Viable Long Term Strategy? - Using Covered Calls & Writing Puts

[Pbayer14]

Is the strategy described below viable?

Assume I want to maintain a long-term allocation to US Large Cap Equities of 70%. I want to use S&P500 index ETFs VOO and IVV for my exposure. Both funds are highly correlated and move in the same direction for the most part, so I am indifferent between which one I own.

Let's say I currently own VOO, and every quarter I use an OTM covered call. If the call expires OTM by the end of the quarter, I maintain the same exposure and receive additional premium income. If the call expires ITM, I would sell my position of VOO at the strike, and use the proceeds to invest in IVV and my exposure is still the same.

Alternatively, lets say again that I own VOO, and every quarter I sell OTM puts on IVV. If the option expires OTM I get to keep the premium and enhance return. If the option expires ITM, I can sell my position in VOO and use the proceeds to satisfy the option obligation to buy IVV, and my exposure is still the same.

** the reasoning for using both IVV and VOO is to avoid a wash sale. If my position in VOO gets called away from the covered call, I can invest the proceeds in IVV and avoid the wash sale.

Is this a viable long term strategy? Is there an iteration that would make more sense? Could both these strategies be used together?

Thanks!

 

[Out-to-Lunch]

** the reasoning for using both IVV and VOO is to avoid a wash sale. If my position in VOO gets called away from the covered call, I can invest the proceeds in IVV and avoid the wash sale.

Definitely NOT an expert. But how do you figure that IVV and VOO are not "substantially identical"? Aren't they both S&P 500 index funds?

I think (but I am no expert) that you could get away with a S&P 500 fund and a total market fund like VTI.

 

[yhoomajor]

In last 18 months, many people did this. Look at SPY chart for last 18 months.
As calls got assigned.. SPY kept moving way higher. So you would be selling SPY at 425, even though current price of SPY may have moved to 440. Most of the people who did this on SPY.. made some but not much. In fact they lagged the plain vanilla SPY returns.

Ask me how I know You would get different results if you dabble into high volatility stocks, like some folks seem to be doing here (re: Semi-conductors and bio-techs).

And also keep in mind.. in rising markets all boats rise.. and even intelligent people think they have outsmarted the market But when the tide goes out, that's when you find out who's been swimming naked

 

[bada bing]

Just guessing, there is a good chance your plan isn't optimized for what you're trying to do. Option writing profits from time decay (called Theta), that increases rapidly in the last 30 days of an option. You would profit much more by writing subsequent contracts over shorter periods because you capitalize on the last 30 days of rapid time decay. Shorter periods are also easier to manage for unforeseen market conditions. Once an option goes ITM (in the money), the collateral shares don't benefit from any further market appreciation. In an unforeseen bull run with a quarterly call option written, you could miss out on substantial gains. Market returns are very "lumpy" and it is impossible to predict when a nice run up is due.

If you want to write covered calls for income, SPY is the most liquid S&P500 ETF by far. Additionally, you could investigate long-term, deep ITM SPY LEAPS as a way to construct a S&P500 mimicking position that is more suitable in some ways for collateral for writing covered calls.

If you do this, don't get greedy and write too close to ITM to generate maximum premium. JMO, but trying to get more than 4% per year option income off of indexes is likely going to be counterproductive at times. And that is if you are willing to manage monthly or shorter duration contracts. Quarterly contracts, you will likely run into situations where you lose as often as you gain.

Hopefully, some the option gurus will chime in. I write occasional calls against my index portfolio, but I only know enough to be dangerous. I just pick up a couple nickels in front of the steam roller and rush away before anything gets scary.

 

[Koolau]

If your strategy is designed to make more than simply buying and holding index funds, I would ask the question "why?" Why do you need more than a fairly simple index strategy would provide? Do you believe you will always come out ahead or isn't your potential for loss at least a bit higher with the strategy?

Not suggesting your strategy won't work. I have no idea. BUT indexing has typically worked though it's boring as snail spit. Personally, I think boring is good when it comes to investing, but that's just me so YMMV.

 

[Closet_Gamer]

If you were doing this in a tax free account, the wash sale issue wouldn't apply so you can simplify the thought exercise and ask if it would work by just doing it on the same security.

In your example, you would sell OTM calls on SPY. If they were called on you, simply re-invest the resulting sale proceeds back into SPY at the strike.

I believe the risk is that you get called when the options are already in the money. So, for example, you sell a call with a $100 strike for $2. The stock trades to $105 and that's when the option gets called. You will receive $100 when the option is called plus you will have your original $2 premium. In this situation, you will have a net losing position vs. just leaving the money in the underlying stock -- $102 vs. $105.

This is why people say its better to write a rolling series of short-duration OTM calls. There is less time for the volatility to catch you in a bad spot. Of course, that's why the premiums are also so much lower.

YMMV.

 

[thepalmersinking]

I would recommend against covered calls on index ETFs unless you are trying to exit and only then in a tax deferred or ROTH Ira.

 

[HawaiiShrimp]

I do covered calls on individual stocks in my tax-deferred and ROTH IRA. I hate paying taxes and/or getting my covererd call assigned.

Why Individual stocks? Because I like higher Implied Volatility (IV).
e.g.
Tesla IV = 66.6 at the moment
Nvidia IV = 41.8 at the moment
VOO IV = 11.8 at the moment
IVV IV = 11.5 at the moment

You don't get to make any decent money if you trade with low IV stocks. To phrase it differently, for me, it doesn't justify the risk and effort to make that little money with low IV stocks.

My covered calls (way out-the-money, aka low risk to get assigned) generate about $10k-$15k per week. That's roughly $600k annual gain. All inside tax-deferred/ROTH ira accounts.

In my 40's now. Some people are happy with lean FIRE ($1-$5M) and call it a day. I am targeting fat FIRE. $30M-$100M before I reach 50's. Investing is my hobby. Eventually, it's going to a foundation or managed trust. Cheers.

 

[pb4uski]

I do covered calls on individual stocks in my tax-deferred and ROTH IRA. I hate paying taxes and/or getting my covererd call assigned.

Why Individual stocks? Because I like higher Implied Volatility (IV).
e.g.
Tesla IV = 66.6 at the moment
Nvidia IV = 41.8 at the moment
VOO IV = 11.8 at the moment
IVV IV = 11.5 at the moment

You don't get to make any decent money if you trade with low IV stocks. To phrase it differently, for me, it doesn't justify the risk and effort to make that little money with low IV stocks.

My covered calls (way out-the-money, aka low risk to get assigned) generate about $10k-$15k per week. That's roughly $600k annual gain. All inside tax-deferred/ROTH ira accounts.

In my 40's now. Some people are happy with lean FIRE ($1-$5M) and call it a day. I am targeting fat FIRE. $30M-$100M before I reach 50's. Investing is my hobby. Eventually, it's going to a foundation or managed trust. Cheers.

Sounds like you are using a strategy similar to ACIO... they 1) buy a basket of stocks, 2) sell covered calls on the higher IV stocks that they hold and then 3) use some of the proceeds to buy protective puts on an index that approximates the basket of stocks. You're doing the second part.

https://aptusetfs.com/acio/
https://aptusetfs.com/wp-content/upl...fferential.pdf

... Let’s say you start with a basket of 50 individual stocks. Those 50 stocks are going to be highly correlated with the S&P 500. Meaning, if the S&P is up or down 10%, your basket of 50 stocks is up or down roughly the same. The basket of 50 stocks will have a high correlation with the S&P 500.

The objective - Income. Growth comes secondary.

What if you sold options on each individual piece (higher IVs) in the form of covered calls, and bought put options on a highly correlated security, say something representing the S&P 500 (lower IVs)? You’d then truly be selling higher IV and buying lower IV. The difference, you guessed it, more greenbacks, higher income.

Because of the differential in IV between individual stocks and a market index - you can sell call options on each individual name x% up, and use those proceeds to buy protection with an option on a basket of securities highly correlated with the 50 stocks at roughly the same x% down, and have cash left over.

More importantly, you can increase the amount of cash left over by adjusting the % up of your calls relative to the % down of your puts. For example, if you sold calls 3% up on individual names and bought puts 5% below a correlated basket, you’d significantly increase the amount of cash left over. As a result, you generate meaningful income, keep potential for drawdown minimal, and still offer potential for some upside participation.