Yes, the numbers are before taxes. It takes no research at all to sell naked SPY puts every week. Its mechanical and takes about a minute. Now the tax prep is another story and, yes, it takes quite a while and is no fun at all.
The amount of risk that Im taking is something Ive been working on trying to measure but havent figured out how yet. I'm using a ton of margin on Fridays, but on the other 4 days of the week, I am close to 50% in cash. So a prolonged drop in the market isn't going to kill me. It would be no worse than if I was fully invested in SPY. My worst mistake has nothing to do with selling options. It has to do with buying options which is unrelated to this strategy. The only thing I wish I had done differently with regards to options trading is to not combat the boredom of a mechanical strategy like this by making other options trades that haven't worked out too well.
I very much appreciate you keeping us informed on this.
I have decided to abandon your strategy in large part because of your results, but for other also reasons.
I have not calculated the return on S&P put strategy since I last posted, but overall the $46,000 I put in my Optionhouse account at the end of the year is now worth $47,485. The 3.2% returns trails the S&P although not because of the strategy but as you say the making the other bad options trades (specifically buying long-term calls and puts on blue chip stocks) and the temptation of the $5 commission.
I have also found it hassle to have to be tied to my computer every Friday, its no big deal 90%+ of the time but the 10% when I am out of town or busy in the morning creates some anxiety. What if the market crashes and my put get exercised and the market continues to go down on Monday?
I have also found it takes way more than a 1 minute per week. I am not necessarily trying to day trade, but force of habit, and the concern of running into another flash crash, means I always enter limit orders at the ask price. Roughly 1/2 the time these don't get execute right away so I find myself babysitting the trade, which in turn creates the boredom factor..
I haven't even had to face the tax issue yet, Schwab transactions seamlessly import into Turbo Tax so the 100+ transactions I had with them only took an hour or so to go through. I hope Optionshouse is as easy.
Which brings me to last problem. If I was trading 50 contracts at time, I'd enjoy lower commission $16 for 50 vs $5 vs 5 contract, but more importantly the amount of money would be worth doing. In order to do that I would need to transfer much of my money from Schwab to Optionhouse. But other than lower commission at OH, I like everything else better about Schwab and I don't want to screw up a 30 years of doing business with firm and being treated more than fairly.
Finally, I am always concerned about VIX. Like many things associated with the stock market I find there is not a strong correlation, between the math and the underlying reality. Right now VIX is around 15, last year it was between 30-40. While I believe VIX is an accurate measure of volatility I don't think it all reflects the fundamentals of the market.
Last Aug the market was in panic and with 1-2% daily moves; because of the debt ceiling stalemate, the US downgrade by S&P, and crisis in Euro, and poor economic outlook. One year later the US economy is in no better shape, Europe is much worse shape, the Euro crisis is no closer to being resolved, the debt ceiling stalemate has been replaced by the end of the year Fiscal cliff, oh and the market is up 17%.
Yet I am only getting 1/2 the premiums for writing portfolio insurance today than I was last year
?.
In large measure I agree with Utrecht, writing puts is different than taking a margin loan (if for no other reason than we aren't paying interest). So I don't think the calculation of 5x leverage is really an accurate assessment of the risk. I'm inclined to think that this is probably a less risky way of investing than simply buy&hold, but I'll concede the math is complicated.
On the other hand I am pretty positive that risk of an huge market sell off in the next 6 month is best case no different than it was a year ago, and probably worse. Over the years reading Buffett's letters the one thing that struck me was how the insurance business is always way more profitable the year after the Hurricanes struck than any other year.
So for me I going wait until I see the next hurricane before I resume writing options.