Selling Covered Calls and Naked Puts

[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]

Quote:

Originally Posted by Sojourner 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]

Quote:

Originally Posted by NW-Bound 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]

Quote:

Originally Posted by 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.

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

[bobandsherry]

Quote:

Originally Posted by tutan Bobandsherry, so here you didn't buy SNAP stock at all? Thanks

That's correct.

[Sunset]

Quote:

Originally Posted by 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.

You are a LOT smarter than me, I don't think I'll try this type of thing, as I'm uncertain of the risks, or why you would even close it out early.

[MRG]

Quote:

Originally Posted by 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.

+1

I've been selling puts on PLTR for a couple months. Weeklies that I sometimes sold, bought back and resold, sometimes multiple times a week with the same option. I finally was put in at 26, but I've already done 4 a share in put premiums. Now onto some more calls.

[Sunset]

Quote:

Originally Posted by 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. ....

If I'm doing my options in an IRA/Roth, I don't see the reason to track the basis of a stock I may get put to.

Sell put for x on some stock, expires.
Sell put for x2 on same stock, expires.
Sell put for x3 on same stock, and gets assigned.
Now I own the stock bought at Y, and it's bad news as it went down before assignment to Y-4.50.

I decide I want to sell a call, what price I can get at some strike price is determined by the market. Does not matter if x+x2+x3 is $10 or $3 or $4.50

Only value in an IRA/Roth I can see, is to internally track and console myself that the drop from assigned price Y might be balanced off by all the work of selling puts earlier ( x+x2+x3 ).
Of course I could have simply waited for the stock to fluctuate down and bought it at Y-4.50 for the same cost/effect.

If I want to measure how well my option dealing is doing, I think I should just compare to VTI holdings or VTI & BND holding.
Basically is it better to do options or just buy and hold VTI & BND

[bobandsherry]

Quote:

Originally Posted by Sunset You are a LOT smarter than me, I don't think I'll try this type of thing, as I'm uncertain of the risks, or why you would even close it out early.

I doubt that's true.... lol..... as I mentioned, I closed it out early as stock price jumped too much and made writing (selling) a call no longer a good return for that trade. If I were to roll the $70 option there was no premium to be made for anything that was under 2 months.

I could have rolled the $70 call (sell) to Jan to align with my $45 call (buy), it was only a couple of hundred dollars. From a % of return it wasn't worth it to me. So for me, to make $115 more by holding for roughly 6 more months wasn't worth it to me as I already made a good profit (almost doubled in 79 days) and didn't want to put that at risk should SNAP price slide over the next 6 months.

I don't know if it was "smart", but as the saying goes, no one ever went broke pocketing profits.

[tutan]

So if SNAP were to suddenly jump overnight, say double, is there a big chance of that Jul23@$70 getting assigned? So the risk is not having the money to cover the purchase of SNAP to cover the call?

[NW-Bound]

Quote:

Originally Posted by bobandsherry ... as I mentioned, I closed it out early as stock price jumped too much and made writing (selling) a call no longer a good return for that trade. If I were to roll the $70 option there was no premium to be made for anything that was under 2 months. I could have rolled the $70 call (sell) to Jan to align with my $45 call (buy), it was only a couple of hundred dollars. From a % of return it wasn't worth it to me. So for me, to make $115 more by holding for roughly 6 more months wasn't worth it to me as I already made a good profit (almost doubled in 79 days) and didn't want to put that at risk should SNAP price slide over the next 6 months...

When a stock is topping out and gets to the higher end of its trading range, demand for out-of-the-money calls dries up. Other traders, or more likely their computers running some trading algol, stop bidding up the stock and its options. For them to go higher, the market wants to see some new positive news, or hype.

The market can be somewhat rational. It is not always crazy.

[indiajust]

the motley fool options crowd claim a success rate of almost 90% of their option trades. They advocate staying with stocks they already know and like, just trying to get better prices. So they lean toward covered calls and cash covered puts. It is expressly an income generating strategy. But they also use it for cap gains, buying stocks they want at a better price and then holding. Later if a stock gets ahead of fundamentals, they sell puts. Generally they are sellers to collect the premium as income.

I have yet to do any trades but I do admit to curiousity and see the utility.

[Sniggle]

Quote:

Originally Posted by indiajust the motley fool options crowd claim a success rate of almost 90% of their option trades. They advocate staying with stocks they already know and like, just trying to get better prices. So they lean toward covered calls and cash covered puts. It is expressly an income generating strategy. But they also use it for cap gains, buying stocks they want at a better price and then holding. Later if a stock gets ahead of fundamentals, they sell puts. Generally they are sellers to collect the premium as income. I have yet to do any trades but I do admit to curiosity and see the utility.

The only frustrating thing about selling cash covered puts to acquire stock 'you want to buy' at a price 'you want to pay' is that in a market like this you end up chasing the stock higher with your 'puts'. Which is really not a bad thing, if you are collecting .5% premium every week on your money that is set aside to own a given stock. Every time you sell a put, the cost basis when you eventually get the stock (and if you are within 5 points of the price when writing puts it will happen) is reduced. (Of course, the cash set aside must increase if the put strike price increases through the iterations).

[MRG]

Quote:

Originally Posted by tutan So if SNAP were to suddenly jump overnight, say double, is there a big chance of that Jul23@$70 getting assigned? So the risk is not having the money to cover the purchase of SNAP to cover the call?

I think, but would appreciate others input, that if the short call is assigned the long ITM is unwound to satisfy the assignment.

[Sunset]

Quote:

Originally Posted by Sniggle The only frustrating thing about selling cash covered puts to acquire stock 'you want to buy' at a price 'you want to pay' is that in a market like this you end up chasing the stock higher with your 'puts'. Which is really not a bad thing, if you are collecting .5% premium every week on your money that is set aside to own a given stock. Every time you sell a put, the cost basis when you eventually get the stock (and if you are within 5 points of the price when writing puts it will happen) is reduced. (Of course, the cash set aside must increase if the put strike price increases through the iterations).

Plus, just when you do get assigned the stock, it will be at the peak of all time and the 20% drop in value is painful.

[NW-Bound]

Quote:

Originally Posted by Sunset Plus, just when you do get assigned the stock, it will be at the peak of all time and the 20% drop in value is painful.

There's danger in repeatedly raising the put strike price to chase a stock.

Sometimes you win, sometimes you lose.

Or a win turns to a loss, or vice versa.

I sold a call on HUM at 455, expiry July 9. It got assigned when HUM reached 455.65 at expiry, a mere 0.65 above the strike price. I immediately sold a put at 455 to buy it back, but it climbed all the way to 471. I let it go and not sell any more put. I "lost" the stock, but made money on it, and also on numerous options written along the way. But if I had set the call price higher than 455, would still have the stock which became 471. Or if I had set the put price higher than 455, might have gotten the stock back. I would have more money. Or is it so?

Just yesterday, the company announced earnings. Beat expectations on both top and bottom lines. Result: stock crashed today to as low as 433, but rebounded to 441 at close. What the heck! I guess the market expected more.

Wow! Glad I sold it 2 weeks ago at 455. Who wouldda thunk? What to do now?

Before it rebounded, I sold a put to buy it back at 435, expiry in two days, 7/30. I pocketed $310 for the contract, whether or not I buy the stock back at $2K cheaper than I sold.

Said I should not sell any more put, lest my stock AA go up more if I get assigned, but it's hard to resist, being such a stock lover that I am. It's so hard to say no.

PS. I sold 13 contracts today on various positions, pocketing $1574. All are covered calls, except for the above HUM put option.

[MRG]

I'm still trying to figure returns without killing myself with data entry. I have to add in the premiums from the next couple of days but for the last 90 days I've pocketed almost 7k in options premiums from 65k play money.

[bobandsherry]

Quote:

Originally Posted by MRG I'm still trying to figure returns without killing myself with data entry. I have to add in the premiums from the next couple of days but for the last 90 days I've pocketed almost 7k in options premiums from 65k play money.

You can use the XIRR function (Excel and Google Sheets), just need to enter the credits and debits, along with the dates. Not overly burdensome on data entry, could code download the data from your broker and massage it. Depending on your spreadsheet skills, can pull the data from transactions.

I look at returns at the individual trade level, gives me insight as to what worked, or didn't, and maybe why. I can see how many winners, or losers there were too. I then consolidate for overall picture on the return, but definitely not as accurate as XIRR would compute. Simplified "return" but all I need for my purpose.

[tutan]

Quote:

Originally Posted by MRG I'm still trying to figure returns without killing myself with data entry. I have to add in the premiums from the next couple of days but for the last 90 days I've pocketed almost 7k in options premiums from 65k play money.

That's impressive. I must be a lot more risk-averse. Have been getting ~$1k per month from 80 -90k of "play money". I keep going back to ARKK, ARKG, CCJ, and AMD. On a couple of occasions I was able to get some low premiums on IJS and EW. I learned about FCX and SAVE from this thread but not so sure about them.