Selling Covered Calls and Naked Puts

[Fermion]

Quote:

Originally Posted by NW-Bound I was traveling, and just saw this. Feb 18 SPY $410 put is now $0.03/$0.04 bid/ask. There are still 2 days left till expiry. I guess one could have bought the puts as insurance for $3.7M (90 x 100 x $410) worth of stocks. Insurance premium of $5K is not bad, but it is for only 1 week.

I didn't buy any (good thing!) but it looks like even still this week the SPY is not dropping below $410 (yet).

Ukraine was somewhat priced in.

[NW-Bound]

Yes.

I have had better luck making money selling out-of-the-money calls and puts than buying them. YMMV.

YTD, I have collected $32,427 in option premium, as of last Friday (this week's trades are not yet included).

Again, my entire portfolio is down an order of magnitude higher than that, but the $32K helps reduce the loss. It's cash I can convert to Wagyu beef if I care to.

[NW-Bound]

Another Friday, another bunch of options expire.

I counted 14 put contracts and 11 call contracts expiring worthless.

I counted 2 call contracts ending up in-the-money, causing me to sell shares. I already sold 2 put contracts to buy the shares back at the same price next Friday.

[aja8888]

Quote:

Originally Posted by NW-Bound Another Friday, another bunch of options expire. I counted 14 put contracts and 11 call contracts expiring worthless. I counted 2 call contracts ending up in-the-money, causing me to sell shares. I already sold 2 put contracts to buy the shares back at the same price next Friday.

You are on a roll. I decided with all the volatility this week, I would not sell any options. Monday I will see what's attractive.

[Born2Fish]

Thanks to everyone for some very good information in this thread.

I have given up trying to find footing on new holdings (for me) in this market and have instead starting making use of covered calls to help me earn a little with the names I like.

I hadn't realized how lucrative it can be!

Next step is to learn about Puts...

[Sunset]

^^^^^ Just be careful, as a even a famous fund manager went belly up doing options wrong.

I lost money on my first option, which was a really good lesson, as it's kept me timid.

[Born2Fish]

Quote:

Originally Posted by Sunset ^^^^^ Just be careful, as a even a famous fund manager went belly up doing options wrong. I lost money on my first option, which was a really good lesson, as it's kept me timid.

Thanks for the cautionary reminder.

I should not have used the word, "Lucrative". I am looking for small profits on the Covered Calls.

So far I have not tried any Puts but rest assured I will stick my toe in the water before wading in!!

[NW-Bound]

Quote:

Originally Posted by Born2Fish Thanks for the cautionary reminder. I should not have used the word, "Lucrative". I am looking for small profits on the Covered Calls. So far I have not tried any Puts but rest assured I will stick my toe in the water before wading in!!

Yes, you eat small but frequent meals. You can still get fat.

Again I only do this on stocks that I already own and am willing to hold long term. The objective is to squeeze out a few more percents each year. If I make a bit more than a guy who owns and holds and does nothing else, I am happy.

But I will bring up again an example where you can end up being behind a guy who does nothing.

Suppose you have stocks A and B, both recently advanced from $90 to $100. You don't think they can go up much more, so sell calls on both of them at $105 for $1.

Stock A continues to go higher from $100 to $110, while stock B drops from $100 back down to $90.

If you did nothing, you still have $110+$90 = $200.

But because of the options, you have to sell stock A at $105, and still hold stock B which is now $90. Net, you have $105+$90 + $1 + $1 = $197. You lost money compared to the do-nothing guy.

Can stocks move 10% in a short time? Yes, they do. 10% in a week is common. Occasionally, 10% in a day. People who own the index or MFs may not realize that individual stocks make huge moves. It's when you average them all out that the individual turmoil gets hidden.

Now, suppose the two stocks move much less, say A goes to $103 while B goes to $97. Again, the do-nothing guy still has his $200, but you now have $103 + $97 + $1 + $1 = $202.

You collect your extra $2 "dividend", then wait for the opportunity to do it again. I don't sell options unconditionally, only when the market goes crazy on particular stocks.

Individual stocks often go crazy for no reason that I can perceive. It's weird, but instead of arguing with the market, I now try to make money.

[NW-Bound]

Quote:

Originally Posted by Sunset ^^^^^ Just be careful, as a even a famous fund manager went belly up doing options wrong. I lost money on my first option, which was a really good lesson, as it's kept me timid.

Options can be used for leverage. And that's when one can lose all of his bets, and even more.

I only do the safer option trades.

[Fermion]

I've been writing calls against some Nektar shares and it hasn't been going well.

I bought the shares at $13, wrote Feb $15 calls for $2, and the stock dropped to $10, so I was $1 down. I have now written May $20 calls against them for $1.50, so technically won't be losing money till $9.50. Someone is selling $5 puts though for pretty big premium, which is worrisome.

[NW-Bound]

Biotech in general has not been doing well. Of this sector, I have mostly ETFs, and they were pummeled before the NASDAQ was. I have given up on writing calls on them, because they also have violent bounces that may just take me out.

Oh well, holding on for long-term now.

[BeachOrCity]

Quote:

Originally Posted by NW-Bound Biotech in general has not been doing well. Of this sector, I have mostly ETFs, and they were pummeled before the NASDAQ was. I have given up on writing calls on them, because they also have violent bounces that may just take me out. Oh well, holding on for long-term now.

I went long xbi. Got way too pricey on vaccines but decent risk reward now.

[joesxm3]

Well I am now the proud owner of 200 more shares of PLTR, closed at about $0.25 below my break-even.

So far with my limited career, I am up about $900 from my TSLA and SQ put sales and down about $400 from my 6 PLTR put sale contracts, two I closed at a loss and four were assigned.

At least I haven't been skinned so far.

[aja8888]

Quote:

Originally Posted by joesxm3 Well I am now the proud owner of 200 more shares of PLTR, closed at about $0.25 below my break-even. So far with my limited career, I am up about $900 from my TSLA and SQ put sales and down about $400 from my 6 PLTR put sale contracts, two I closed at a loss and four were assigned. At least I haven't been skinned so far.

Sell covered calls OTM on the PLTR. Make some money back.

[aja8888]

My 10 contract $16 Ford put expired. I have another put with a 3/18 expiry date @ $16.

[itsme2]

Quote:

Originally Posted by NW-Bound +1 A trader who buys an ITM call for the "poor man's covered call" strategy has the risk/reward partially cancels out by the OTM call that he sells. But a holder of an ITM call who does not offset it with another trade is purely using leverage, in the hope of enjoying the potential stock gain while committing less capital than someone who buys the stock outright.

Right on!

[joesxm3]

Well look to SQ to skyrocket.

I sold a $140 covered call today, 2 week duration.

I want to lighten up on my SQ allocation, but maybe $145 would have been a better pick.

[Running_Man]

The following is how I utilize puts as a method in my investing philosophy as I am just beggining to implement the strategy and limit my cash exposure to test the outcomes on options to $250K maximium at the present time.

RGLD is a gold royalty company and the original timeframe is late November 2021, RGLD was on my interest list as I thought it had placed a bottom of $92.37 in October 2021 but with the stock trading at 101-102 decide to sell a near term 95 PUT with the idea of picking up the stock on a correction so on November 23, I sold a Dec 20 95 PUT in RGLD for $49.32 with the stock selling at 101.64.

On December 20 the PUT expired worthless but the option premiums were expanding and on Dec 20,2021 I sold a Jan 21 95 PUT for $155.23 with the stock @ $102.30. As time passed, I realized the correction to 95 was unlikely and on Jan 11th, 10 days before the expiration of the 95 PUT, with RGLD at $102.32 I placed an order to sell a Jan 21 100 PUT expiring in 10 days for $309.32. For 10 days I had an additional $10,000 in cash needed for a total of $19,500 but I thought the chance of both options being exercised against me is very unlikely.

On January 19th RGLD was acting very bullish and not only are the PUTS unlikely to be exercised but I believe RGLD is poised to make a significant move up, as Russia is making big noises in Ukraine and inflation is accelerating so on 1/19/2022 I purchased 100 shares of RGLD for $10,269.95. This is $100 more than I could have purchased the stock for on November 23rd but I have taken in at this point $556.28 in option premiums.

My hypothesis was RGLD would make a new all time high in the next two years over $150 for a 50% gain. On Feb 24th RGLD had advanced to $122 and so I sold an October 160 CALL for $264.31 covered by my 100 shares of RGLD. On the same day convinced the move up had started but now willing to double my position as the stock was acting as I had anticipated I sold a April 14th PUT @ 105 for $188.31.

To summarize on the morning of March 1st I owned 100 shares of RGLD at a cost of $10,269.95 with the current value on the morning of $12,650 and had received option premiums of $1,008.90. I was limiting my gain in the stock to a price of 160 and was obligated to buy another 100 shares should the price fall to 105. The Ukraine situation showed no sign of being resolved and I believed the 105 price would never be seen so I purchased another 100 shares of RGLD a cost of $12,799.00 on March 1st. I wanted to take advantage of a sharp move up and so I sold a 3/18/22 135 RGLD CALL at the same time on March 1st for $210.31. This past week I saw the call was very likely going to be exercised and since the stock was acting so well, on March 17th I purchased another 100 shares for $13,559.

100 shares of RGLD were called and I received $13,499.30 for the shares purchased @ $12,799. I own 200 shares of stock purchased for a total cost of $23,828.95 with a current value of $27,432 cost per share of $119.14. Total option premiums collected over the past four months now totals $1,219.21. Gain on the 100 shares purchased and called away are $700.30. So my “in pocket” returns are $1,919.51

I am still in the camp that RGLD will hit $160 and potentially go much higher, I would prefer to keep 100 shares in investment minimum in RGLD while limiting my downside risk.

On Monday I will review the CALL prices for the April 14th date, presently a 140 CALL is selling for $4 and a 145 CALL is selling for $215; a 125 PUT is selling for $130. I am inclined at this moment to sell the 140 CALL and the 125 PUT; pocket $530 and increase my cash on hold by $12,500 which the PUT provides a 15% annual interest rate while that amount is on hold, and the CALL premium will return $400 of my total investment. But much can happen by Monday and the situation can totally change.

All of these transaction are inside an IRA so there is no tax consequences.

[Running_Man]

Quote:

Originally Posted by Fermion I've been writing calls against some Nektar shares and it hasn't been going well. I bought the shares at $13, wrote Feb $15 calls for $2, and the stock dropped to $10, so I was $1 down. I have now written May $20 calls against them for $1.50, so technically won't be losing money till $9.50. Someone is selling $5 puts though for pretty big premium, which is worrisome.

I see the clinical trials did not go well for Nektar and now it is down to $5.60. Without the covered calls your loss would be greater, but that would of course depend on whether you still think Nektar is worthy of holding after the clinical trial results.

This highlights the advantage of selling near term calls and puts as you can adapt your strategy, longer term options somewhat locks in a decision on buying a stock. But at this point I would assume you could buy the calls back at a profit if you wanted to exit the position.

[bucktheherd]

Quote:

Originally Posted by NW-Bound As I explained earlier, I hold about 100 stocks, diversified in different sectors. Each day, some sectors advance, while others retreat. Occasionally, on a bullish day, nearly everything goes up. Conversely on a bad news day, nearly everything goes down. I spend time each day perusing through the stocks, looking for stocks that have been going up for several consecutive days and sell calls on them. Conversely, stocks that are going down for several consecutive days, I sell puts on them. Recently, I refrained from selling puts, because I found I was having more contracts getting assigned. I wanted to reduce my stock AA from its current 80% level. And so, nearly all of the contracts I sold recently are covered calls. Most of them are on semiconductor stocks, which I have a lot of. Too much in fact. Stocks like AMAT, LRCX, KLAC, MU, SWKS, SMH, etc... Even when I have 1000 shares in a position, which is 10 lots, I only sell 1 contract at a time, preferring to ladder up the strike price if the stock keeps rising. My broker charges $0.35 per contract, and it does not save me money to sell more than 1 lot at once. I prefer weekly options over monthly options, if the former is available on my stocks. I try to get a premium of 1% for volatile stocks, and 0.5% for more stable stocks. The strike price is usually 1 to 2% out of the money. It helps to catch the stock at its high price of the day to sell calls, and conversely at a low price to sell puts. Timing is of course difficult, so I often ladder the lots as explained earlier, in order to get a better trade. If a stock moves against my expectation, I put it aside and look for some other positions I can do a trade on. Again, I have 100 stocks in the portfolio to choose from, and many positions are good for 10+ lots, although many are so sluggish their option premium is not worth the trouble. Occasionally, for a lark I may sell a contract just to get $50 or less, which is not a lot of money, but OK for a 1-week gain. In order to see how your stocks are moving relative to the market, I find this market map useful. https://finviz.com/map.ashx PS. Looking at my positions, if I were to write covered calls on all the shares, that's a few thousand contracts. At my usual rate of selling 10 to 20 contracts per day, that's only less than 1% of the portfolio per day. And then, these expire after 1 week anyway. You see that the amount of option selling I do is not at all excessive.

Thoughts on simultaneously selling out of the money covered calls and puts, no more than a week out? Seems like a reasonable way to reduce the overall number of exercised options, while hedging the timing/quality of purchases, for someone not interested in spending a lot of effort on finding deals.