Selling Covered Calls and Naked Puts

[bobandsherry]

AMZN is at $3300/share. GOOG is at $2730. A contract on 100 shares covers a serious amount of money. And I made the point of not holding more than 5% of portfolio in any single stock. And I have never owned these stocks, nor AAPL.

My highest priced per share stocks are ASML ($760), followed by LRCX ($614), then HUM ($430). I can do options on these, but not too many contracts. Even HD is pricey at $330. Stocks with price less than $200, preferably less than $100, I like much better.

TSLA is a highflyer too. I've written PUTS (mostly weekly), pocketed decent premiums and have fared better this year vs those who bought and held.

 

[NW-Bound]

TSLA is a highflyer too. I've written PUTS (mostly weekly), pocketed decent premiums and have fared better this year vs those who bought and held.

I only write puts on stocks that I don't mind owning. TSLA is not one of those for me, because of its high P/E.

For stocks that bounce around in a range, shareholders can get some "dividends" by writing calls, and this would work for TSLA too.

Once in a while, I would regret selling a contract because a stock surged up way past my strike price. This happens today with KLAC. I wrote a contract for 330 expiry next Fri 8/6, when the stock was at 315. The company reported good earning; stock jumped to as high as 352 today, and closed at 348. Wowza! I left too much money on the table. The contract only got me 3.10. Good thing I only did 1 contract, and still have another lot of KLAC.

I will have to write a put next week on KLAC to try to get it back.

Meanwhile, I sold another 15 contracts today.

 

[MRG]

Been playing with Fidelity Active Trader pro for options. I used it to roll 28 contracts forward, learned I needed to up the net credit to get the best prices. I'll push it further next week. I broke 7k in options premiums in the last 90 days!

 

[rayvt]

Well, don't get too excited yet. It goes just as fast when they turn against you. Actually, it goes quicker, as I found out the hard way. ::sigh::

 

[NW-Bound]

^^^ Yes. As they say, easy comes, easy goes.

 

[aja8888]

My FCX sold call for 300 shares got taken @ $36.50 this last week. I've done the put/call cycle four times now. I will sell some puts on it next week. I also sell puts on T and have done this about a dozen times without it being put to me. Nothing exciting here, just some steady "pin" money.

 

[bobandsherry]

Meanwhile, I sold another 15 contracts today.

That's getting it on. I haven't found anything new recently that got me to pull the trigger, let alone 15 times in one day

 

[Sojourner]

NW-Bound, would you mind sharing a list of the puts you've been selling in recent months? I'd be interested to see the tickers, the strike prices, the expirations (or durations, e.g. weeklies, monthlies, etc.), and the number of contracts for each. I've only been selling about 10 contracts/month so far this year, but I'm thinking of expanding that to maybe 15-20 and would like some ideas from a more experienced trader like yourself. Thanks in advance!

 

[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.

 

[Sojourner]

In order to see how your stocks are moving relative to the market, I find this market map useful.

https://finviz.com/map.ashx

Ooh, that is a very cool market map. Thanks!

 

[Sojourner]

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.

I honestly have no intuition for what an "excessive" amount of option selling would be. I would like to ramp up my selling somewhat, since I think I'm doing less than I—very safely and conservatively—could do. But I don't have a clear sense for what that threshold would be. For example, this month (I have only been selling monthly calls/puts) I have sold options on 11 stocks/ETFs, for a total of $3k in options premiums and putting $165k of cash "at risk" of being assigned. Is that too little, just about right, not enough? The $165k represents about 3% of my overall investable assets. Off the top of my head, I think I'd be pretty comfortable upping the "at risk" cash to $250k... but I just don't know if this is the best, most prudent way to think about it.

 

[NW-Bound]

At any point, my covered calls encompass about 10 to 15% of my stock holdings.

About puts, my cash AA is about 20%, and I commit no more than 1/2 of that or 10% to cover put options at the highest point. It means that if the sky falls, I will still have 10% in cash. Of course, if that were to happen, the stock portion would lose value and the 10% cash may become 15%.

Of course, YMMV (as Koolau likes to say).

 

[NW-Bound]

I have 25 contracts expiring today. Together, they brought me more than $2500 cash in option premium.

But, but, but, among them is a call option on KLAC, which causes me to sell a lot at $2,300 below Friday close, and a put contract on HUM which causes me to buy a lot at $1,100 above the market price.

This means that overall, if I did nothing, I would have more money than selling options (gain $2500 on option premium, but lose $3,400 on the 2 contracts that get assigned).

Well, maybe in the near future, HUM will rise back up, and KLAC will give up some recent gains, and all this works out to my advantage. Who knows?

Anyway, my portfolio set a new personal high watermark, so I can't complain too much. Looking ahead, I still have many call contracts that will expire. It is likely that the market will pull back, and I will not get to sell off some shares to reduce my stock AA. At least, the cash from the option selling is way more than I spend, so that consolation prize is comforting to have.

 

[MRG]

I had 21 contacts I rolled forward for $750 in premiums. This is a fun game I started doing back in lock down for entertainment.

 

[aja8888]

Besides me playing a few options here and there (about $700 in premiums per month, average), I bought a small position @$280/share in Moderna (MRNA) the day it was announced they were being added to the S&P 500. Last week I sold it for $430. I did the same with Tesla when they were announced to be in the S&P 500. Bought in at ~$400 and sold a few weeks later ~$700.

Seems like when a company is chosen for the S&P, the stock takes off a bit due to the big funds having to hold positions. Another way to make a few dollars outside of options. May not work for all stocks though.

This stuff is all done in my IRA.

 

[NW-Bound]

At this point, my YTD cash from option premium is $166,502. I get my mojo back to the level of last year.

However, it really does not mean anything if I make a lot of money selling options on stinkin' stocks that I lose money on. It's the total portfolio return that matters. I keep an eye on that too.

The point about selling options is to get some extra returns. This is nice only if your core holdings at least keep up with the S&P.

 

[Rowej]

Question

Can you explain your writing an in the money leap a little more, I am missing something on it,

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.

 

[Rowej]

Second question

If you don’t mind. What size portfolio are you using to generate the $1600 a week. I trade a lot of options as well. So just curious.

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!

 

[Rowej]

Another option

Rather than just buying back the stock that got called away, I start selling puts on the stock I want back, weekly if they offer weekly options. This allows me to get the stock back at some point at a discount to the price it got called away at.

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.



+1

 

[Sniggle]

Been trying this for 6 weeks now. I have sold 63 contracts, a mix of covered calls and cash covered puts.

I began this journey buying a few large blocks of stocks on a whim, and have been working hard to get on the positive side of those mistakes. I am not quite out from under, but have made progress and may be free of those mistakes at the end of this month.

I also lost some significant upside on a few stocks that were assigned (AMD, NET, MSFT come to mind), but it is part of the game I guess.

My better plays have been selling puts on NVDA, MSFT and GS…. Although I would have had bigger gains buying and holding.

So for the 6 week period I came in at 4.46% return vs S&P at 3.4%.

 

[bobandsherry]

I also lost some significant upside on a few stocks that were assigned (AMD, NET, MSFT come to mind), but it is part of the game I guess.

I set my strike price at a level I'd plan to sell and a reasonable return. If it gets assigned it's a price I had already set as an exit. When assignment happens I just shrug, knowing I've made a good profit and look for next target. As they say no one ever went broke taking profits. [emoji41]

 

[Rowej]

HUM at 455

You shouldn’t mind losing HUM at 455 anymore, you can buy it back now at $417 at a 6% discount, lol

I have never sold at or in-the-money covered calls, but perhaps I should. I only hold stocks I like, and hope people will love them even more than I do and pay an arm and a leg for them.

Yes, I hold only stocks with decent P/E, that I feel comfortable holding long-term. The option selling is just a way to make some extra money, hence I tend to set the strike price too high so that I will not lose the stock and have to buy it back even higher. This works against me when I do not mind reducing a position. Old habits die hard.

I much prefer to sell weekly options instead of monthly. However, not all stocks have weekly options. The reason I have so many options expiring today is because many of them are monthly and expire this Friday. I can gauge the stock movements a lot better 1 week ahead, compared to 1 month. One month is a really long time.

It's also tougher selling options on high-priced stocks, such as ASML, LRCX, etc... I do not have too many round lots of these, and hate to lose them. I lost HUM at 455 last week, and have been kicking myself.

I really like stocks and ETFs that are under $100/share, because I have many lots and can ladder my options. I may sell a contract at $50 when the stock is at $49 and moving up. If it gets to $50, I will sell at $51, and so forth. And if it gets to $51, I may start to sell put at $50, and going higher if the stock keeps moving up. In the case of HUM that got assigned last week at 455, even before the call expired I immediately wrote a put for 455 which expired today and got me $3.6/share as a consolation prize. HUM closed at 470.9 today. Argh! I hate to let one get away like that.

It's easier to do the above for weekly options. One month is a long time to judge how much a stock can move in that time, and I often lose a good stock selling it too soon, or end up adding too much to one position when a put gets assigned.

 

[NW-Bound]

You shouldn’t mind losing HUM at 455 anymore, you can buy it back now at $417 at a 6% discount, lol

Except that I sold a put at $430, which expired yesterday. HUM closed at $419 yesterday. With the put assigned, that's an immediate loss of $1100 for the round lot.

But, but, but, this talk made me look back at all the transactions on this lot of 100 shares of HUM, which I initially built a position with a purchase on 1/19/2021, paying $425 a share.

Since that date, I wrote a total of 16 options including the final call that "lost" me the stock at $455, and the recent put that gets the shares back to me.

In all, I made $6819, counting all options plus the gain from selling the shares.

Counting the $1100 immediate loss now, that's still a gain of $5,719 on a principal of $42,500. That's a gain of 13.5% in less than 7 months.

That's a lot better than if I bought and held: bought at $425, and the current price is now $419, for a loss of $600.

PS. I forgot the little dividend I collected while I held the stock, but it's negligible in the total picture.

PPS. Forgot about another possibility. After I bought HUM at $425, it went as high as $475 intraday in the intervening 6 months. If I were clairvoyant and sold at the peak, would have made $5000. Here, I made $5719 with options. Not too shabby.

 

[bobandsherry]

Except that I sold a put at $430, which expired yesterday. HUM closed at $419 yesterday. With the put assigned, that's an immediate loss of $1100 for the round lot.

But, but, but, this talk made me look back at all the transactions on this lot of 100 shares of HUM, which I initially built a position with a purchase on 1/19/2021, paying $425 a share.

Since that date, I wrote a total of 16 options including the final call that "lost" me the stock at $455, and the recent put that gets the shares back to me.

In all, I made $6819, counting all options plus the gain from selling the shares.

Counting the $1100 immediate loss now, that's still a gain of $5,719 on a principal of $42,500. That's a gain of 13.5% in less than 7 months.

That's a lot better than if I bought and held: bought at $425, and the current price is now $419, for a loss of $600.

PS. I forgot the little dividend I collected while I held the stock, but it's negligible in the total picture.

PPS. Forgot about another possibility. After I bought HUM at $425, it went as high as $475 intraday in the intervening 6 months. If I were clairvoyant and sold at the peak, would have made $5000. Here, I made $5719 with options. Not too shabby.

Yep, definitely need to look at the whole picture and count those premiums you pocket along the way. Definitely changes your view (and return). As they say, can't win them all.... But in many cases it's still not a loss, just not as big of a win.

 

[DR1959]

I play with a portolio that is right now at $1,160,000
But not all of it is investable short term.
I would say only about $300K of it is short term that I buy and sell options with. The rest, I will write covered calls against long term plays with a goal of not losing my stock. That does happen sometimes but then I will hopefully have a chance to buy it back at lower price. I just got called away on my Pfizer stock and I am looking to buy it back, but I made plenty on my premium and I got the recent dividend. That is my goal to get both.

The way the leaps work. So the goal on the leap is to find a stock that you can collect a decent yield on. Works best with monthly dividends but works with any stock.

Let's use STAG as an example.
I bought 1000 shares of STAG at say $40
I sold a LEAP in December 2021 at $35, which is in the money, but sold it for $5.25, so if I get called away, I make 25 cents a share or $250.

If I don't get called away, I pocket a dividend of 12 cents or $120 a month.
$120 a month on a ($40,000 - $5,250) = $34,750 is 4% yield.

So I get the dividend and as long as stock never goes below $35, I am gauranteed to make money.

That one is close, I have done others even further out of the money, but they usually will get called, but again, I make money regardless, since I always make sure my net cost is below strike.

Realty Income is another one I played.
Symbol O
Pays monthly, nice dividend, I have covered call at $50 with a net of 49.75

You are not making big money here, but who wouldn't want a pretty safe 4-5%