Selling Cash-Covered Puts

[atfourty]

Hi All,
I was wondering if any of you sells cash-secured puts for income. I have been doing it for about 6 months or so with pretty good success.

Currently i have about 20K tied up to support the puts in various stocks.

 

[MRG]

Your selling naked puts and collecting the premium? I did that for a while on stocks I wouldn't mine owning, if I got put into it, no problem just sell calls against the position, make money on that side too.

Psst want to buy some CAT at $116? Best wishes,
MRG

 

[brewer12345]

I occasionally sell puts in small size. The only cases where I do so are when I am building a position in a particular stock and wish to buy more at a cheap price. The premium has to be juicy enough to bother, and it is only a part of any particular position I will look to put on in a single stock. I would never do it to generate income, only to get long at a specific price.

 

[MasterBlaster]

I have some very poor experience with covered call options. You take on all of the downside risk of a stock and forego any upside potential. And all for the smallest amount of money. No thanks - I learned the hard way. Covered calls are no bargain.

 

[clifp]

I have been doing so in my IRAs off and on for the seven or eight years.

I have 2 hard rules and 2 soft rules
1. It has to be on stock that I really want to own
2. The annualized premium at least 15%

Now 15% is more than adequate rate of return but it is a ceiling not a floor, and sometimes you sell a slightly out of the money put and the stock craters and you lose 20%. In 2013 the 15-20% I was making selling put was dwarfed by the 33% of the overall market, in 2010, and 2012 it was the same as the market and 2011 when the market was flat it outperformed.

The two soft rules are.
1. VIX near 20...
2. The put strike price should be a price I am happy to buy the stock at.

Selling puts is selling insurance, in general I want to be in the biz of selling insurance right after 3 hurricanes have hit not when we have had a 3 years of no hurricanes.
I took advantage of Jan pull back to sell puts and the Vix spiked to 20.. I doubt I'll sell more until the VIX goes back up.

I started selling Tesla puts at 70 a year or so ago. I'd be happy to own the stock at 70. This latest batch which expired last week were at 140. I'm way less interested in own Tesla stock at 140, much less 245.

On the other hand I am greedy and I was getting a 35% annualized return for writing the insurance.

 

[FIRE'd@51]

I do this all the time with cash sitting in my IRA. I prefer to use weekly options since it is less likely that the stock will move far from the strike price in a week. If I get assigned, I write a covered-call (usually at the same strike) to further lower the basis. I only do this with stocks I don't mind owning at a price equal to the strike price less the premium, and usually only on stocks with a decent dividend yield in case I end up owning them for a while. So long as I beat the return on cash (not a particularly high hurdle these days) I figure I am ahead of the game. So far this year I have realized gains of about 4.5% on the cash employed. For the full year of 2013, I earned about 30% on the cash employed.

 

[brewer12345]

I sold some puts today. In small size, I put on a synthetic long position in something I already own a chunk of. I sold some long dated, slightly out of the money puts and bought the same number of call contracts just out of the money with the same tenor. I had to add a little bit of cash (a few hundred) to put the position on.

 

[amfox1]

Other than the VIX rule, I use cash-secured puts in much the same way as clifp, albeit only in taxable accounts.

Sent from my VS980 4G using Early Retirement Forum mobile app

 

[MRG]

Other than the VIX rule, I use cash-secured puts in much the same way as clifp, albeit only in taxable accounts.

Sent from my VS980 4G using Early Retirement Forum mobile app

How come only in taxable accounts? I sense I'm going to learn something new. Thanks in advance.
MRG

 

[TallTim]

I do more or less what FIRED@51 and cliffp describe, relatively large cash backstop allows me to write probably 20-50 contracts per week. As others have noted, this has generated very good cash on cash returns for us the past 3-4 yrs. Also, I can be 100% liquid at almost any time ... worst case is I end up buying stocks I would be OK with owning anyway.

I do this mostly in taxable accts ... which I know is not tax-efficient, but using my IRAs for this means that the trades need to be 100% cash secured up front as opposed to just the maintenance requirement in a non-IRA/retirement acct.

It takes only a few hours a week to generate pretty good income and seems to have become a popular trading approach out there.

YMMV, but it has accelerated my march to FIRE by a few yrs.

 

[aja8888]

Just curious, but what is the most preferable broker to sell puts at? And, are there any sites to practice on?

I used to sell covered calls with a brokerage house years ago (before internet), but when the apocalypse hit (California divorce), I went back to basics and somewhat underground.

 

[amfox1]

How come only in taxable accounts? I sense I'm going to learn something new. Thanks in advance.
MRG

A number of my puts are tied up in long-term trades, as opposed to opportunistic short-term trades. For instance, I have sold long-term puts in three stocks to finance long-term call spreads in three stocks which I believed, when made, were near a bottom. I can only do spreads in my taxable account.

Other of my put trades are opportunistic, mainly around stocks I own which appear to be stuck in a tight range. Sell the put at the bottom of the range, buy it back at the top.

Others are around stocks I follow that drop for no good reason. For instance, when retail stocks started tanking in January, Kohl's (KSS) fell from 57 into the low 50s with no specific company news. I snapped up some Jan31 52 puts, ended up rolling them out from Feb28 51 puts and they expired today, with the stock at 56. I made a 2.14% (18.1% annualized) return on the secured cash over a 43-day trade.

While I can do these latter two types of trades in my IRA, I have (for now) chosen not to do so. (BTW, in both accounts cash is segregated to cover the puts, unlike TallTim's case.) Part of this is that my IRA is more fully invested in income-producing stocks and bonds.

 

[MRG]

Amfox1,
Thank you very much for the detailed explanation. I learned a lot, I'll probably try one of the strategys you mentioned soon, more resarch needed of cost basis on my end.

Another tool in the toolbox, thanks you helped me learn something today, not always an easy task.
Best wishes,
MRG

 

[brewer12345]

I will throw out an example of what I did recently. I am already in UPL and have a fundamental bullish view of the company and natural gas in general. When the stock sold off hard on Wednesday for no apparent reason, I sold 1/16 $22 puts for $3.40 and bought 1/16 $25 calls for $4.30. The stock was at 23 and change when I put the trade on. I had to add a little cash to the trade since I did not want to do a spread on the call side. I think of this as a "synthetic long" position.

 

[Fermion]

Cash secured puts are a decent way to get tax deferred money...possibly never pay tax on the money.

Example:

You sell 20 contracts at $100 strike on XYZ index that is trading at $105. You sell them one year out and collect $5 per put, or $10,000. This of course ties up $200,000.

XYZ index drops to $99 and you are assigned the shares. The $10,000 is added to your cost basis and you owe zero tax on it at the present time. Perhaps some time in the future when you have lower income, you sell XYZ for zero cap gains.

Even better would be using this strategy to gain income now while staying under the subsidy cutoff for ACA.

All sorts of fun things to do!

 

[bondi688]

I have some very poor experience with covered call options. You take on all of the downside risk of a stock and forego any upside potential. And all for the smallest amount of money. No thanks - I learned the hard way. Covered calls are no bargain.

Agree that selling covered calls have their downside. I sold a covered call after one of the stocks I bought had a huge drop, and I was trying to nibble at some premium to compensate psychologically and sold the call at what I thought was a safe spread but way below my purchase price. But the stock got called away when it recovered within a short time. And now the price had shot straight up and I missed the whole spike up. So instead of being in the black now, I ended with a capital loss.