy way (well, once you learn the basics and understand the risks) to boost returns on idle cash. And I love the monthly income I'm able to generate... it just feels great. I just wish I'd discovered all this "selling options for income" stuff years ago!

In terms of paper losses when puts get assigned, I don't look at it that way exactly. I tell myself a) the stock is almost certainly going to go back up, b) I'll sell calls on it until that happens to generate more income, and c) I'll happily collect dividends in the meantime, too. It almost seems like a no-lose proposition. Obviously, there is risk and a certain amount of opportunity cost, but IMHO the risks are pretty minimal, all things considered.

That's my thinking too, when I get assigned a put. I told myself that I bought the stock at a lower price than many have bought at, and history shows that in the long run, guys who buy and hold do well.

But, but, but I do not play the indices, and sell put options on selected stocks or sector ETFs that I felt were "mistreated" by the market, that they should stop dropping before they got that low. But now, they have dropped "that" low, and I am a proud owner of a losing stock.

What if I turned out to be wrong, and the market pricing was right? What if this particular stock deserves to be that low, and is going lower because its fundamental is deteriorating, its business is falling apart?

Doing options on the S&P is of course safer, but the premium is lower because the risk is lower. Hence, I do near 100% individual stocks and sectored ETFs. There's always risk, so I constantly try to avoid going overboard over a premise. Diversify, diversify... This can be hard, once you have developed a certain conviction. You definitely do not want to be hardheaded.

When you consider all the risks, things are no longer certain. It's always a game of probabilities.

 

[bobandsherry]

That's my thinking too, when I get assigned a put. I told myself that I bought the stock at a lower price than many have bought at, and history shows that in the long run, guys who buy and hold do well.

But, but, but I do not play the indices, and sell put options on selected stocks or sector ETFs that I felt were "mistreated" by the market, that they should stop dropping before they got that low. But now, they have dropped "that" low, and I am a proud owner of a losing stock.

What if I turned out to be wrong, and the market pricing was right? What if this particular stock deserves to be that low, and is going lower because its fundamental is deteriorating, its business is falling apart?

Doing options on the S&P is of course safer, but the premium is lower because the risk is lower. Hence, I do near 100% individual stocks and sectored ETFs. There's always risk, so I constantly try to avoid going overboard over a premise. Diversify, diversify... This can be hard, once you have developed a certain conviction. You definitely do not want to be hardheaded.

When you consider all the risks, things are no longer certain. It's always a game of probabilities.

The best advise I've received, no one ever went bankrupt taking profits. [emoji39]. Some I hold, JPM is my long hold, I retired from there and understand the basis of that company and Dimon. There's a few others long term holds. Others are taking trades, never trying to time market but typically have an exit strategy when I buy something. Most of the time it's a big "W", and yet sometimes money left on the table. I use options selectively and not everyone is a winner but still ahead of the game. I could spend more time to understand the technical details, might do better, might just confuse myself. Lol

 

[Sniggle]

I think it is important to keep track of your basis. If you have been selling puts on a stock for a number of cycles, your basis if/when you get assigned will be much lower than the actual price you are paying. This will inform you when pricing the calls going the other way.

Although making a number of mistakes, it is really interesting and fun to play this game. For example:

7/12 - Bought 100 AXP at 93.92 (yes, overpaid as always..but was before I could sell covered puts)
- I have sold calls 3 times since buying the stock, strike price @ 95, netting (after roll) $85.55, $203.70 and today $206.35 (7/30) (today not net if I roll again). That is $495.55 premium collected in 11 days, lower my cost basis to roughly $89. If the stock gets assigned on 7/30 I would have made 3.47% in under 20 days, or an annualized return of 62.5%. Not to shabby.

I have also been selling puts on AXP in my other account, 8 put options at $167.5. I have made $2148.75 in premium this week (rolled it once), or 1.6% on the $134,000 tied up in 5 days.

 

[tutan]

Here's an example of the Poor Man's Covered Call, I closed out the position today (I'll explain later why).

• 
  5/5 I bought SNAP, Jan21@$45 Call for $1,477, I felt comfortable that $45 was deep ITM as SNAP was trading around $65 at the time. That same day I sold a Jun18@$70 for $126. My net investment / capital is then $1,351.

• 
  My strategy was then to write calls until Jan21 and pocket the premium.

Bobandsherry, so here you didn't buy SNAP stock at all? Thanks