Selling Covered Calls and Naked Puts

[ownyourfuture]

I have around 100 stock positions, all the way from boring stocks like AA, WMT, PFE, TSN, etc..., to semiconductor stocks like MU, INTC, LRCX, etc... and biotechs.

You never told us the name & symbol of the mutual fund you manage

 

[NW-Bound]

You never told us the name & symbol of the mutual fund you manage

I surely did! Back in 2012, I made a thread to compare Wellesley VWINX and NWBGX.

That thread is here: https://www.early-retirement.org/forums/f28/wellesley-vs-nwbgx-59433.html.

Ever since the late 90s when I decided to be an active investor, I have always held around 100 long-term positions, not including options that are transient and expire quickly.

At one point, I thought of consolidating down to sectored ETFs, in order to reduce the number of positions. But then, I discovered that individual stocks have higher volatility, and fetch higher option premium. I went back to my old way.

By the way, people who own individual stocks know what I am talking about. The S&P index may move up/down 1% daily, but individual stocks may move 2x, or 3x. Instead of owning the S&P, you can own a cross section of it, and try to enhance the return with call options on the more volatile components.

And that's what I have been trying to do, although I do overweigh some sectors that I think will do better in the near future. These include semiconductor and energy.

 

[tutan]

Put sellers! How much do you 'risk' per trade? I am satisfied with getting around $100 premiums for $8k - $10k on expirations mostly less than 40 days. But the constraint here, I believe, is mainly due to the amount of money I have for options is less than $100k. One drawback is that I don't get to play with higher priced stocks.

 

[Sunset]

Put sellers! How much do you 'risk' per trade? I am satisfied with getting around $100 premiums for $8k - $10k on expirations mostly less than 40 days. But the constraint here, I believe, is mainly due to the amount of money I have for options is less than $100k. One drawback is that I don't get to play with higher priced stocks.

Same here, biggest one I did recently was on QQQ , was willing to buy it for $32K and in return I got close to $500.
It was a month or so ago, and I wish I had gotten it still the $500 is a nice consolation prize

Normally I do a 10K risk for around $100 or better

 

[NW-Bound]

Put sellers! How much do you 'risk' per trade? I am satisfied with getting around $100 premiums for $8k - $10k on expirations mostly less than 40 days...

For puts, I usually look for a premium of 1% of principal per week. Of course, that often requires a strike price not too low from the current price, and it gets tricky here.

And that means shopping carefully for stocks I do not mind owning if I get assigned. Also, if getting assigned means I will have too much of that stock, or too heavy a concentration in that sector, then I want to be sure that the stock is not likely to go down further. It means looking for stocks that have been down for a couple of weeks or even a month, and a rebound is likely or at least not a further deep decline.

Because I stay diversified across different sectors, I often find opportunities due to sector rotation, when investors dump an entire sector to flock to another one. If I don't find a "good deal" to my liking, I don't sell. I rarely commit more than 1/3 of my cash holdings. About 1/2 is the highest I have gone, I think.

 

[NoiseBoy]

Just want to follow this discussion

 

[MRG]

Put sellers! How much do you 'risk' per trade? I am satisfied with getting around $100 premiums for $8k - $10k on expirations mostly less than 40 days. But the constraint here, I believe, is mainly due to the amount of money I have for options is less than $100k. One drawback is that I don't get to play with higher priced stocks.

I play 20-25k per equity and play 2-3 a time. I was getting 1.5-2% weekly on some more volatile stocks. Looking like I will be assigned 25k worth of stocks to sell calls on
this Friday.

 

[tutan]

For puts, I usually look for a premium of 1% of principal per week. Of course, that often requires a strike price not too low from the current price, and it gets tricky here.

And that means shopping carefully for stocks I do not mind owning if I get assigned. Also, if getting assigned means I will have too much of that stock, or too heavy a concentration in that sector, then I want to be sure that the stock is not likely to go down further. It means looking for stocks that have been down for a couple of weeks or even a month, and a rebound is likely or at least not a further deep decline.

Good pointers! Thank you! I hopefully learned my lesson back in Feb. when I got too complacent being a novice put seller and got assigned MTLS, a component of ARKK and ARKQ. MTLS.. 3-D printing my foot!

 

[Running_Man]

Put sellers! How much do you 'risk' per trade? I am satisfied with getting around $100 premiums for $8k - $10k on expirations mostly less than 40 days. But the constraint here, I believe, is mainly due to the amount of money I have for options is less than $100k. One drawback is that I don't get to play with higher priced stocks.

I do not consider the premium much other than to evaluate if it would earn 10-12% annually on my money as a minimum, since the idea is to be able to pick up a stock I want at a favorable price.

At the end of the day I will track to categories, stocks purchased under the put program and how I do on those long term, which will be the put price less the premium deducted from the final disposition price in the future. that will give me my equity return

Then I will have the put premium on the cash in my account allocated for puts and that will give me a return on my cash. We'lll see how this plays out, but the comments so far are very helpful.

 

[NW-Bound]

Jumped hard on the covered calls bandwagon in the last month (which is probably a negative indication[emoji14]).

1st covered call result was very good, but I also left a lot on the table. AMD, bought at 1000 shares at 80 on 7/16, sold 10 07/02/22 86.5 calls for 1.11 on 6/28, stock got assigned away yesterday for strike price.

Initial investment:$80000
Profit after 20 days: $7600
Return: 9.5%
Return annualized: 173%

Profit lost due to stock price ($94.70) when assigned: $7100[emoji22]

I know I could have made almost double if I just held, but hard to be upset with a 173% annualized return...

AMD closed today at $90.54, down from when you got assigned, but still higher than your $86.5 strike price. It may drop some more.

Here's a chance for you to sell puts to buy it back. Put options at $86.5, expiry Aug 6, paid $2.60. Tomorrow, the premium may be higher.

When I have 1000 shares in one position, my style of trading is to sell 1 or 2 contracts, then if the stock keeps going up will sell another 1 or 2 contracts at a higher strike price, possibly with a later expiry. By laddering the covered calls, I will not lose all of my good stock at once, and hopefully get more money from the covered calls. Again, I only hold stocks I want to keep long term, so of course I think of them as "good stocks".

Occasionally, I would lose the good ones, and they kept rising. But by chasing after them with puts, I managed to recover some of the money I left on the table.

As Koolau always says, YMMV.

PS. Laddering the calls gets me more money when a stock is rising. It gets me less money when the stock is in a decline, but still more than if I did nothing.

 

[ownyourfuture]

I surely did! Back in 2012, I made a thread to compare Wellesley VWINX and NWBGX.

Ever since the late 90s when I decided to be an active investor, I have always held around 100 long-term positions, not including options that are transient and expire quickly.

Pretty much the same for me, although the most positions I ever had at one time was around 20. The biggest mistake I made was in 2000 & 2001. I call it, trying to catch a falling knife syndrome (TTCAFKS)

I'd see a stock that was trading at $50 while the 52 week high was $200 & think to myself, wow, what a bargain. So I'd buy. A couple weeks later it was $25

It taught me a valuable lesson.

As for options, I'd sell out of the money covered calls on my long-term holdings on days they were up substantially.

That worked well for me until 2017, when I initialized my high deductible healthcare plan through the ACA. Without any option income, I was already close to the cliff, so I stopped selling them.

Fellow family/friend investors who are in a position where they could make substantial additional income by selling covered calls, get the deer in the headlights look when I try to explain it to them

 

[highlan875]

Please be careful. As a seasoned options analyst you’ll be served by the understanding the map is not the territory.
There’s a strategy that’s created using equities as fixed income securities that’s worth pursuing.

 

[Twolves]

Try NUSI, lot better protection in the down market. But the monthly dividends are less than QYLD.

 

[rayvt]

To be frank, I am not impressed with QYLD when I take a quick look just now.

In an up market, it gained much less than the indices. Yet, in a down market, it lost the same, or even more.

That's because covered calls have a ceiling on the upside, but you fully participate on the downside. In general you have a majority of small wins and a small number of large losses.

The losses come as a surprise, because people read and believe all the touts who claim that covered calls are free money.

 

[Sniggle]

So having fun with this covered call thing so far. My major mistake early on has been chasing the underlying stock to buy it. Now that I have the ability to sell cash covered puts I should be able to avoid that trap.

Example: Bought 1700 CAT for 217.85 on 6/29 (chased it, paid like $1.50 too much...uggh)
- Sold 222.5 7/9 covered calls on 6/29 at $1.7 ($2725 profit)
- rolled to 220 7/16 covered calls today at $1.3 (missed the mid day run up..oh well) ($2182 profit)

I should be able to rinse and repeat, as long as the market does not crash, but I am happy owning CAT even in a downturn. If I get assigned at $220 I will have made 2.36% profit in 18 days. Not bad. And if I get assigned I will come right back with a cash covered put on a down day.

Am I missing something?

 

[NW-Bound]

That's because covered calls have a ceiling on the upside, but you fully participate on the downside. In general you have a majority of small wins and a small number of large losses.

Yes, and no.

First of all, QYLD sells at-the-money covered calls. Which means that in an up market when the stocks keep rising, the fund limits its gains to just the option premium.

It would do better to sell out-of-the-money calls; you trade off some premium for better potential gains.

Secondly, QYLD sells calls at the end of every month regardless of market conditions. When the market drops "bigly" right before the fund writes the next batch of monthly options, it guarantees to lock itself to selling low, when the market rebounds.

To prevent this, I only write options after a string of up days, particularly when investors feel so bullish, and are running victory laps. And I write options on individual stocks, and many of them go up/down in the opposite direction of the entire market. I try to make contrarian plays to bet against the sector rotation.

The losses come as a surprise, because people read and believe all the touts who claim that covered calls are free money.

There's never free money. There are always risks, and one needs to understand them, if he hopes to mitigate them.

 

[aja8888]

Please be careful. As a seasoned options analyst you’ll be served by the understanding the map is not the territory.
There’s a strategy that’s created using equities as fixed income securities that’s worth pursuing.

Can you expound on any of this?

 

[NW-Bound]

Try NUSI, lot better protection in the down market. But the monthly dividends are less than QYLD.

Same as with QYLD, I never heard of NUSI. It's a fund holding mainly NASDAQ stocks, then using option collar strategy to sell calls to get cash to buy protective puts. Nothing unusual here. This strategy may give up some returns in a hot market, in exchange for reduced loss in a bad down market.

The idea is nothing new, but a lot depends on execution. The fund manager buys/sells options not according to the calendar. He is not buying the entire NASDAQ 100 either, and may go outside of the NASDAQ. In other words, he retains the discretion to do as he sees fit.

NUSI is still a very small fund, and has not been around that long with an inception date of 12/2019. From a brief look at NUSI, I see that downdraft in a market period such as early 2020 was quite decent. While the S&P lost -19% and the NASDAQ -13% at the pandemic outbreak, NUSI lost a respectable -8%.

But then, the performance since then trails the NASDAQ significantly as can be expected. This of course does not make it a bad fund. You win less, but also lose less if and when calamity strikes. Is the lower return worth the protection? We will not know until the next crash.

 

[NW-Bound]

I looked further by comparing NUSI to Wellington, a popular 60/40 MF.

Over its short life of not even 2 years, NUSI gives roughly the same return as Wellington, but with less up/down. I have not seen anything bad here.

Of course the fund does not have a long track record, but this goes to show one can use options to do many things such as hedging, instead of betting to win big but with an minuscule chance as many speculators try to do.

 

[gregorit]

This actually is a relatively hot strategy right now given the market over the past year or so. The core of it is selling covered calls against a portfolio of solid but volatile stocks and then wheeling over to cash-secured puts if your calls get assigned. (Doing this in a retirement account is particularly advantageous from a tax perspective.) An oft-cited goal is to tack on 1% per month in addition to the growth in the underlying. This is actually lower-risk than a simple buy-and-hold on the portfolio but you can end up missing some gains if your portfolio starts running up.

I never expected this strategy to surface on this forum given the relatively conservative styles and allocations (3-bucket, hold and forget, index, bond mix) of most folks but much more interesting to me than the typical conversation about how to fill up one’s retirement life. <grin>

PS: An extra 1% income/month on an investable stock portfolio may not seem like much but if you have a double-comma base it can be meaningful but the cost is several hours a week as you have to be somewhat attentive to what’s going on in the market.

 

[Parfumeur]

Running_Man> Is your naked PUT cash covered?

 

[Parfumeur]

Don't see any mistake.
Which example? Buy Stock for $30, sell call for $10, collect a premium of $20,95 which gives me a cost of $9.95. So called at $10, I make a nickel a share but sit on dividend for a year or so. Dividend is at my net cost of $9.95, so if dividend is 5% at $30, at $9.95 it is 15%!!!!!

Dunno, but option in the money, particularly deep in the money, come dividend time, you usually get assigned.

 

[Running_Man]

Running_Man> Is your naked PUT cash covered?

YES

 

[RVplusDog]

I’m loving the frosting that options are adding to my portfolio also. As others have mentioned, we have discussed several of these strategies in other threads.

My current strategy is to diversify my options almost as much as my investments are diversified. I still occasionally (rarely) buy a call or even more rarely a put - and if I do, it’s a small dollar amount that’s more akin to casino play money than investing.

I like the strategy of selling deep in the money LEAPS calls on ATT and other nice dividend stocks, although they do seem to get called very early about half the time.

Over time, I’ve gotten more picky about timing the selling of my calls and puts. I have a list of target & current investments, and using iPhone apps I can easily sort by % up or down during extended hours, then do quick research as needed, then write the options as desired, selling calls on the up stocks and puts on the down ones.

One of the best moves I made was moving my retirement accounts from Vanguard to e*trade. I spent decades not knowing what I was missing, manually or with other great effort creating systems and spreadsheets to accomplish things that can be practically single click actions at ET.

The plethora of very good trading tools have really streamlined my options. Earlier in this thread someone mentioned rolling —> I’ve been astounded with how easily some options roll, earning more & more every week in a lot of cases. Even complex rolls such as increasing the call price or decreasing the put price execute at earnings that sometimes surprise me. My takeaway has been, for these choppy and meme-riddled markets, to place pie-in-the-sky orders for rolling any near-term in-the-money options. More often than not, they execute and I’m left with more cash and a better price on that call or put. If a call looks to stubbornly stick (PFE & WFC are two I’m going to lose soon), then I’ll sell a put at the same price to get it back.

That all said, I still do have a small amount of gambling-type options (puts mainly) where I stand to eventually lose a few hundred dollars. I’m talking really risky stuff where I know darn well it’s rolling dice - biopharm, crypto, pot, etc. Keeping the tip of my pinky toe in those keeps me really disciplined and focused in my “real” money which only goes into solid long-term companies.

 

[thepalmersinking]

I sell LEAPS every January on PYPL, V, MA, MSFT MCD all in Roth and tIRAs and my 401k using way out of the money strike prices like 40% upside. I use the proceeds to fund money market account for cash someday. Originally, Ive had to roll up a couple of times and got called away on 2,000 shares of SQ last year but that was fine because i bought it at $12. That strategy brings in $12K or so a year. Been doing it for years. Those are core holdings so if they get called away, except for SQ which was the seed money for my Bond $, i just buy it back. I may have done that once in the past. Is it a smart strategy, i dont know but i like playing the game. In th few cases that i have roll up, i just use the money from the money market account. I’ve bounced back and forth between doing it every quarter and once a year. I think you can maybe make a little more by doing it each quarter.