Education about Selling Puts

[Texas Proud]

Covered calls and selling naked puts have the same profit profile. The problem with covered calls for a trader is needing to tie up huge amounts of capital to buy the stocks so you can sell the calls. When selling naked puts, you can use collateral from the rest of your portfolio to sell the puts. You dont tie up any money at all.

Now, if you already own stocks for the long term and want to sell calls for additional premium thats a different story.

It was when I first started working, doing tax returns... there was a client who had sold his company to a listed company and held about 10% of the outstanding shares... It was not a huge company, but pretty big...

He made over $100,000 per year in selling covered calls... it was part of his sale strategy to sell stock on a regular basis.. if he had to cover the call, no big deal as he had planned to sell shares anyhow.... if he did not, then he kept the money from the call...

I was pretty shocked at how much he could make doing the options...

 

[NW-Bound]

If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.

 

[Texas Proud]

If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.

He had about $150 to 200 mill at the time... early 80s...

He also had a 100 ft yacht when that size was big....

Never got to get on the yacht... but the partner did....

 

[Lakewood90712]

The Options Industry Council has lots of excellent free webinars on all kinds of options trading.

Several strategy's using puts and calls to make money and protect against unlimited downside. "Straddles" , Strangles ". A lot like work if you ask me.

Naked cash secured puts are a dangerous thing for a casual trader, kind of like catching falling knives, IMO.

 

[clifp]

The Options Industry Council has lots of excellent free webinars on all kinds of options trading.

Several strategy's using puts and calls to make money and protect against unlimited downside. "Straddles" , Strangles ". A lot like work if you ask me.

Naked cash secured puts are a dangerous thing for a casual trader, kind of like catching falling knives, IMO.

A cash secured put is not risky and is slightly less dangerous than holding the security.

Since the end of 2014 I've had ~105K in cash in one of my IRA. Rather than buy at 500 shares of SPY at about 208 on 12/30/2104. I've written cash secured puts .I've written a total of 6 different puts slightly out of the money at prices ranging from 200 to 208. I've collected a total of $7,253 in net premiums including commission which have averaged about $12.80.

Last Friday (Aug 21), rather than buy back my short 205 put position, I let it get exercised. So I ended with 500 shares of SPY which is at a loss. If had just bought the share at the end 2014, I'd be in exactly the same situation, except for I would have lost out on the $7253 in option premium but collected ~$1,000 in dividends.

The only risk I took was that if SPY had gone up to say 240 I might have collected ~$8,000 in premiums but lost out on 16,000 in gains in SPY price appreciation.

Now a flat to slightly down market is about as perfect a time to write cash secured puts. But as a said one of the best things about this strategy making bad years slightly better.

 

[utrecht]

A cash secured put is not risky and is slightly less dangerous than holding the security.

Since the end of 2014 I've had ~105K in cash in one of my IRA. Rather than buy at 500 shares of SPY at about 208 on 12/30/2104. I've written cash secured puts .I've written a total of 6 different puts slightly out of the money at prices ranging from 200 to 208. I've collected a total of $7,253 in net premiums including commission which have averaged about $12.80.

Last Friday (Aug 21), rather than buy back my short 205 put position, I let it get exercised. So I ended with 500 shares of SPY which is at a loss. If had just bought the share at the end 2014, I'd be in exactly the same situation, except for I would have lost out on the $7253 in option premium but collected ~$1,000 in dividends.

The only risk I took was that if SPY had gone up to say 240 I might have collected ~$8,000 in premiums but lost out on 16,000 in gains in SPY price appreciation.

Now a flat to slightly down market is about as perfect a time to write cash secured puts. But as a said one of the best things about this strategy making bad years slightly better.

The amount of money Ive made this year selling weekly SPY puts in this flat market is ridiculous (relative to other yrs). Last wk I took a hit when the market tanked but it was a small hit compared to what Ive made already this year.

 

[NW-Bound]

If his shares were worth $10M, then squeezing out an additional $100K or 1%/yr is fairly easy to do.

He had about $150 to 200 mill at the time... early 80s...

He also had a 100 ft yacht when that size was big....

Never got to get on the yacht... but the partner did....

Then the $100K is pitiful. He must be too busy with his yacht to make his money work harder.

 

[Texas Proud]

Then the $100K is pitiful. He must be too busy with his yacht to make his money work harder.

He got great dividends.... plus, I think he only did options for the shares he actually wanted to sell, not a big percent of his holdings...

But I guess that it is small change for that amount of assets...

There was one client we did their return who was getting north of $10 mill in dividends each year... also tried to keep cap gains at about the same amount... again, early 80s so many years ago...

 

[NW-Bound]

I do not personally know anybody with that kind of money, but I suppose that there are a lot of them. Looking around me at mansions, airplanes, and huge yachts, I am sure that the owners must have the kind of net worth that you describe. Yet, they are still peons in the stratosphere, and do not get mentioned in Forbes or the media.

Many years ago, I picked up a boat magazine at my dentist office to read. It described a humongous yacht being built in Italy for a guy who flew his personal 727 there every month to monitor the progress. I did not recognize his name at all. How many people like that in the world? Amazing.

 

[aja8888]

My step daughter's boyfriend's father is one of them. The boyfriend lives on the dividends of his share of the trust fund daddy set up for the four kids.

I figure the kid does well as he has 7 motorcycles, two built Mustangs and doesn't have a job. I think the fund kicks out $40K per quarter in earnings. The kid also has a house in Anchorage that he rents out, but lived there for a few years.

Dad had a large chemical distributor business in Houston (30 years in business) and sold it 10 years ago. Rumor has it that he cashed out for over $100 mil. The Dad is always on some far away vacation. I've met him once....a pretty nice, down to earth fellow with one lazy son we know.

 

[hnzw_rui]

The Dad is always on some far away vacation. I've met him once....a pretty nice, down to earth fellow with one lazy son we know.

In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.

 

[clifp]

In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.

I wonder if retirement would be as sweet if you never worked?

 

[aja8888]

In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck. The son just got lucky since he was bankrolled by daddy.

I could write a paragraph about his shortcomings, but not worth it. Let's say he doesn't show any sense of responsibility and is flighty. He said to me one day, he "can't wait for his ship to come in" (meaning the inheritance when dear old dad passes). I suspect step daughter will become one of his cast off toys at some point in time. Her Mom (my DW) feels like I do.

Found money is not the same as earned money.

 

[NW-Bound]

In fairness, aren't we, with our own goals of ER, kinda pursuing the same? Could be it's not so much laziness rather, the freedom of choosing your own pursuits since you're not tied to earning a paycheck...

On a much smaller scale, yes. And we had to create our own means.

But if I had a rich daddy, would I be so gun ho to decline his money and go make my own fortune? Probably not, as I am too laid back.

When visiting the Hearst Castle, I learned that the castle builder, William Randolph Hearst, had a rich father but his fortune was self-made. He did get some initial help from his father, but his eventual riches far eclipsed that of his father. Many billionaires are like that, not the type who hangs around this forum.

 

[clifp]

I could write a paragraph about his shortcomings, but not worth it. Let's say he doesn't show any sense of responsibility and is flighty. He said to me one day, he "can't wait for his ship to come in" (meaning the inheritance when dear old dad passes). I suspect step daughter will become one of his cast off toys at some point in time. Her Mom (my DW) feels like I do.

Found money is not the same as earned money.

I think you are right. I thought Buffett approach give your kids enough money to do anything they want but not enough to do nothing makes a lot of sense.

I hope your step daughter sticks around long enough for his ship to come in.

 

[Texas Proud]

I do not personally know anybody with that kind of money, but I suppose that there are a lot of them. Looking around me at mansions, airplanes, and huge yachts, I am sure that the owners must have the kind of net worth that you describe. Yet, they are still peons in the stratosphere, and do not get mentioned in Forbes or the media.

Many years ago, I picked up a boat magazine at my dentist office to read. It described a humongous yacht being built in Italy for a guy who flew his personal 727 there every month to monitor the progress. I did not recognize his name at all. How many people like that in the world? Amazing.

You have to remember that in the early 80s there were not that many billionaires.... we did have a client that was on the 400 list, but I never did anything with his return... just looked him up and he is on the billionaires list now, but not in the top 400... again, this is not the other two people that I mentioned... I would bet that both have already passed...

 

[NW-Bound]

We are drifting far from talk about selling puts, but as we have so much fun talking about how some people are so rich...

What I meant was that one does not have to have a billion to have impressive wealth. What about just a "few hundred millions"? A report I saw said that in 2012 there were 31,000 centimillionaires in the US.

They must be all over the place. As I am not in their circle, I never run across one. Not even know one indirectly. How many degrees of separation to get from me to one of them, I wonder. Two? Three? No, must be two. I know the executives at my former megacorp. They were certainly not centimillionaires, but their bosses were.

 

[hnzw_rui]

What I meant was that one does not have to have a billion to have impressive wealth. What about just a "few hundred millions"? A report I saw said that in 2012 there were 31,000 centimillionaires in the US.

They must be all over the place. As I am not in their circle, I never run across one. Not even know one indirectly. How many degrees of separation to get from me to one of them, I wonder. Two? Three? No, must be two. I know the executives at my former megacorp. They were certainly not centimillionaires, but their bosses were.

Now that I think about it, my former boss probably is one. His Beverly Hills home was $20M and I've seen several buys for 100,000 AAPL shares among his holdings. He's also the biggest tightwad I've ever met.

 

[stepford]

Just remember that the way we think/talk about those centimillionaires/billionaires is probably the way our struggling non-FI friends think/talk about *us*.

 

[CoolChange]

We are drifting far from talk about selling puts, but as we have so much fun talking about how some people are so rich...

What I meant was that one does not have to have a billion to have impressive wealth. What about just a "few hundred millions"? A report I saw said that in 2012 there were 31,000 centimillionaires in the US.

They must be all over the place. As I am not in their circle, I never run across one. Not even know one indirectly. How many degrees of separation to get from me to one of them, I wonder. Two? Three? No, must be two. I know the executives at my former megacorp. They were certainly not centimillionaires, but their bosses were.

I had actually forgotten this was a thread that I started when reading this. As usual around here, the segue posts can be as entertaining (though, maybe not as informative) as the ones on topic.

To your degrees of separation question for myself, I think I know a billionaire and his immediate family fairly well if you include all of the charitable and family foundations that he effectively controls but are not technically counted in his net worth. You would never know he was anything more than middle class if you met him or his wife outside their home. His best friend is definitely on the list of Forbes billionaires; but, I do not know that family myself.

Just remember that the way we think/talk about those centimillionaires/billionaires is probably the way our struggling non-FI friends think/talk about *us*.

I know this is true for some of my extended family speaking about me, and was true long before my NW ever even crossed the seven figure mark.

 

[NW-Bound]

OK, back on selling puts.

Writing naked puts is very dangerous, no different than buying on margin. You can lose more than the amount that you bet. Having money to back up the puts is safe, but then the money you make must be compared with what you can make buying the stock itself with that cash.

In a flat market, writing covered puts or calls can enhance your return. And as clifp pointed out earlier, even if you are wrong, it reduces your gain in good years, but also reduces your loss in bad years. Kind of like buying insurance. So, done right it is not at all risky.

PS. Some will say that they can close out a naked put to limit their loss the same way one can stop loss on a margin trade. That takes discipline to capitulate instead of hanging on hoping the market will turn around. And I wonder if you can be fast enough in a flash crash.

 

[utrecht]

What does a flash crash have to do with selling puts? A flash crash implies a severe and sudden crash and then almost immediate recovery. Why would you need to be fast to do anything?

 

[NW-Bound]

I don't know how long it takes for them to assign the puts to you. I guess even if they do, a quick recovery still limits your loss, if any.

So, maybe not a flash crash, but a steep and deep descent, like what we saw in late 2008/early 2009.

 

[utrecht]

I don't know how long it takes for them to assign the puts to you. I guess even if they do, a quick recovery still limits your loss, if any.

So, maybe not a flash crash, but a steep and deep descent, like what we saw in late 2008/early 2009.

Even when the puts are WAY in the money, they normally dont get assigned unless they are very close to expiration, like they expire that day. Ive only had puts assigned early twice, but even if they were assigned and you owned the stock, when the flash crash was over and the stock vaulted back up, you would be back to even or close to it.

Now, yes, if you sell puts and there is a prolonged deep market correction or bear market, you will get slaughtered if you just sit there and do nothing. There are all kinds of options strategies to limit the damage when that happens

 

[NW-Bound]

I wonder why the option clearing house has not updated their computer to do option assignment in real time. They are behind the HFT guys who trade stocks in milliseconds.