Selling Covered Calls and Naked Puts

[FIRE'd@51]

I expect the S&P 500 to hit 3500 by the end of October so the selling of Covered Calls should result in no loss of stock for the next few weeks.

Just to give a frame of reference, the Nov 1, SPX 3500 puts have a delta of 0.01, which indicates that the options market is attaching only about a 1% probability of the market being 3500 or less at expiration.

 

[Running_Man]

Just to give a frame of reference, the Nov 1, SPX 3500 puts have a delta of 0.01, which indicates that the options market is attaching only about a 1% probability of the market being 3500 or less at expiration.

Yes so that is why I think not selling those puts naked at this time would not be a good investment.

 

[Running_Man]

Sounds like you are politely saying the market is about to take a 20% dive by Halloween.

Math is hard I'm trying to keep it simple.

 

[SecondAttempt]

Check out QYLD. A covered call ETF. I use it, I've made 10% with a 12% yield. There are others, but this is the best.

I'm curious about your statements, not challenging you, jus have some questions.

The ETF you named is restricted to the Nasdaq 100. Why go with a fund with that kind of restriction? Why not RYLD which spans the Russell 2000?

I have writen covered calls in the past so I am familiar thought not deeply knowedgeable

The yield on these is very high. Covered calls are usually very low risk. Is there something about putting them in a fund that increases risk? Usually the risk is opportunity loss if a big gainer is called away. Are these returns high because of low interest rates and the funds may crash when rates go up?

 

[pb4uski]

^^^ Another interesting options ETF is ACIO. They invest in individual stocks in the S&P 500... enough tickers that the individual stock portfolio would be reasonably expected to mirror the S&P 500. Then they write covered calls on the more high volatility individual stocks in the portfolio and use some of the proceeds from those calls to buy protective puts on the S&P 500. The proceeds from the covered calls on the high vol tickers exceed the cost of the protective puts... so they get a little juice in income and downside protection on the whole portfolio.

https://aptusetfs.com/acio/
https://aptusetfs.com/wp-content/uploads/2020/09/Part-2-IV-differential.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.

 

[Running_Man]

I'm curious about your statements, not challenging you, jus have some questions.

The ETF you named is restricted to the Nasdaq 100. Why go with a fund with that kind of restriction? Why not RYLD which spans the Russell 2000?

I have writen covered calls in the past so I am familiar thought not deeply knowedgeable

The yield on these is very high. Covered calls are usually very low risk. Is there something about putting them in a fund that increases risk? Usually the risk is opportunity loss if a big gainer is called away. Are these returns high because of low interest rates and the funds may crash when rates go up?

RYLD is writing calls on the Russsel 2000 index
QYLD writes calls on individual stocks in the Nasdaq 100

The option premium on individual shares is going to be higher than a basket ETF as volatility is greater.

QYLD is also writing calls on 100% of portfolio while RYLD write calls on 85% of portfolio. Also RYLD is a far more diverse industry sector with only 15% information and technology while QYLD is 50%.

QYLD is designed to pay out 50% of the premiums received capped at 1% per month maximum while RYLD only specifies they will pay less than 1/2 capped at 1%.

QYLD is a 4 billion dollar fund while RYLD is a 300 million dollar fund. You are basically converting the upside potential for an income stream, and if the market would hit a long period of sideways action you will do better, if it jumps dramatically you will do not nearly as well and if it falls you will have some protection and less at risk as your investment is returned via option premiums monthly.

But they are both very interesting.

 

[SecondAttempt]

RYLD is writing calls on the Russsel 2000 index
QYLD writes calls on individual stocks in the Nasdaq 100

The option premium on individual shares is going to be higher than a basket ETF as volatility is greater.

QYLD is also writing calls on 100% of portfolio while RYLD write calls on 85% of portfolio. Also RYLD is a far more diverse industry sector with only 15% information and technology while QYLD is 50%.

QYLD is designed to pay out 50% of the premiums received capped at 1% per month maximum while RYLD only specifies they will pay less than 1/2 capped at 1%.

QYLD is a 4 billion dollar fund while RYLD is a 300 million dollar fund. You are basically converting the upside potential for an income stream, and if the market would hit a long period of sideways action you will do better, if it jumps dramatically you will do not nearly as well and if it falls you will have some protection and less at risk as your investment is returned via option premiums monthly.

But they are both very interesting.

Thanks. I understand the difference between the index and individual shares. I will have to read more closely. This looks intriguing especially given my market expectations.

I also need to review how interest rates may impact. As I have mentioned in another thread, I did some in-depth option analysis about 20 years ago. Interest rates play a factor in valuation because they determine the risk-free return against which the risk is valued. I just don't recall off hand how to do the math. We've had quite an unsual period of low rates going back even before covid. I just don't want to be caught with my pants down if interest rates go up and the market panics. The Fed has said there will be no surprises. But that only makes a surprise more dangerous.

 

[bobandsherry]

As of right now KLAC is at 349. Would expect that 325 still in play, but if you are looking to get the stock back in the portfolio to write additional calls against at 355 now would be the time as you could probably get a nice premium with the recent uptick in VIX and you will not have to worry about seeing 355 again for a couple of years, so it won't be called away.

Took 8 days but prediction fulfilled KLAC hit 325 this morning.

Ya called the bottom, but popped yesterday back to $372+. Would have been a good trade play.

I expect the S&P 500 to hit 3500 by the end of October so the selling of Covered Calls should result in no loss of stock for the next few weeks. Alternatively selling puts are not reccomended as I think you will be able to pick up any stock you like for a good deal cheaper, or sell naked puts at that point.

Point being if you are thinking of selling covered calls premium should be good in the coming days so even selling right by the money might be advantageous.

S&P Close 10/11 - 4,361
S&P Close 10/29 - 4,605
Difference = +244 or 5.6% gain (35% above your expectation).

Gotta say I'm glad to see S&P has exceeded your expectations. Still uncertainty in the market and the country, so who knows what we'll see by year-end.

 

[NW-Bound]

About KLAC, I had 200 shares and sold out both of them when my covered calls got assigned. Bought both lots back below where I sold, by selling puts which got assigned.

Then, sold covered calls again. KLAC put out a good quarterly report, and its share price went banana again. I just got 100 shares pulled out from me with a covered call getting assigned. When I saw the stock jump $17/share above my strike price of $355, immediately sold a put to buy it back at the same price. Will see if it gets down to that price.

Meanwhile, I still have the other lot with a call on it at $380, expiring next Friday. Who knows if it will go up that high, and I am all out of the good KLAC stock again. This market is crazy.

 

[Sniggle]

Does anyone sell puts, and then buy puts at a lower strike price as insurance? It is not an 'official' strategy, but it seems to make sense to me.

Example: I sold AMD 119 puts and bought AMD 115 puts before the recent earnings. My net credit was $1.50, so at most I could have made $150 per contract, and my downside was losing $250 per contract. I bought on Monday and earning came out Tuesday night. As expected, the stock responded well after earning, so I quickly sold my insurance puts (115) to recoup $25 per contract, for $175 per contract profit, held for 5 days, that required $11900 capital tied up per contract for those 5 days.

I was pretty confident that the earnings would cause the stock to rise, and considered the 1.3% return on my money over 5 days worth the risk, and if it dropped below 119 but above 115 I did not mind owning the stock.

Am I missing something, or does this make sense to you option pros?

 

[NW-Bound]

Does anyone sell puts, and then buy puts at a lower strike price as insurance? It is not an 'official' strategy, but it seems to make sense to me.

Example: I sold AMD 119 puts and bought AMD 115 puts before the recent earnings. My net credit was $1.50, so at most I could have made $150 per contract, and my downside was losing $250 per contract. I bought on Monday and earning came out Tuesday night. As expected, the stock responded well after earning, so I quickly sold my insurance puts (115) to recoup $25 per contract, for $175 per contract profit, held for 5 days, that required $11900 capital tied up per contract for those 5 days.

I was pretty confident that the earnings would cause the stock to rise, and considered the 1.3% return on my money over 5 days worth the risk, and if it dropped below 119 but above 115 I did not mind owning the stock.

Am I missing something, or does this make sense to you option pros?

I am not a pro, but know that this is one of the "official" strategies, called bull put spread. A bull put spread is also known as a credit (put) spread or a short put spread.

See: https://www.investopedia.com/articles/active-trading/021814/what-bull-put-spread.asp

I have never used these techniques, and only use the simpler calls and puts.

 

[jr6035]

I sell calls on AMD. Thats a great stock. But go out to a 30 Delta or less, or you will leave money on the table.

 

[tutan]

Does anyone sell puts, and then buy puts at a lower strike price as insurance? It is not an 'official' strategy, but it seems to make sense to me.

Example: I sold AMD 119 puts and bought AMD 115 puts before the recent earnings. My net credit was $1.50, so at most I could have made $150 per contract, and my downside was losing $250 per contract. I bought on Monday and earning came out Tuesday night. As expected, the stock responded well after earning, so I quickly sold my insurance puts (115) to recoup $25 per contract, for $175 per contract profit, held for 5 days, that required $11900 capital tied up per contract for those 5 days.

I was pretty confident that the earnings would cause the stock to rise, and considered the 1.3% return on my money over 5 days worth the risk, and if it dropped below 119 but above 115 I did not mind owning the stock.

Am I missing something, or does this make sense to you option pros?

What if AMD went below $115? What are the mechanics to get rid of the shares at $115 that you will be assigned at $119? I assume both contracts expire on the same day.

 

[Sniggle]

What if AMD went below $115? What are the mechanics to get rid of the shares at $115 that you will be assigned at $119? I assume both contracts expire on the same day.

If that happened, it would all be sorted out at expiration, automatically...in essence I would have gotten assigned the shares at $119, and then sold them at $115, with the subsequent financial loss to my account. As the 119 Puts were cash covered puts (money put aside at the time of sale), the purchase at 119 was fully funded.

 

[Sniggle]

The fun of playing with the big boys. I sold a GOOG 111221 2950 put on Monday for $16. GOOG went down and then up today. I rolled the put into a GOOG 111221 2990 put for about $6 premium at around 2 PM. I bought to close that put for .75 at around 355 because I did not want to hold GOOG over the weekend (it would have expired worthless, but it was vacillating right at 2990.

So, for $295000 of sequestered capital, I made $2125 (with that extra $525 by being diligent as the market moved to close), for an annual rate of return of 37.45%.

Good fun (.....when it goes your way)

 

[Running_Man]

So I think I sold my last option for the year today. This was interesting should have been doing this long ago. Selling Puts almost exclusively on stocks I am very interested in 10-15% below current bid price for one month out and averaging 13.65% annually on a time weighted average basis on the amount of cash required for the put writeups. Previously for a life long stupidity reason I would wait for stocks to fall into a price I would like and buy when it hit the price. This is so logical I am smacking myself for never doing this before, thank goodness for NW-Bound, without his comments I would never do this. Even if I employed this strategy on only 10% of my short term cash it would double the return of the entire block of short term cash.

 

[Sojourner]

So I think I sold my last option for the year today. This was interesting should have been doing this long ago. Selling Puts almost exclusively on stocks I am very interested in 10-15% below current bid price for one month out and averaging 13.65% annually on a time weighted average basis on the amount of cash required for the put writeups. Previously for a life long stupidity reason I would wait for stocks to fall into a price I would like and buy when it hit the price. This is so logical I am smacking myself for never doing this before, thank goodness for NW-Bound, without his comments I would never do this. Even if I employed this strategy on only 10% of my short term cash it would double the return of the entire block of short term cash.

+1!
Sold my last option of 2021 today, as well, and I also feel pretty stupid for not discovering the "magic" of selling options much sooner. My APY on the cash I set aside in my brokerage account to cover assigned puts is about 17% so far, and the options income I've generated this year is enough to cover a significant chunk of my basic, annual spending needs. So... I'm a happy options camper.

 

[rayvt]

There is nothing "magic" about selling options. It's not free money, even though it may appear to be for a period of time.

There is no free money to be had in the stock market. You are just putting on a risk that you are perhaps not aware of.

When the market turns against you, options can rip your face off.

 

[bobandsherry]

There is nothing "magic" about selling options. It's not free money, even though it may appear to be for a period of time.

There is no free money to be had in the stock market. You are just putting on a risk that you are perhaps not aware of.

When the market turns against you, options can rip your face off.

If you are selling covered calls on stock you plan to hold, it's kinda free money. An extra dividend so to speak. [emoji41]

 

[NW-Bound]

So I think I sold my last option for the year today. This was interesting should have been doing this long ago. Selling Puts almost exclusively on stocks I am very interested in 10-15% below current bid price for one month out and averaging 13.65% annually on a time weighted average basis on the amount of cash required for the put writeups. Previously for a life long stupidity reason I would wait for stocks to fall into a price I would like and buy when it hit the price. This is so logical I am smacking myself for never doing this before, thank goodness for NW-Bound, without his comments I would never do this. Even if I employed this strategy on only 10% of my short term cash it would double the return of the entire block of short term cash.

+1!
Sold my last option of 2021 today, as well, and I also feel pretty stupid for not discovering the "magic" of selling options much sooner. My APY on the cash I set aside in my brokerage account to cover assigned puts is about 17% so far, and the options income I've generated this year is enough to cover a significant chunk of my basic, annual spending needs. So... I'm a happy options camper.

When people talk about their cash being a dead weight on the portfolio, I keep saying mine is not. Heh heh heh...

I usually commit about 10-30% of my cash, and the return when averaged over the entire cash portion is not bad at all. Heh heh heh...

There is nothing "magic" about selling options. It's not free money, even though it may appear to be for a period of time.

There is no free money to be had in the stock market. You are just putting on a risk that you are perhaps not aware of.

When the market turns against you, options can rip your face off.

Of course, there's risk and one has to know how to control it. Same as what I do, Running_Man and Sojourner only commit a portion of their cash to cover put options. And if the market drops 50%, we lose money, but it is still not as bad as someone who buys/holds the same stocks.

The stock buy-and-holder may win out when the stock goes to the moon. Maybe he will make 10x, while we only collect the small option premium. But then, I am not holding my entire stash in cash for writing put options. I own plenty of stocks too. Remember that I am only doing this on the cash portion of the portfolio, and then only on part of that cash.

And this is why I repeatedly said I don't bother to hold bonds. I think that bond return is low and the reward is lousy compared to the risk/reward of doing cash-covered put options. But then, this requires some market watching to sell options only on market down days. Yes, it takes some market timing.


PS. People will say, if it is so easy then why big investors don't do it. They know about all this, but being of their size, they cannot do the small hit-and-run that I do. They do big option and future trading on the S&P, but options of many individual stocks do not have the high volume for them to mess with.

It's like you can buy one or two foreclosed homes to flip, but that's peanuts for Buffett and he will have to look to buy an entire town and he cannot do that without people noticing.

 

[NW-Bound]

If you are selling covered calls on stock you plan to hold, it's kinda free money. An extra dividend so to speak. [emoji41]

Well, I have "lost" a few hot stocks, when they surge on good news to way above my strike price. Yes, I make money, but not as much as a buy-and-hold guy. Needless to say, I don't like this a bit.

I usually watch the stock, and often sell a put option at the same strike price or slightly higher further out in the future in order to get it back. If I keep doing it, will slowly catch up with the stock and own it again. Or it may come down along with the market in a correction, back to where I sold.

Markey gyrations are fun to watch when they happen, because they now represent opportunities instead of worrisome times.

 

[bobandsherry]

Well, I have "lost" a few hot stocks, when they surge on good news to way above my strike price. Yes, I make money, but not as much as a buy-and-hold guy. Needless to say, I don't like this a bit.



I usually watch the stock, and often sell a put option at the same strike price or slightly higher further out in the future in order to get it back. If I keep doing it, will slowly catch up with the stock and own it again. Or it may come down along with the market in a correction, back to where I sold.



Markey gyrations are fun to watch when they happen, because they now represent opportunities instead of worrisome times.

If it gets assigned, then I just do a put. Buy back on the dip. Overall I'm ahead of the game.

 

[NW-Bound]

If it gets assigned, then I just do a put. Buy back on the dip. Overall I'm ahead of the game.

Yes, but as I said I have "lost" some good stocks that are hard to buy back. They keep going and going out of sight.

What I have learned is if the stock fundamentals support the price, just bite the bullet and buy it back at the higher price.

In a classic book "The Battle for Investment Survival" by Gerald M. Loeb, I learned from the author that it is perfectly all right to buy a stock back at a higher price if you see that the fundamentals have changed, and the higher price is warranted.

Gerald Loeb was a founding partner of E.F. Hutton.

 

[street]

Day trading is very interesting to me. I also not sure I would want to learn all the ins and outs but still intriguing. So, I was told that there is about 2 percent of day trades that actually are successful at making a living trading.

Is there any truth to that?

 

[NW-Bound]

Option selling is not day trading.

And option selling is not even option trading (buy and sell). I only sell out-of-the-money (OTM) call and put options. I do not buy options. The few times I bought options, I always lost. So, I stopped buying, except to cover a short sale.