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Planned Early Retirement in 2018. Any other naked put sellers here?
Old 01-04-2017, 06:40 PM   #1
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Planned Early Retirement in 2018. Any other naked put sellers here?

Hi all!
I'm new to this forum, cruising anonymously here as JohnDoe123. I'm Ern but you can call me Big Ern as well.
Also, when I write "naked put sellers" I mean that the puts are naked while I'm fully dressed. We keep this family-friendly here.
I'm in my early 40s, my wife in her mid-30s and we have a little daughter, age 3.
I reached about 90% of the FIRE (Financial Independence, Retire Early) nest egg target. The nice Wall Street bonus check later this month and another one in 2018 should put me over the finish line.

I plan an initial withdrawal rate of about 3.25% p.a. We'll have about 30% assets in tax-deferred accounts and 70% in taxable accounts (with high cost-basis!). My target allocation in retirement: Very little cash, zero bonds and the bulk of the assets as follows:
  • 40% U.S. stocks, mostly in the retirement accounts but also a little bit in the taxable accounts.
  • 30% futures trading account with Interactive Brokers (taxable account). I short put options on S&P500 futures to generate (relatively) stable passive income: slightly higher returns than S&P, at half the volatility. Quite intriguingly, I haven't found much discussion on this topic in this forum, apart from a few old posts. Selling naked puts seems to be a dirty word in most FIRE circles. I've been doing this for about 6 years with pretty good success.
  • 30% Real Estate (through private equity funds, in taxable account, obviously) in multi-family housing with stable rental yield and a little bit of potential for capital gains.

I currently prefer to have no emergency fund (at 60% current savings rate we can cover all expenses, even unexpected ones with a month or two of savings).

I'm not into stock picking. Index investing with Vanguard/Fidelity works just fine for me. But I'm always looking for new ideas to find passive income: So far, I'm outsourcing the real estate investments, but I'm open to learning more about the landlord business. P2P lending platforms is another intriguing passive income source I would like to learn more about.
I'm pretty knowledgeable about options trading (covered calls, naked puts, etc.). I work in the finance industry and know my way around derivatives trading. I prefer the options on index futures because they are Section 1256 contracts (better tax treatment!). If anyone wants to learn more about this I'm happy to help!

Cheers!
Big Ern
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Old 01-04-2017, 06:48 PM   #2
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Welcome to the forum Big Ern and Happy New Year.
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Old 01-04-2017, 06:52 PM   #3
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Welcome to the forum Big Ern and Happy New Year.
Yes, Happy New Year to you as well!
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Old 01-04-2017, 07:24 PM   #4
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Funny to read your post. I just discovered your blog today as well.
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Old 01-04-2017, 08:38 PM   #5
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I have sold puts from time to time, and much less frequently than selling covered calls. My puts are cash-covered.

The option writing added another 1% on the total portfolio return in 2016 (8.9% total return with 35-40% in cash). I only write these options when I think a sector is at the upper or lower bound of its range. I do this as a lark instead of trading the stocks.

About the puts, if they got assigned, these were the stocks I would not mind owning anyway.
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Old 01-04-2017, 08:57 PM   #6
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Welcome Ern.

Great job on meeting your nest egg goals at such a young age. Retiring when the kids are home gives you more time to spend with them and be there, actively involved, when they need it. I know - I'm retired with teenagers under roof.
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Old 01-04-2017, 09:39 PM   #7
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I have sold puts from time to time, and much less frequently than selling covered calls. My puts are cash-covered.

The option writing added another 1% on the total portfolio return in 2016 (8.9% total return with 35-40% in cash). I only write these options when I think a sector is at the upper or lower bound of its range. I do this as a lark instead of trading the stocks.

About the puts, if they got assigned, these were the stocks I would not mind owning anyway.
Thanks! I do naked puts (a little bit out of the money) with 3x leverage (gasp!), but they are super-short-term. Sell Friday with Wednesday expiration. Then sell Wednesday with Friday expiration. So the leverage doesn't kick in until the market has fallen quite a bit, which it normally doesn't. Even in August 2015 and January 2016 I lost less than the S&P500 index. Works beautifully!
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Old 01-05-2017, 09:17 AM   #8
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Naked put and call seller here. I particularly like selling puts when I want to buy the stock anyway but are looking for a slightly lower purchase price. So I write the puts - if the stock doesn't quite get cheap enough, I collect the premium. And of course if the stock does decline past the strike price then I get the stock on a cheaper basis.

At present I have naked puts that expire in January on GILD and PXD.

I will also write naked calls on stocks I consider overvalued and wouldn't mind shorting. Right now I am short naked calls on TSLA, January expiration.
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Old 01-05-2017, 11:13 AM   #9
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Welcome Ern.

Great job on meeting your nest egg goals at such a young age. Retiring when the kids are home gives you more time to spend with them and be there, actively involved, when they need it. I know - I'm retired with teenagers under roof.
Thanks! That's a great point, because right now we have a toddler at home and it's all fun and games. Having more time with the teenagers at home is so important, too, to make sure they stay on track. Yet another reason to target an early retirement! Cheers!
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Old 01-05-2017, 11:19 AM   #10
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Originally Posted by wingfooted View Post
Naked put and call seller here. I particularly like selling puts when I want to buy the stock anyway but are looking for a slightly lower purchase price. So I write the puts - if the stock doesn't quite get cheap enough, I collect the premium. And of course if the stock does decline past the strike price then I get the stock on a cheaper basis.

At present I have naked puts that expire in January on GILD and PXD.

I will also write naked calls on stocks I consider overvalued and wouldn't mind shorting. Right now I am short naked calls on TSLA, January expiration.
Wow, you are brave! I've never touched naked calls so far. The way you describe the rationale for selling puts is one of the best summaries I've seen. That's exactly why I do it too. I do it on the index level with options on S&P index futures and with very short expirations only. That's where the nicest yields are!
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Old 01-05-2017, 02:36 PM   #11
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I prefer selling credit spreads to naked puts or calls because the the margin is a lot less which results in a higher ROR on the cash employed. Also, you don't have to worry about a margin call.
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Old 01-16-2017, 07:29 PM   #12
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I'm interested to learn more about your naked puts strategy. I've done longer-term covered puts and calls on stocks but never naked on index futures. Please PM if you are comfortable sharing.
I've done a bunch of real estate loans through the crowdfunding platforms and can share my experiences if interested.
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