Selling Covered Calls and Naked Puts

[Running_Man]

Dipping my toes into this arena inspired by NW-BOUND in the description of the strategy to gain income on idle funds, for the first time I have decided to sell calls and puts, I have purchased them on multiple occassions but the recent interest rates make these far more interesting to me.

So I sold one Pepsi 142 expires July 23 put yesterday for 83.30 bucks based on my thoughts of trying to see how easy it is to predict I could pick up money without getting the stock put to me, which I already own. But I viewed the recent price ac'tion and thought the decline would not carry to 142 and if it did it is a stock well into my buy zone. If I calculated this right it is about 10% return for the fund committment on an annual basis.

I had also been looking at purchasing more of my favorite stock which has been falling IDA. I had been waiting for the stock to get back to a 3% yield @ 94.67 and had alerts set for if it hit 95 and decided to instead sell a put, so I sold an August 20th 95 put for $1.93 and instead of entering a GTC order for 94.67 I will get paid $193 if the stock falls below the range, which I calculated as 14.4% annual rate for the funds if the stock is not put to me.

Now as I understand it is possible IDA could fall to 94 or so for a day or 2 and recover to 98 and I will not get the stock with the put option that I would get with a GTC option, but with nearly 3 quarters of stock dividend income and already having a position in IDA, for selling the put I am willing to take that risk. IDA I feel has a pretty decent chance of falling possibly even as low as 87 and still be in the long term uptrend, so I think it is at least 50-50 I fill on this. I view this stock if I get it as being unlikely to be sold any time in the next 10 years barring a major change in the direction of the company, which could occur, but is not anywhere in my expectations for the moment.

No covered calls yet as I view the market as ripe for potentially large moves to the upside and will hold onto the stocks for now. No need to get my knees wet until I see if my toes get chewed off.

Comments other Selling Covered Calls and Naked Put strategies and results are welcome.

 

[jr6035]

Check out QYLD. A covered call ETF. I use it, I've made 10% with a 12% yield. There are others, but this is the best.

 

[NW-Bound]

I sold one Pepsi 142 expires July 23 put yesterday for 83.30 bucks...

If I calculated this right it is about 10% return for the fund committment on an annual basis.

I had also been looking at purchasing more of my favorite stock which has been falling IDA...

I sold an August 20th 95 put for $1.93 and instead of entering a GTC order for 94.67 I will get paid $193 if the stock falls below the range, which I calculated as 14.4% annual rate for the funds if the stock is not put to me.

PEP and IDA are not the stocks I follow, but very quick look on their fundamentals show they are the kind of stocks suitable for this option play, in my opinion. Their volatility is low, thus the risk is also low. The reward will not get you rich, but it should beat CD or bonds.

I also like to do option selling on stocks that I already own, because I already have to follow the stock fundamentals to justify holding them, and it does not take much more homework to do options on them.

If the stock goes down and I see no change in fundamentals to justify it, I sell puts. Of course you could just buy more shares when the price drops, but that is more risk to get a higher potential reward, and may mean putting too much into one stock. Options can be a lower risk for market timing than buying/selling stocks.

If the put gets assigned and I have more shares added to my position, I will try lighten up the position by selling calls.

Occasionally, a stock may drop so much that its market price is way below my strike price. This means I lose much money when the put is assigned. This does not happen often, but when it does, the loss which is hopefully temporary is a lot higher than the premium. This means one poor put option may wipe out the gain on 4 or 5 other successful puts. Success here for me means the puts expire worthless, and I keep the premium.

On the average, I have an overall gain, but it means writing many puts for the average to be in my favor. An example is the lottery. You want to be selling lottery tickets, not buying them, but you have to sell many of them to be assured of making money. If you sell only a few tickets, imagine what happens if one of them is the grand prize.

I have quite a few stocks with low volatility similar to PEP and IDA, but also stocks with a higher beta like HD, MU, CF, FCX, etc... I have been trading options more on the high-beta stocks, and neglecting the low volatility ones.

 

[NW-Bound]

Check out QYLD. A covered call ETF. I use it, I've made 10% with a 12% yield. There are others, but this is the best.

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.

 

[MRG]

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.

+1

It going to lose principle. Can't do otherwise. I know it's popular for the Reddit dividend crowd. I seldom say anything about it there.

 

[NW-Bound]

As a human trader, I follow the market, and hold off on selling call options when the stocks are down, lest the stocks bounce back and the other side of the trade get my stocks too cheap.

I like to sell call options when the mood is bullish, and people are in the "buy, buy, buy" mood. They pay big bucks for stocks that they think will go to the moon. Well, not my stocks which are not meme stocks and cannot go to the moon, but some people still think will go up as high as the Empire State building.

I think the reason QYLD trails the underlying index NASDAQ 100 is because it uses mechanical trading. The fund trades at-the-money call options every successive month, the day before option expiration. It does not care if the market is going up or down, or what the mood or volatility is.

 

[Running_Man]

PEP and IDA are not the stocks I follow, but very quick look on their fundamentals show they are the kind of stocks suitable for this option play, in my opinion. Their volatility is low, thus the risk is also low. The reward will not get you rich, but it should beat CD or bonds.

I also like to do option selling on stocks that I already own, because I already have to follow the stock fundamentals to justify holding them, and it does not take much more homework to do options on them.

If the stock goes down and I see no change in fundamentals to justify it, I sell puts. Of course you could just buy more shares when the price drops, but that is more risk to get a higher potential reward, and may mean putting too much into one stock. Options can be a lower risk for market timing than buying/selling stocks.

If the put gets assigned and I have more shares added to my position, I will try lighten up the position by selling calls.

Occasionally, a stock may drop so much that its market price is way below my strike price. This means I lose much money when the put is assigned. This does not happen often, but when it does, the loss which is hopefully temporary is a lot higher than the premium. This means one poor put option may wipe out the gain on 4 or 5 other successful puts. Success here for me means the puts expire worthless, and I keep the premium.

On the average, I have an overall gain, but it means writing many puts for the average to be in my favor. An example is the lottery. You want to be selling lottery tickets, not buying them, but you have to sell many of them to be assured of making money. If you sell only a few tickets, imagine what happens if one of them is the grand prize.

I have quite a few stocks with low volatility similar to PEP and IDA, but also stocks with a higher beta like HD, MU, CF, FCX, etc... I have been trading options more on the high-beta stocks, and neglecting the low volatility ones.

when to buy and sell is exactly what I am thinking of doing, selling puts when I think the price has fallen too far and selling cars if I think the market is getting frothy and I'd be willing to lighten the load.

 

[DR1959]

Been doing covered calls and cash puts for years.
Works great for me.
Another strategy I employ is buying a common stock that pays a nice dividend. I then write a in the money LEAP, which is a far out covered call. I only do if less, so if stock purchase is $30, then I look to get a call with a strike of say $10, for less than $10. Even if $9.95, I am secure. Then I sit back and collect the dividends and wait to see if I get called which is 99% for certain. If you do the math, your yield is much greater than the actual yield on dividend because you have less on table. BTW, works best with monthly dividends, since with a quarterly you could get called right before dividend.

I also will write a put that puts me in the stock right before the dividend, collect that, then write a call just after dividend. If you play it right, you can make money on put, call, and dividend. That's a triple play!

You not getting big dollars. but on a 1000 shares you can turn a decent buck on 1/8 point.

I am a income investor, retired.

 

[NW-Bound]

Been doing covered calls and cash puts for years.
Works great for me.
Another strategy I employ is buying a common stock that pays a nice dividend. I then write a in the money LEAP, which is a far out covered call. I only do if less, so if stock purchase is $30, then I look to get a call with a strike of say $10, for less than $10. Even if $9.95, I am secure. Then I sit back and collect the dividends and wait to see if I get called which is 99% for certain. If you do the math, your yield is much greater than the actual yield on dividend because you have less on table. BTW, works best with monthly dividends, since with a quarterly you could get called right before dividend.

I also will write a put that puts me in the stock right before the dividend, collect that, then write a call just after dividend. If you play it right, you can make money on put, call, and dividend. That's a triple play!

You not getting big dollars. but on a 1000 shares you can turn a decent buck on 1/8 point.

I am a income investor, retired.

I have not done the above, but it is an excellent idea. I already own the boring utility ETF XLU, which has a dividend yield of 3%, paid quarterly. It did not occur to me that I could double the yield very safely. And if I time it right, may even pick up a bit of capital gain. The question is how long I can ride it until the call gets assigned.

This shows that options are not the devil like many people think. One can take a lot of risk hoping to make outrageous gains, or use it to reduce risk, knowing that it will put a cap on the upside.

 

[DR1959]

I use options to help add income.
I used to play market to grow wealth, that worked very well through the years.
Buy and hold growth stocks.
The issue there is your wealth is tied to the health of the market.
When you trade for income, you are always protected to a degree.
A covered call that expires worthless is free money.
A covered call that gets called gets you out of a stock you may phsycollogically of held too long.
Yes, covered calls have worked against me. I got called out of roku around $85, I stopped looking but it has more than tripled. But with that said it also had many loss of sleep drops in there.

I average $1600 a weeks playing the market this way. Not bad for a guy who doesn't work!

 

[NW-Bound]

^^^ By the way, your example in the post above had a simple mistake. I knew what you mean, but someone not familiar with options may get confused.

 

[DR1959]

^^^ By the way, your example in the post above had a simple mistake. I knew what you mean, but someone not familiar with options may get confused.

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%!!!!!

 

[ownyourfuture]

So I sold one Pepsi 142 expires July 23 put yesterday for 83.30 bucks based on my thoughts of trying to see how easy it is to predict I could pick up money without getting the stock put to me, which I already own.


No covered calls yet as I view the market as ripe for potentially large moves to the upside and will hold onto the stocks for now.

I've never sold puts. Pepsi is now pushing $150, was the option exercised ?

I sold covered calls in the past. Johnson and Johnson, Intel, etc.
I'd only do it on days they had large upside moves. I didn't want the shares to get called away, so I sold substantially out of the money calls.

Because of that, the premiums weren't that great, but extra income is extra income.

 

[finnski1]

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%!!!!!

Well if you collect a premium of $20.95 as you say and the underlying stock was $30 then your cost wast $9.05 not $9.95. Also your terminology is what may be confusing. When you say "sell call for $10 " above what you really are saying is sell the $10 strike price call for a premium of $20.95 not sell a call and collect $10 which is sort of what it reads like.

 

[DR1959]

Ah, I see that.
Yeah, so the numbers should read:

Buy Stock at $30
Sell $10 call for $20.05
Net cost of this play is $9.95
Collect Dividend and hope the option doesn't get assigned until the end.
If it goes at end, profit is $.05 a share plus the dividend.
Risk is stock would have to drop to $9.95 before you lose money.
If yield at $30 was 5%, then yield at $9.95 is 15%.

Enter this trade, the day before ex-dividend to avoid getting assigned. Has worked for me and I have many plays like this:

ABBV
ATT
STAG
O
OXSQ
STWD

 

[NW-Bound]

Yes, covered calls have worked against me. I got called out of roku around $85, I stopped looking but it has more than tripled. But with that said it also had many loss of sleep drops in there...

Surely, I have had good stocks called from me, and I left too much money on the table.

Hence, what I do now is to ladder my options and not sell calls on all shares of a position at once. If I have 300 shares of XYZ, I will sell 1 contract now, and wait till next week to sell more.

And if a stock rises up more than I anticipate, and if its fundamentals have improved to warrant it, I will look to buy it back, even if that means accepting defeat, that I was originally wrong. This can be via a put. When I am forced to buy back high, I usually hedge by immediately sell a covered call not too far out-of-the-money, or even at-the-money.

Well if you collect a premium of $20.95 as you say and the underlying stock was $30 then your cost wast $9.05 not $9.95. Also your terminology is what may be confusing. When you say "sell call for $10 " above what you really are saying is sell the $10 strike price call for a premium of $20.95 not sell a call and collect $10 which is sort of what it reads like.

+1

 

[DR1959]

So what I do if a covered call goes bad or looks like it is going to go bad is roll it.
So if stock is $30 and I have a covered call $30 and I want to keep it, I roll it to another week or month. This gives me additional time premium and a chance for it to drop. Sometimes if my original covered call had a large time premium, then you can roll it for the same money into a higher strike, say $32.50 and pick up the extra equity rise.

Rolling is a art to decide best time to roll. Waiting too long, can be costly to roll. Rolling too early can still have a large time premium.

 

[NW-Bound]

Another Friday, another chance to count the options that expire.

Today, 20 calls expired worthless. 6 puts expired worthless.

1 call getting exercised. 1 put getting exercised.

Life is still good.

 

[DR1959]

Nice
I got 3 calls expired. One put.
One will be assigned.
Profit for week is $2442

 

[Running_Man]

So what I do if a covered call goes bad or looks like it is going to go bad is roll it.
So if stock is $30 and I have a covered call $30 and I want to keep it, I roll it to another week or month. This gives me additional time premium and a chance for it to drop. Sometimes if my original covered call had a large time premium, then you can roll it for the same money into a higher strike, say $32.50 and pick up the extra equity rise.

Rolling is a art to decide best time to roll. Waiting too long, can be costly to roll. Rolling too early can still have a large time premium.

I think your strategies are quite intriguing and excellent. I know I would never worry about getting called, I think we will have to see. I would sell a call on a stock that would put the price higher than value I could see in other potential stocks.

A dividend stock with 3X return is outstanding I will have to look into that.

 

[pb4uski]

Is anyone here buying calls as a stock substitute?

 

[Running_Man]

I've never sold puts. Pepsi is now pushing $150, was the option exercised ?

I sold covered calls in the past. Johnson and Johnson, Intel, etc.
I'd only do it on days they had large upside moves. I didn't want the shares to get called away, so I sold substantially out of the money calls.

Because of that, the premiums weren't that great, but extra income is extra income.

The put option is 142 no one will sell at 142 and it really makes it less likely to be called by exercise date. I myself am not married to any stock, if a stock gets called from me I would have a good idea of the about 100 candidates of what would be the best replacement, it could be the stock that got called, but usually with a rising stock price another stock has a better risk profile to me.

My present individual stocks:
IDA
PNW
OGS
AMT
FPI
AMGN
UNH
PEP
MMM
ITW
COST
ORCL

A sampling of my Potential replacements:
ABBV
MRK
NVO
V
MCD
LMT
NOC
ERIE
RLI
TRV
NTRS
ROK
APH
ALLE
TEL
ADI
INTC
TSM
TXN
AAPL
NEE
BDX
MDT
STE
ABT
JNJ
JBHT
ODFL
UNP
DPZ
YUM
CTAS
G
ROL
RSG
WM
BR
SPGI
ATO
CPK
RPM
LNT
AEE
AEP
DTE
MGEE
WEC
CSCO
CABO
CMST

 

[NW-Bound]

Is anyone here buying calls as a stock substitute?

People who do that are using leverage to get a potentially higher gain, but with an accordingly higher risk.

That is the opposite of the conservative stance taken by people who post on this thread so far.


PS. I take the above back. It is possible to buy calls as a part of a conservative investment strategy.

 

[Sniggle]

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.

I plan to take another bite at the AMD apple on Tuesday.

Other stocks I sold covered calls on include:
-CAT
-MSFT
-DULT
- INTC
- N ET
-NTAP
-OKTA
-CSCO
-MCD

I may lose MSFT after the crazy 6 points on Friday. Most of the calls currently are 7/16.

It’s fund to throw around money in the 401k without tax paperwork.

 

[pb4uski]

People who do that are using leverage to get a potentially higher gain, but with an accordingly higher risk.

That is the opposite of the conservative stance taken by people who post on this thread so far.


PS. I take the above back. It is possible to buy calls as a part of a conservative investment strategy.

Yes, I think I'm doing it conservatively. I'll use SPY as an example. Let's say that SPY is at 433 and a LEAP call expiring in 2 1/2 years in Dec 2023 with a 400 strike (33 in the money) is 68.

So let's say I have 433 to invest. I could just buy 1 share of SPY... if SPY pays 1.8% in dividends and I reinvest them in Dec 2023 I would have say ~1.045 shares. If in 2 1/2 years SPY is 20% down (346), even (433) or 20% up (520) I would have 362, 453 or 543, respectively for IRRs of -7.0%, 1.8% and +9.6%, respectively.

An alternative is to buy the call for 68 and invest the remaining 365 in some investment grade preferred stocks that pay 5%. In 2 1/2 years the 365 will be 412. If SPY is 20% down (346), even (433) or 20% up (520) the call would be worth 0, 33 or 120, respectively. The totals would be 412, 445 or 532, respectively for IRRs of -2.0%, 1.1% and +8.6%, respectively.

Transaction date	07/01/21
SPY	433.0
Dividend rate	1.80%
Expiry date	12/23/23
Sell date	12/23/23	2.48	years
Strike	400.0
Option cost	68.0
Intrinsic value	33.0
Time value	35.0
Fixed interest rate	5.00%
	Negative	Neutral	Positive
SPY at sale date	346.4	433.0	519.6
Change	-20.00%	0.00%	20.00%
Intrinsic value	0.00	33.00	119.60
Est time value	0.00	0.00	0.00
Total value	0.00	33.00	119.60
Fixed value	411.94	411.94	411.94
Option value	0.00	33.00	119.60
Total value	411.94	444.94	531.54
IRR	-1.99%	1.10%	8.62%
Shares, beginning	1.000	1.000	1.000
Dividends	0.045	0.045	0.045
Shares, ending	1.045	1.045	1.045
Long value	362.07	452.58	543.10
IRR	-6.96%	1.80%	9.57%
Option over long	4.97%	-0.70%	-0.95%

So net, I forfeit ~1% if things go well to limit my losses if things go bad and stay bad. That's the basic idea anyway.