Selling Covered Calls and Naked Puts

[itsme2]

+1

A trader who buys an ITM call for the "poor man's covered call" strategy has the risk/reward partially cancels out by the OTM call that he sells.

But a holder of an ITM call who does not offset it with another trade is purely using leverage, in the hope of enjoying the potential stock gain while committing less capital than someone who buys the stock outright.

Right on!

 

[joesxm3]

Well look to SQ to skyrocket.

I sold a $140 covered call today, 2 week duration.

I want to lighten up on my SQ allocation, but maybe $145 would have been a better pick.

 

[Running_Man]

The following is how I utilize puts as a method in my investing philosophy as I am just beggining to implement the strategy and limit my cash exposure to test the outcomes on options to $250K maximium at the present time.

RGLD is a gold royalty company and the original timeframe is late November 2021, RGLD was on my interest list as I thought it had placed a bottom of $92.37 in October 2021 but with the stock trading at 101-102 decide to sell a near term 95 PUT with the idea of picking up the stock on a correction so on November 23, I sold a Dec 20 95 PUT in RGLD for $49.32 with the stock selling at 101.64.

On December 20 the PUT expired worthless but the option premiums were expanding and on Dec 20,2021 I sold a Jan 21 95 PUT for $155.23 with the stock @ $102.30. As time passed, I realized the correction to 95 was unlikely and on Jan 11th, 10 days before the expiration of the 95 PUT, with RGLD at $102.32 I placed an order to sell a Jan 21 100 PUT expiring in 10 days for $309.32. For 10 days I had an additional $10,000 in cash needed for a total of $19,500 but I thought the chance of both options being exercised against me is very unlikely.

On January 19th RGLD was acting very bullish and not only are the PUTS unlikely to be exercised but I believe RGLD is poised to make a significant move up, as Russia is making big noises in Ukraine and inflation is accelerating so on 1/19/2022 I purchased 100 shares of RGLD for $10,269.95. This is $100 more than I could have purchased the stock for on November 23rd but I have taken in at this point $556.28 in option premiums.

My hypothesis was RGLD would make a new all time high in the next two years over $150 for a 50% gain. On Feb 24th RGLD had advanced to $122 and so I sold an October 160 CALL for $264.31 covered by my 100 shares of RGLD. On the same day convinced the move up had started but now willing to double my position as the stock was acting as I had anticipated I sold a April 14th PUT @ 105 for $188.31.

To summarize on the morning of March 1st I owned 100 shares of RGLD at a cost of $10,269.95 with the current value on the morning of $12,650 and had received option premiums of $1,008.90. I was limiting my gain in the stock to a price of 160 and was obligated to buy another 100 shares should the price fall to 105. The Ukraine situation showed no sign of being resolved and I believed the 105 price would never be seen so I purchased another 100 shares of RGLD a cost of $12,799.00 on March 1st. I wanted to take advantage of a sharp move up and so I sold a 3/18/22 135 RGLD CALL at the same time on March 1st for $210.31. This past week I saw the call was very likely going to be exercised and since the stock was acting so well, on March 17th I purchased another 100 shares for $13,559.

100 shares of RGLD were called and I received $13,499.30 for the shares purchased @ $12,799. I own 200 shares of stock purchased for a total cost of $23,828.95 with a current value of $27,432 cost per share of $119.14. Total option premiums collected over the past four months now totals $1,219.21. Gain on the 100 shares purchased and called away are $700.30. So my “in pocket” returns are $1,919.51

I am still in the camp that RGLD will hit $160 and potentially go much higher, I would prefer to keep 100 shares in investment minimum in RGLD while limiting my downside risk.

On Monday I will review the CALL prices for the April 14th date, presently a 140 CALL is selling for $4 and a 145 CALL is selling for $215; a 125 PUT is selling for $130. I am inclined at this moment to sell the 140 CALL and the 125 PUT; pocket $530 and increase my cash on hold by $12,500 which the PUT provides a 15% annual interest rate while that amount is on hold, and the CALL premium will return $400 of my total investment. But much can happen by Monday and the situation can totally change.

All of these transaction are inside an IRA so there is no tax consequences.

 

[Running_Man]

I've been writing calls against some Nektar shares and it hasn't been going well.

I bought the shares at $13, wrote Feb $15 calls for $2, and the stock dropped to $10, so I was $1 down. I have now written May $20 calls against them for $1.50, so technically won't be losing money till $9.50. Someone is selling $5 puts though for pretty big premium, which is worrisome.

I see the clinical trials did not go well for Nektar and now it is down to $5.60. Without the covered calls your loss would be greater, but that would of course depend on whether you still think Nektar is worthy of holding after the clinical trial results.

This highlights the advantage of selling near term calls and puts as you can adapt your strategy, longer term options somewhat locks in a decision on buying a stock. But at this point I would assume you could buy the calls back at a profit if you wanted to exit the position.

 

[bucktheherd]

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.

Thoughts on simultaneously selling out of the money covered calls and puts, no more than a week out? Seems like a reasonable way to reduce the overall number of exercised options, while hedging the timing/quality of purchases, for someone not interested in spending a lot of effort on finding deals.

 

[NW-Bound]

Thoughts on simultaneously selling out of the money covered calls and puts, no more than a week out? Seems like a reasonable way to reduce the overall number of exercised options, while hedging the timing/quality of purchases, for someone not interested in spending a lot of effort on finding deals.

I do sell OTM calls and puts on the same day, but usually not on the same stocks. I sell calls on stocks that go up big, and puts on stocks that go down a lot. I don't know how this reduces the number of exercised options, because both types could get exercised if my prognosis is wrong.

For the same stock, if I write a call and a few days later see that it looks like it will get assigned, I often write a put without waiting for the call to be assigned. If I still have many shares left of this stock and do not miss it, I set the put strike price lower than the call strike price. If I really want to get this stock back, I will set the strike price the same as the call. I would sell the put for the same expiration, then if that fails to get assigned, for the next week.

With the market as volatile as it has been, the stock often swung back, and the call did not get assigned but the put was. Now, I have more of this stock than I planned.

And that's how I intentionally reduced my stock AA to 60% early in the year, and saw it climb back up to 75%.

 

[NW-Bound]

I reached that milestone that I anticipated to happen this year: the cumulative premium collected from selling covered calls and puts reached the 7-figure mark.

It is currently $1,001,139 to be exact, as tracked by Quicken.

Much of this money was due to me being active in option selling in recent years. As of 1/1/2017, the amount was only around $10K.

 

[pb4uski]

Congratulations! I'm not yet even up to your $10k of 2017, but I've only been doing cash covered calls for about 5 months as a short-term debt substitute.

I have been happy with the results. I've done 161 different transactions and yielded 4.54% after getting two written calls assigned to me... if it wasn't for those assignments my yield would have been 6.34%. I usually write calls that are about 20% OTM and a 1-2 months. Not a bad use for dry powder.

 

[NW-Bound]

I've done 161 different transactions and yielded 4.54% after getting two written calls assigned to me... if it wasn't for those assignments my yield would have been 6.34%...

Yes, the right way to evaluate the execution of option selling is to include the effects of the ones that get assigned. Compared to doing nothing, covered calls may result in you selling below market price, and puts may result in you buying at higher than market price. Just 2 assigned calls out of 161 trades knocked down your results quite a bit.

And then, it is still not as simple as counting the gain/loss of each trade individually. Here's an example from my actual trades.

Last Friday, I "lost" a lot of CAT (Caterpillar) to a call at 187.5, while the closing price was 198.25. One could say that the call cost me $1075 for the round lot.

Prior to the call expiry, I wrote a put to buy it back at the same price of 187.5. After the call was assigned, CAT reported a disappointing earning yesterday, and it dropped big. The price is currently 182.78, below my put price. If the price stays there, two days from now I will have bought it back at $472 above the market price.

So, does it mean that I lost a total of $1075+$472 for option selling? That's what I "lost" compared to a perfect stock trader who sells at the top and buys at the bottom.

No. The net result will be that I get my CAT shares back, plus the cash premium from the call and the put. Compared to buy/hold, I make a few hundred bucks.

Not all "losing" trades work out like the above, but you can see the complications of the accounting.

Hence, in the end, I only look at the net investment gain, and compare my number to different benchmarks, be it the total market+total bond, or Wellington or some other balanced funds.

 

[pb4uski]

Gotcha... I agree and focus on net cash flows.

I have a spreadsheet with the dates of each transaction. For cash covered puts for each one written I have an "outflow" of the contracts times strike times 100 less the premium received plus any commission... the net amount of my settlement fund that is encumbered by the transaction. At expiry I have an "inflow" equal to the contracts times strike times 100... the amount of my settlement fund that is released as a result of expiry. If assigned then I have an outflow equal to contracts times strike times 100 and an "inflow" with a date of today with the current value of the shares that I own (as if I sold them at market today). I also schedule out all open sold put as if they expire worthless at expiry since the current value is well over the strike. Do an XIRR for the dates and amounts and voila!

I just realized that I understated the return because I had the interest that I receive on the settlement fund backwards for some reason, so once I fixed that it improved the XIRR with assignments to 5.70%... settlement fund interest had been pathetic until the last month or two but now it is pretty respectable.

My only two "losers" have been DIS and TGT, both companies that I think well of and don't mind owning and once they get assigned to me I just write covered calls on them at the price that I bought them for for extra income.

 

[NW-Bound]

For a conservative investor, which I am not, I don't think it is hard to get a decent return on your cash by selling puts. Decent here means more than 1%/month.

I am not conservative, hence sell more calls than puts. I usually sell puts only to buy back shares that I "lost" via assigned calls. And being a stock lover, I hate losing these winnin' stocks.

This year, I got out of some stocks at a decent price, then sold puts to buy them back. Boom, they crashed, and I would have done much better not selling puts to buy them back.

But then, as I said, if I lose less money than just buy/hold, it's still a gainful activity.

 

[Closet_Gamer]

I reached that milestone that I anticipated to happen this year: the cumulative premium collected from selling covered calls and puts reached the 7-figure mark.

It is currently $1,001,139 to be exact, as tracked by Quicken.

Much of this money was due to me being active in option selling in recent years. As of 1/1/2017, the amount was only around $10K.

Congrats! That is a result.

What is the average amount you have "on the wheel" at any one time?
How has that changed since 2017?

Really interesting.

 

[NW-Bound]

^^^ Just a fraction of my portfolio. About $500K to $1M, varying depending on the market condition. The option premium gets me from 0.5% to 1% of the committed principal per week, meaning the shares that I write calls on, or the cash that I write puts on. Many stocks do not have the high volatility for their options to be worthwhile.

On the average, I collect more than $5K/week. Right now, I counted 44 options outstanding, which I sold for $4,582.

How has it changed since 2017? I now sell more options, instead of one once in a while.

To do that, I watch the market more each day to seize the opportunity. One day, semiconductor sector is hot, the next day it's metal mining or fertilizer, etc... When the market goes banana, I sell OTM calls to them. When the market is sulking, I sell OTM puts to them. There are also days when I find nothing worthwhile to sell.

 

[Quattro73]

Stupid question but what cash/securities do you have to secure it with?

Does it have to be in your settlement account ?

I don’t guess individual treasuries count?

 

[NW-Bound]

Stupid question but what cash/securities do you have to secure it with?

Does it have to be in your settlement account ?

I don’t guess individual treasuries count?

Ah, this is not a stupid question at all. There are things I did not know until a few years ago, and even now don't know it all and have not bothered to figure out.

We all know about a sweep fund that's set up within our investment accounts. When we sell stocks, the proceeds go there. When we buy stocks, money is taken from there to pay for the shares. In the brokerages I had, the same default sweep fund they set up for me worked fine to back up the put options that I sold. Not so at Merrill Edge.

I had a lot of cash in the account, and yet when I entered a put sell order, their Web page came back with a message "You have no cash to back this put". What?

I called them and learned that their default sweep fund was not good for backing puts. Yet, it was good to buy stocks with. There's something fishy there, but I have not tracked it down (certainly not by asking them). So, what was my recourse?

I was told that I could move some money from the sweep fund to one of several other money market or short-term Treasury funds, and these could back up my puts. And they even paid better interests to boot!

The only problem is if I want to buy stocks outright instead of writing puts, I must sell some shares of my chosen T-fund (a Black Rock fund) to move money to the sweep fund, which then pays for the shares.

And similarly, if I have a put assignment, I must be sure to have cash in the sweep fund. One time, I got a call from the broker saying I did not have enough cash to pay for the put assignments. It took me a second to remember that the T-fund that covered the puts could not automatically pay for the put assignment, and money must be moved by me.

In short, there's something weird going on there with these funds, and you need to talk to your broker about this.

What I ended up doing was to divide my cash between the sweep fund and the T-fund. This is also good to limit my ability to write puts, and to keep me from going too gunho on put writing and driving my stock AA to a too high level if all the puts get assigned. I always want to have some loose cash in case the sky falls, and stocks get dirt cheap.

 

[madatrub]

I reached that milestone that I anticipated to happen this year: the cumulative premium collected from selling covered calls and puts reached the 7-figure mark.

It is currently $1,001,139 to be exact, as tracked by Quicken.

Much of this money was due to me being active in option selling in recent years. As of 1/1/2017, the amount was only around $10K.

Can you run through your strategy? You own underlying? Write covered calls on the underlying a few months out at about 20% OTM? Then you write puts? What are you trying to accomplish with them? Do you write them at the same time as the CC or at a later date?

 

[NW-Bound]

I made quite a few posts earlier in the thread about what I do. You will have to scroll up to find them.

Generally, I do very close-in options, only 1 to 2 weeks out. Eat small, but eat often.

 

[tulak]

Generally, I do very close-in options, only 1 to 2 weeks out. Eat small, but eat often.

I’m trying this myself, using a similar strategy. Not sure if I’ll have as much luck, but so far it’s fun and I’m learning the mechanics of how calls/puts are sold and assigned.

For others that are interested, the recommendation I would make is pick a stock and start selling puts and calls. Nothing beats real experience.

So far I’ve made $290 in premiums. Unfortunately if I held the stock, I’d have about $850 in unrealized gains. On the plus side, it was more yesterday and I’ve only been doing this for a couple of weeks.

 

[steelyman]

I spent time a few years ago selling calls and puts on an index ETF in a taxable accounts. I didn’t like the bookkeeping involved. Another turn off was the difficulty obtaining quotes through software like Sheets and Quicken. I believe the tickers have been standardized since then but still can’t get them.

Now I just sell covered calls occasionally in a Roth. I think of it as receiving an extra dividend but it’s no big deal.

 

[NW-Bound]

I spent time a few years ago selling calls and puts on an index ETF in a taxable accounts. I didn’t like the bookkeeping involved.

I definitely would not do this in a taxable account. Not with the several thousand of option sales each year.

Another turn off was the difficulty obtaining quotes through software like Sheets and Quicken. I believe the tickers have been standardized since then but still can’t get them.

No, the same option still carries different symbols in Merrill Edge and Schwab. The price of the contracts is not available from a data feed. The price data is downloadable from the brokerages, and only after midnight.

Now I just sell covered calls occasionally in a Roth. I think of it as receiving an extra dividend but it’s no big deal.

Each contract premium is indeed small, anywhere from $50 to $500+, depending on the stocks. But when you get weekly dividends from many stocks, they add up.

And that's how I get more than $200K each of the past few years. Year to date in 2022, it's $131K.

Imagine if I had the same money in a Roth to generate this tax-free income. It's ridiculous.

 

[Running_Man]

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.

NW Bound,
TOPIC KLAC:
with the recent market turmoil in chip stocks and the recent sale by the President of KLAC of 25% of ownership in the stock 25 million dollars realized at the good price in August of $385, what is your outlook on this stock. As you stated a year ago, this stock did much better than some of the chip like NVDA which is down 75%, but with a PE of 13 wondering if you are following it's Prospects and if this is a good consideration for put selling with the current fear premium?

At present put price of 3 for a 10% drop in KLAC by October 21 you earn 1% on the money put at risk over those 11 days or about 35% annually and you then would own KLAC with a nearly 2% dividend on purchase price, up from the 1.2% of a year ago with the price decrease and the dividend increase.

An aggressive target could be long term 173 for a 3% yield, to defer for a better target, wondering if this is still on your radar

 

[NW-Bound]

I still have my shares of KLAC along with those of other semi equipment makers, such as AMAT and LRCX. They have all come down a bit, and I would have a lot more money if I unloaded them at the peak. However, I have made a lot of money selling covered calls on them, and that makes a difference. It's time I sit down and do some accounting to measure the effects of my trades.

Back to your question of selling puts on KLAC, I still believe in the prospect of these stocks long term. Perhaps I am not up-to-date, but have not seen any announcement of chip makers such as TSM and Intel on cutting back on their fab building.

Still, I have enough of these stocks, too much perhaps. Hence, I am not going to sell puts on them, lest I get assigned and own even more. A guy needs to exercise restraint and not bet everything on one horse. If you don't have any shares right now, your proposed move is a decent one. To borrow from Koolau, YMMV.

 

[NW-Bound]

Sold more OTM covered calls early in the day, netting $1902 in contract premium. I was busy selling until the market bell rang.

Unless the market surges tomorrow, I have $10K of options expiring worthless.

YTD, I pocketed $163K in option premium. On my way to the benchmark of $200K/year in option trading. I still lose money overall, but with option trading I lose $200K less.

Not as nice as in bull years when the $200K is on top of the market gain, but the time has changed.

 

[NW-Bound]

Unless the market surges tomorrow, I have $10K of options expiring worthless...

The market unexpectedly surged today. Many of the options that I thought were going to be worthless came in-the-money.

Just a cursory look shows me that of the ones that will get assigned and cause me to sell stocks under the market price today, they will cause me to be "losing" some stocks at more than $13,500 below the market price. In other words, if I did not sell these options, I would have $3,500 more than I do now ($13,500 minus $10,000 in option premium).

Despite this, the whole portfolio is still up more than 2.1% today. Not shabby for a stock AA of 74%.

I will need to see what my stock AA is after the option assignment. Next week, if the market loses its gun ho and drops back, I will look to sell puts to buy these shares back, either at a lower or same price that I sell them at.

 

[bobandsherry]

The market unexpectedly surged today. Many of the options that I thought were going to be worthless came in-the-money.

Just a cursory look shows me that the ones that will get assigned cause me to sell stocks under the market price today. Altogether, I will be "losing" some stocks at more than $13,500 below the market price. In other words, if I did not sell these options, I would have $3,500 more than I do now ($13,500 minus $10,000 in premium). Despite this, the whole portfolio is still up more than 2.1% today. Not shabby for a stock AA of 74%.

I will need to see what my stock AA is after the option assignment. Next week, if the market loses its gun ho and drops back, I will look to sell puts to buy these shares back, either at a lower or same price that I sell them at.

No opportunity to roll those options? Or feeling like I do that we may see some drops after this week's pop?

I've been quiet lately on selling options, but this week's pop has me feeling that we may see flat or more likely down on prices, so sold a few that are out of the money to pocket a few dollars. If they do get assigned I'm ok as premium plus strike price would be above my cost, so ok either way.