Selling Covered Calls and Naked Puts

[Flieger]

Inspired by this thread, I have dipped toes in to Covered Calls with 5 stocks that I intend to hold. Just started this (in April) as a way to supplement income once retired in next year to year and a half. I'd like to outline my thoughts on this strategy/plan and see how it aligns with those that have been at this a lot longer and that are much more experienced with Options. I am now looking at cash covered Puts to accomplish my stated strategy below of reallocating position across more sectors. So far:

~$500k in positions allocated to this "income strategy"
Avg DIVS - $1,766/mo
Avg Options - $5,162/mo
Total Avg "Income" - $6,928/mo

I am going to decrease holdings in these 5 stocks to allow same overall position value with 5 additional stocks to add some sector diversity.

I am trying to "ignore" for the most part the position swings in overall value (other than what I would do with any stock as far as decision making on hold, sell, buy) and only looking at the "income" side. I am also looking at beta of 1 or less average for the 10 positions once I have re-allocated.

Open to thoughts/suggestions.

 

[tutan]

Just started in April so your numbers are extrapolated from only two months? I've tried options on less volatile stocks but the premiums are not attractive enough for farther strike prices so I end up choosing strikes very close to market. The downside of course is higher chances of getting assigned. Being low beta, these stocks can take a while to recover so I am stuck with a few (hundreds) which means opportunity lost to generate income.
Now I like the idea of buy-write (deep ITM calls) on SPY which I learned from Happyras here. Then one may lose big if the market has a sudden drop.

 

[Flieger]

Just started in April so your numbers are extrapolated from only two months?

Yes, only 2 months, but those are the actual numbers.

 

[Happyras]

Yes, only 2 months, but those are the actual numbers.

Pretty decent return, it would be interesting to see what VIX was on your buy/write day and when you roll the option. Low VIX I expect a 6% annual time premium, but with higher volatility a 16% annual rate is possible, at least that what I see trading them on SPY.

 

[fh2000]

Covered calls are very difficult strategy for me. The upper profit is limited, and the downside loses are great. I have done CCs in the past but always regretted it.

Now that I am retired and in need to cash out some holdings for expenses, I will do some CCs with those shares that I intend to sell anyway.

 

[Flieger]

Covered calls are very difficult strategy for me. The upper profit is limited, and the downside loses are great. I have done CCs in the past but always regretted it.

Now that I am retired and in need to cash out some holdings for expenses, I will do some CCs with those shares that I intend to sell anyway.

What did you regret about your CC's?

I am only doing CC's with strike price above my basis, and 2-3 weeks out. I have rolled a couple when it made sense, continued to be profitable, but I am not married to any of the stocks which I do CC's on, so it's ok if they are assigned.

I had a Put that was assigned Friday, so now have additional shares that I planned to buy at some point anyway. Ex-Div is Monday, so I will get that Div's and put a CC in just a little outside of my basis and see if I can get income 3 ways on the one. Fingers crossed.

 

[fh2000]

What did you regret about your CC's?

I am only doing CC's with strike price above my basis, and 2-3 weeks out. I have rolled a couple when it made sense, continued to be profitable, but I am not married to any of the stocks which I do CC's on, so it's ok if they are assigned.

I had a Put that was assigned Friday, so now have additional shares that I planned to buy at some point anyway. Ex-Div is Monday, so I will get that Div's and put a CC in just a little outside of my basis and see if I can get income 3 ways on the one. Fingers crossed.

Around the time when Apple came out with first iPhone, I put aside $25K for Apple stock, and $25K for Google stock. I sold CC later on both and only saw both stocks started to fly high. I rolled both up and out a couple of times until no more strikes to roll up to. This is the risk of rolling up and high.

I wanted to buy back the CCs but waited until time value was almost diminished. I was able to buy back Google CC and shelled out total $40K loss. Today, those shares worth a lot more.

But Apple call owner exercised before expiration, and my shares got called away. I made 100% profit on Apples shares. Had I just kept the shares without messing with it, I would have at least $500K worth of Apples instead of pittance return of $25K.

You could say that I made a mistake doing CC on high flying stocks, or I was too slow to buy back the CC to keep the stock. But the maintenance of this strategy requires active monitoring. This is harder than I thought. So, I no longer try to do CCs for small profit.

 

[Golden Mean]

I agree it can be a bit of a trial managing CCs.

I've had a number of stocks that sat 10-15% below my cost basis. I could either sit and wait or I could sell CCs with a strike below my basis. Most times that I decided to sell CCs below my basis, the stock would rally and I'd be scrambling to roll up and out. If I succeeded, usually the math worked out that I should have just waited for the stock to recover before selling a CC (ie buying to close, rolling up and out netted almost no net gain).

All that said I think I've done well. I've gotten between 5% and 10% in 30 to 80 days on most of my CC/stock deals.

 

[Flieger]

Looks like this may be a down month (June). I rolled one stock at a loss (income from CC Options) to avoid a Call below my basis which tanked me so far. I'm not sure how to model it since with the roll, my overall will be positive (if it's called, my increased CG on the position will outweigh the CC Option loss), but when I am looking at the "income from options" side of it, I like to ignore the unrealized positions valuation. I guess the main thing is to ensure my overall value is on the green side....

Once June is at or near over, I will update the numbers above. I am sure the average will come down.

 

[ownyourfuture]

Own 1008 shares Direxion Daily Semiconductor Bull 3X Shares (SOXL)
Cost basis $13.77

Sold 2 CC contracts today. JUL 14 2023 $27 @ $1.63

My reasoning is that it's basically doubled in one month (see screen cap)
and may have gotten ahead of itself.

 

[Golden Mean]

I don't see an image. Attaching one here.

Good luck with the contracts!

One a side note, I moved $$ from TQQQ(3x etf Nasdaq100ish) to SSO(2x etf s&p 500ish) due to similar feelings.

 

[ownyourfuture]

I don't see an image. Attaching one here.

Good luck with the contracts!

One a side note, I moved $$ from TQQQ(3x etf Nasdaq100ish) to SSO(2x etf s&p 500ish) due to similar feelings.

Not sure why you couldn't see the image ?
I see it was up again today. If you add after hours trading, it's only around $.20 away from the strike price of $27

Nvidia has been beyond belief. It's been single-handedly carrying my IRA & I only have about 30 shares!

Sure looks like an A-I generated bubble (even Intel has been caught in the updraft) but who knows ?

Good luck with your move as well.

 

[Flieger]

So, as I thought, June was tough. Had several calls exercised after trying to roll, etc. had some gain from those and the options overall, but definitely impacted my average and now have cash in SPAXX that I am waiting to redeploy for some other options driven stocks. Still have a few good dividend stocks (monthly) that have started July OK. Here's a snippet of the April and May hoorah, and the June carnage.

For some reason Name Blocks not pulling in it goes top to bottom:
>Called Stock Gain/Loss (small font)
>Options Income/Loss
>Divs Income
>Total

AVG AO is (After Options Start)

 

[ownyourfuture]

A couple questions:
Assuming they don't drop in tomorrow's session, it looks like 200 shares of SOXL will be called away.
(See post 535 above)

When this happens, is the standard FIFO method used ?
That would be ideal in my case as I bought my first 200 shares on 2022-06-10 @ $18.80, by far the most I paid for any of the 4 lots I purchased.

Follow up question: What if that wasn't the case ?
If I had paid more for 1 of the lots I purchased later, could I choose to have those called away ?

Thanks in advance.

 

[Golden Mean]

A couple questions:
Assuming they don't drop in tomorrow's session, it looks like 200 shares of SOXL will be called away.
(See post 535 above)

When this happens, is the standard FIFO method used ?
That would be ideal in my case as I bought my first 200 shares on 2022-06-10 @ $18.80, by far the most I paid for any of the 4 lots I purchased.

Follow up question: What if that wasn't the case ?
If I had paid more for 1 of the lots I purchased later, could I choose to have those called away ?

Thanks in advance.

I believe it depends on your broker. For Vanguard you have to call and tell them which shares to take (or they default to fifo). Some brokers you can do it on the website, maybe when you sell the covered call?

 

[ownyourfuture]

I believe it depends on your broker. For Vanguard you have to call and tell them which shares to take (or they default to fifo). Some brokers you can do it on the website, maybe when you sell the covered call?

It turned out to be a non-event as shares went down around $1.00 today & closed $.77 below the strike price. Next time I sell calls, I'll pay more attention to any options that may be available.

Thanks for the reply.

Regards

 

[Golden Mean]

It turned out to be a non-event as shares went down around $1.00 today & closed $.77 below the strike price. Next time I sell calls, I'll pay more attention to any options that may be available.

Thanks for the reply.

Regards

Always nice when they expire worthless. $$

 

[ownyourfuture]

Always nice when they expire worthless. $$

It sure is!