Selling Covered Calls and Naked Puts

[bobandsherry]

The total cash from option transactions from 1/1/2020 till now is $9449.03. Add to that the $825 net gain from the shares, the gain is $10274.

Nice way to show a strategy where you do CC to improve your return on stock you already held and wanted to keep holding. And good example of how to recover should your shares look like they will get assigned, make lemonade out of those lemons.

And for those just looking or considering CC, the objective isn't to hit homeruns, but a lot of singles and sprinkle of doubles. But also be prepared for an occasional walk or even strike out. In other words, these are NOT the high potential flyers for returns. But for that lower return you also limit your risk. Looks like you got at least a double, and maybe a triple on your MU CC's.

 

[MRG]

I was curious what your stock was, thanks for mentioning it. This is a good example of making a little extra scratch while continuing to hold a stock you want to hold long. I don't recall if you mentioned what your duration was, but if it was a month, that's still $750/yr in your pocket.



At a $150/sh to value the return on the premium, that's still 5% you are paid while continuing to hold a stock what I'll assume you feel has continued upside. I guess you could see a $20/sh price drop in the next 10 months, but I'd also guess you'd keep on holding this so the premium helps to soften that possible outcome.

+1
APPL is a long term holding I juice a little from CCs. Other more volatile names I've been using are PLTR, PLUG, AMD. I think they're overvalued and I don't really want to hold any of them long term right now. However you can get some juicy put premiums and seldom be assigned. I'll be called out of most of my PLTR this Friday and will write more puts on it beforehand. Less volatile names I've recently played are IBM and MO. Both are good plays for people who own, wouldn't mind owning them and understand how the dividend plays into their pricing.

I played with CCs a long time ago and it wasn't nearly as practical to play. Today's 65 cent contract and zero commission makes it a much easier to produce extra returns from stocks you already own or would like to.

 

[NW-Bound]

YTD, I have collected $183,742 from option premiums. For the 8 months so far, it's a bit less than last year, but I was slowing down and not as active as I was last year.

I think I was more on my toes last year, when people were dropping like flies from Covid. Then, with the vaccines out I assumed that it would be all honky dory, and my stocks would keep going up and up. No, it's never 100% safe, and if it were the market would price it in.

Now, I want to reduce my stock AA, and instead of selling the shares outright, I am trying to squeeze a few more bucks via call options. However, it's hard to break from the habit of setting the price high so that the options would not get assigned. Old habits die hard.

 

[jr6035]

+1
APPL is a long term holding I juice a little from CCs. Other more volatile names I've been using are PLTR, PLUG, AMD. I think they're overvalued and I don't really want to hold any of them long term right now. However you can get some juicy put premiums and seldom be assigned. I'll be called out of most of my PLTR this Friday and will write more puts on it beforehand. Less volatile names I've recently played are IBM and MO. Both are good plays for people who own, wouldn't mind owning them and understand how the dividend plays into their pricing.

I played with CCs a long time ago and it wasn't nearly as practical to play. Today's 65 cent contract and zero commission makes it a much easier to produce extra returns from stocks you already own or would like to.

I own Both IBM and MO. I got assigned at $143 on IBM last month. Just bought my 100 shares back at 137 a week later. It's a long term keeper for me.

 

[Sniggle]

It has been an interesting and challenging couple of weeks in option pits, with a general downward drift in my portfolio. Seeing your portfolio drop 10K+ on a day can be jarring.

However, it has taught me some valuable lessons, the most important being that even on a down day there are ways to add value to your portfolio:

- Selling CC puts on stocks that are dropping into your 'buy' zone
- Adjusting your covered call positions when the value of the current contract is negligible. Even on a down day a few of your stocks may be up, and being slightly up in a down market can add value to future call premium. Sometimes this requires dropping the strike price to below your break even point, but climbing out of a hole may take several careful steps up the ladder.

I am becoming keenly aware of how important it is to dedicate some time around market open and market close every day, to see what is happening and to take advantage of opportunities to adjust options/write new options. Taking advantage of temporary momentum in a stock to roll an option can be a game changer. OK, back to my day job.

 

[NW-Bound]

Another Friday, another batch of options hit expiry.

I had 46 contracts shorted (sold).

33 covered call options expiring worthless
7 put options expiring worthless

2 call options getting assigned
6 put options getting assigned

The worthless options net me around $2300 in premium.

The options that get assigned are in-the-money only by a small amount, mostly a few pennies per share, and cost me less than $300 compared to doing nothing. I said I should not be selling put options, lest they get assigned and keep me from lowering my stock AA, but some stocks went down so much I found it hard to resist. Did I say that I am a stock lover?

Still, overall option selling helps my return this week, compared to doing nothing.

Next week, I have a lot of monthly contracts expiring. These are also higher-priced contracts. Some may get assigned, and this will help bring down my stock AA as I have wanted to do for some time.

 

[MRG]

I had 12 puts expire worthless and 1 call. During the week I rolled 9 calls and wrote one additional put. This week looks like $600 in premiums on 65k of cash.

 

[Rowej]

I have a little different twist on this, as I am an option seller of puts and calls and other strategies, because I don’t want to be long the market at all time highs. I sell puts on stocks I would want to own that are not at all time highs. So I am willing to build a portfolio of stocks at much lower prices, so I sell puts on this stocks. If they get put to me then in immediately sell a call against it to collect the premium on the call side.

This allows me to pick stocks I can sell puts on, at strike prices, much lower. I am fairly active and I have a goal of $12,000 a month in realized premium collected. I typically do this using less than 25% of my buying power, so I have a lot of dry powder. I intend to continue this strategy for quite a while to cover my living expenses since I stopped working in March.


Over time, I will get stocks assigned, and build a portfolio while continuing to reduce my. Cost basis by selling calls and additional puts on the same stocks that I am assigned that are further out of the money.


Today I had 21 options expiring and only 4 were in the money, by a few cents, all of those. Stocks i want to own. Monday I sell calls on them.

There are a lot of options with options as we like to say!

 

[NW-Bound]

Today is triple-witching day. Like they say, the market is jittery all week, with waves of selling and buying, stock prices moving to and fro, it's hard to know how it was going to end.

I have 107 covered call contracts expiring out of the money, giving a gain of $11,500 on option premium.

19 covered calls expired in the money, causing me to sell stocks at $1,230 below their closing prices.

17 put contracts expired out of the money, giving me $2,234 in premium.

8 put contracts expired in the money, making me buy stocks at $1,515 above market price.

So, my net gain on option trading for this week is $11,500 - $1,230 + $2,234 - $1,515 = $10,989.

This $11K gain is not the weekly gain, as it includes gains from many monthly options that expired today.

What is as important as this gain is how much stock is sold vs. purchased due to option assignment. The assigned calls cause me to sell $170,400 worth of stock, while the assigned puts cause me to buy $56,700 worth of stock.

The net effect is that my stock AA will go down a bitty bit. My sector concentration also changes. I will be shifting some money from the semiconductor sector to other sectors such as healthcare.

 

[RobbieB]

Woo-hoo, 10 grand a week! Half mil a year.

You rock!

 

[NW-Bound]

No. As I said, the $11K today includes some monthly options, hence is higher than normal.

As I posted earlier, I made around $320K last year on option premium. That's only $6K/week on the average.

YTD, in 2021, I have sold enough contracts to get $196K on option premium. Pro-rated, this is lower than last year, but I don't know how things will work out for the rest of the year.

 

[chassis]

@NW-Bound the $320k was on how much capital deployed?

 

[NW-Bound]

@NW-Bound the $320k was on how much capital deployed?

My total investable portfolio is 7 figures, not 8 figures. That's all I will say.

I do not write puts on all my cash, nor write calls on all my equities. I cannot do that even if I want to. For example, some of the cash is in 401k Stable Value, some is in I bonds. Some of the equities is in MFs.

The "active" part of cash is about $600K, although I never use all of it.

The "active" part of equities used for covered call writing is about $2M. Quite a few of my stocks are so sleepy, their option premiums are dirt cheap and not worthwhile.

Of course, the deployed portion of cash and stocks varies from week to week.

 

[NW-Bound]

It so happened that last week I sat down to compile the transaction records of 2020 in order to have a better picture of my option activity. I already use Quicken to look at loss/gain of my stocks/bonds/options, but Quicken does not provide some answers I was seeking. Quicken does not sort out the calls from the puts, nor take into account the effects of option assignments.

Here's what I found. The portion of contracts getting assigned is a lot higher than the 15% that I thought. There's nothing like counting the actual transactions using a spreadsheet, rather than guesstimating.

In 2020, I sold 1003 OTM covered calls for $205,459, and spent $21,916 to close some of them out prior to expiry. Net gain with premium from calls: $183,543.

I sold 840 OTM put options for $184,064, and spent $46,824 to buy some of them back. Net gain from puts: $137,240.

Total gain from option premium: $320,783. Quicken reports $318K, and the small difference is caused by using trading dates vs settling dates.

What I did not have a full grasp on are the following numbers.

Of the 1003 calls, 310 calls got assigned (31%), and the total stock sale was $2,961,085.

Of the 840 puts, 177 puts got assigned (21%), and the total stock bought was $1,413, 250.

Of course some shares got bought, then sold, and churned. I was surprised to see that the churning was that high. It's because the assignment rate was higher than I thought. Also, the sales were a lot higher than the purchases.

If I sold more than I bought, then why my stock AA was going up? I must have bought a lot of stocks outright, and not just via put assignments. I need to look into this to satisfy my own curiosity.

Anyway, you can see that while it is easy to count the money one makes from option premium, the only thing that matters is the total portfolio return.

PS. Last year, my stock AA was lower than now, and I had a larger pile of "active cash" with which to write puts. Hence, I made more money with puts last year than I do this year. Additionally, I try to refrain from writing puts, because I want to reduce my stock AA.

 

[chassis]

It so happened that last week I sat down to compile the transaction records of 2020 in order to have a better picture of my option activity. I already use Quicken to look at loss/gain of my stocks/bonds/options, but Quicken does not provide some answers I was seeking. Quicken does not sort out the calls from the puts, nor take into account the effects of option assignments.

Here's what I found. The portion of contracts getting assigned is a lot higher than the 15% that I thought. There's nothing like counting the actual transactions using a spreadsheet, rather than guesstimating.

In 2020, I sold 1003 OTM covered calls for $205,459, and spent $21,916 to close some of them out prior to expiry. Net gain with premium from calls: $183,543.

I sold 840 OTM put options for $184,064, and spent $46,824 to buy some of them back. Net gain from puts: $137,240.

Total gain from option premium: $320,783. Quicken reports $318K, and the small difference is caused by using trading dates vs settling dates.

What I did not have a full grasp on are the following numbers.

Of the 1003 calls, 310 calls got assigned (31%), and the total stock sale was $2,961,085.

Of the 840 puts, 177 puts got assigned (21%), and the total stock bought was $1,413, 250.

Of course some shares got bought, then sold, and churned. I was surprised to see that the churning was that high. It's because the assignment rate was higher than I thought. Also, the sales were a lot higher than the purchases.

If I sold more than I bought, then why my stock AA was going up? I must have bought a lot of stocks outright, and not just via put assignments. I need to look into this to satisfy my own curiosity.

Anyway, you can see that while it is easy to count the money one makes from option premium, the only thing that matters is the total portfolio return.

PS. Last year, my stock AA was lower than now, and I had a larger pile of "active cash" with which to write puts. Hence, I made more money with puts last year than I do this year. Additionally, I try to refrain from writing puts, because I want to reduce my stock AA.

@NW-Bound thanks for this and the previous examples. I'm interested to add this to my investing regimen, likely in the future.

Does this fuzzy math work: $320k return on approx $4m worth of securities in play. So 7-ish percent return?

 

[NW-Bound]

@NW-Bound thanks for this and the previous examples. I'm interested to add this to my investing regimen, likely in the future.

Does this fuzzy math work: $320k return on approx $4m worth of securities in play. So 7-ish percent return?

Sure. Maybe more, maybe less, depending on how one does accounting as to what portion is "in play" or at risk. It's extra money, so any amount is helpful. I think that in my case, I have been fortunate that it was well enough to justify the time I spent.

The return of the entire portfolio, which includes cash and equities outside my main trading accounts, has been about the same as the S&P for the last 3 years.

And because my stock AA has been in the range of 60% to 80%, roughly speaking the extra return from option selling allows me to match the market, as if I were 100% invested. That's enough for me to be satisfied.

 

[chassis]

Sure. Maybe more, maybe less, depending on how one does accounting as to what portion is "in play" or at risk. It's extra money, so any amount is helpful. I think that in my case, I have been fortunate that it was well enough to justify the time I spent.

The return of the entire portfolio, which includes cash and equities outside my main trading accounts, has been about the same as the S&P for the last 3 years.

And because my stock AA has been in the range of 60% to 80%, roughly speaking the extra return from option selling allows me to match the market, as if I were 100% invested. That's enough for me to be satisfied.

Thanks again. So SP500 return + options return = total return on total investable assets including cash?

 

[NW-Bound]

Thanks again. So SP500 return + options return = total return on total investable assets including cash?

The sum of all account balances is what I looked at, and reported on the YTD Return thread for the return on total investable assets.

Well, except that I am not an indexer, though stay quite diversified with around 100 positions in various sectors. But I do use the S&P as a benchmark.

 

[Sojourner]

Just curious, @NW-Bound, how much time do you spend on options trading each week? IOW, if you were to abandon options trading entirely, how much more time would you have each week for other activities? I only do monthly options (so far), and I'm wondering how much more time I'd need to put into it to ramp up into weeklies like you're doing.

 

[NW-Bound]

Each morning, I spend about 1.5 to 2 hours after the market opens to watch the market, and to look at my positions to see if I should sell some options on them. And I do this while surfin' the Web for news too. Or while I am browsing this forum.

And then, after lunch, I have about 1/2 hour before the market closes to see if I should do something.

At night, while surfin' the Web for news, I keep an eye out for economic news that may be actionable for me. And following news while watching out for market impact is something I have done for years.

As mentioned earlier, in 2020 I did about 2000 contracts, so that's about 40 contracts a week, or not quite 10/day. This year, it's a bit less.

In 2019, prior to Covid, my option trading brought in around $113K. Obviously, being locked at home prompted me to spend more time trading. When I was traveling, I might just run a Quicken update to see the daily balance of my accounts, and that was it.

 

[Sojourner]

Each morning, I spend about 1.5 to 2 hours after the market opens to watch the market, and to look at my positions to see if I should sell some options on them. And I do this while surfin' the Web for news too. Or while I am browsing this forum.

And then, after lunch, I have about 1/2 hour before the market closes to see if I should do something.

At night, while surfin' the Web for news, I kept an eye out for economic news that may be actionable for me. And following news while watching out for market impact is something I have done for years.

As mentioned earlier, in 2020 I did about 2000 contracts, so that's about 40 contracts a week, or not quite 10/day. This year, it's a bit less.

In 2019, prior to Covid, my option trading brought in around $113K. Obviously, being locked at home prompted me to spend more time trading. When I was traveling, I might just run a Quicken update to see the daily balances of my accounts, and that was it.

Thanks. Sounds like about 2½ to 3 hours per day, typically. That translates to about $450/hour for the time you're actively spending on it. Not bad! I don't think I'd want to spend quite that much time on it, though, personally. For me, anything more than about an hour or two per week starts to feel a little too much like a j*b. But I do enjoy the 3-4 hours I spend on my options selling each month!

 

[Go-NoGo]

Fidelity has a webinar coming up this week on options/covered calls. It is a "101" level course - designed for those who want to learn a bit before starting:

https://fidelityevents.com/SeptemberSpecial?ccsource=em_Publications_892366_106_0

It might be open to non-Fidelity customers as well (you will have to register to check)

 

[NW-Bound]

... For me, anything more than about an hour or two per week starts to feel a little too much like a j*b...

Active investing is not for everybody.

But I do spend a lot more than 1 or 2 hours per week on gardening, and my wife spends that much time in the yard each day.

I certainly spend a lot of time on this forum, and have not made any money from it.

 

[chassis]

@NW-Bound it sounds like we have similar time investments in the market. Your daily cadence is similar to mine. I need to school up on options and give them a try. I'm meeting my own goals for total return, so haven't seen a need to change much in the past few months, but I want to keep my mind open for new ideas.

 

[NW-Bound]

Many people think of what I do as work, but I enjoy it as a pastime. I don't watch TV, play no computer games, and do not read fictions (I do enjoy non-fictions), play no card games, etc... This is one of my pastimes.

Of course if I lose money with option selling, or trail the market too badly, it would stop being fun and I am sure I would stop.

You keep reading that the masses who trade lose money or trail the indexers who buy and hold. So, I asked that if the masses lose money by trading, then would I make money if I do the reverse? I thought that if I sell when they clamor to buy, and buy when they sell in a panic, would that be wrong?

Writing OTM calls and puts is just my chicken way of sell high/buy low. Instead of selling at what I think is high, I say I will sell if it goes even higher. Same thing with buying low.

To me, it's a game of patience and calculations. It's about overcoming fear and greed. It's not adrenaline-packed like a sport. It's not all chances like a casino game. You can chose the risk/reward trade-off level that you like.