Writing Options for Income

[Mr Schmitty]

Do any of you have experience writing options for retirement income? I did it for 4 years supporting 100% of my expenses. If so I would like to learn what strategy you used. I tried several but found covered calls/cash secured puts are the easiest based on risk, profit, etc. Thx in advance

Mr Schmitty

 

[MichaelB]

I moved the thread to the "Stock Picking" forum where option strategies are discussed.

 

[Fermion]

Quite a few of us do covered calls or cash secured puts (NWbound and myself for sure) but only a few do the more complicated stuff like option spreads, strangles, straddles, three ways.

Naked puts? You could lose your shirt on a margin account with a big market drop like 2009, even if you were not exposed to diversity risk by writing puts on a broad index.

Covered calls and cash secured puts are lower risk than regular stock market investing, so they are good for income but might miss out on big gains.

 

[Mr Schmitty]

thx, actually im doing cash secured puts like you mentioned, so I should have called it that

 

[Totoro]

Practical question: how do you write a cash secured put with your broker?

Can't figure out how to do it

Sorry for hijacking the thread, just curious and since the experts are here ..

 

[Fermion]

Usually you have to upgrade your account to some level of option trading, by clicking a few buttons that say you know option trading can be risky (although cash secured puts are very much not risky). If you want to sell naked puts you will need to click many more buttons to show that you know how to click buttons and know naked puts can put you in a cardboard box under a bridge.

 

[Hamster]

Practical question: how do you write a cash secured put with your broker?

Can't figure out how to do it

Sorry for hijacking the thread, just curious and since the experts are here ..

Depends on your broker to some extent. Who do you use?

With Fidelity if you select Options, just select Put and Sell and enter a price. Default is cash covered. I don't have a margin account so I don't have any other options.


Sent from my iPad using Early Retirement Forum

 

[MasterBlaster]

Just say no !

Covered Call Options - Give you all the downside risk, No upside benefit, and very little income. Just say no !

Ask yourself why are you holding this stock !

 

[Gone4Good]

Covered Call Options - Give you all the downside risk, No upside benefit, and very little income. Just say no !

Ask yourself why are you holding this stock !

+1

 

[Hamster]

+1

-1

If you don't like options, then don't use them but many people do use them and make money with them. You may miss some potential upside but that's all - and that's a risk with most investing decisions.

 

[Fermion]

Covered Call Options - Give you all the downside risk, No upside benefit, and very little income. Just say no !

Ask yourself why are you holding this stock !

Japan's flat market called and would like to have a word with you.

Writing covered call options are one good way to keep up with inflation in a world of flat markets and measly dividends.

Earn 1.8% a year on dividends or earn 1.8% + 4 to 5% with call options.

 

[TallTim]

10+ yrs trading options ... started as a hobby/side thing to generate more savings juice. Ended up getting to FI and RE once option gross was > base salary gross $ for a number of years in a row. Since then it's been a very nice source of income for me, personally. Earning 1-2% per month average on the options account pre tax consistently for about 7 years, for example.

That said, I agree it takes time to both learn what you're doing and also managing positions. I am not complaining as I can cover 100% of living expenses plus college tuition on 4-6 hours per week most weeks in terms of focused effort.

It's not for all, but I and others here are living proof that is is doable. I don't need to do the trading for the $, but it does provide a nice cushion.

Started in covered calls and cash secured puts (BTW, if you trade in an IRA, that's the only kind of put you can really do) and have progressed over a number of years to more complex positions.

Among the advantages for an RE person is relatively moderate time commitment (once you get up the learning curve, which can be steep), ability to be 'in' or 'out' 100% on a week to week or month to month basis, so you can take time away for extended travel if you want. I am not a tax expert (and this is not tax advice), but it is possible to set things up in a way that allows trading profits to have a pretty favorable tax treatment as well.

To the OP, there was a similar thread a while back where people published more info about the strategies, brokerages they use as well as training resources; you may want to search for that as well. Feel free to DM or PM me if you want more specifics about brokers, rates and training I would recommend personally.

 

[Mr Schmitty]

options levels

Fidelity is my broker may be different other houses. See below

Level 1
Covered call writing of equity options.
Level 2*
Level 1, plus purchases of calls and puts (equity, index, currency and interest rate index), writing of cash covered puts, and purchases of straddles or combinations (equity, index, currency and interest rate index). Note that customers who are approved to trade option spreads in retirement accounts are considered approved for level 2.
Level 3
Levels 1 and 2, plus spreads, covered put writing (selling puts against stock that is held short) and reverse conversions of equity options.
Level 4
Levels 1, 2, and 3, plus uncovered (naked) writing of equity options, uncovered writing of straddles or combinations on equities, and convertible hedging.
Level 5
Levels 1, 2, 3, and 4, plus uncovered writing of index options, uncovered writing of straddles or combinations on indexes, covered index options, and collars and conversions of index options.

 

[papadad111]

I don't do much with options but I have been educating myself on one ETF - PUTW, which looks kinda interesting. I need to understand it more fully before jumping in though ..

" The WisdomTree CBOE S&P 500 PutWrite Strategy Fund seeks to track the performance, before fees and expenses, of the CBOE S&P 500 PutWrite Index (PUT), a collateralized put write strategy on the S&P 500 Index. The strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index. The Fund’s strategy of selling cash-secured SPX Puts serves to partially offset a decline in the value of the S&P 500 Index to the extent of the premiums received."

 

[youbet]

-1

You may miss some potential upside but that's all - and that's a risk with most investing decisions.

I was under the impression you still were on the hook for downside moves during the call period. Am I misunderstanding that?

 

[youbet]

I don't do much with options but I have been educating myself on one ETF - PUTW, which looks kinda interesting. I need to understand it more fully before jumping in though ..

" The WisdomTree CBOE S&P 500 PutWrite Strategy Fund seeks to track the performance, before fees and expenses, of the CBOE S&P 500 PutWrite Index (PUT), a collateralized put write strategy on the S&P 500 Index. The strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index. The Fund’s strategy of selling cash-secured SPX Puts serves to partially offset a decline in the value of the S&P 500 Index to the extent of the premiums received."

It's an "index fund" so what could go wrong?

 

[Fermion]

Covered calls will look stupid during periods of 20% a year market returns and will look pretty dang smart during lower return years.

Who thinks we will continue to see 20% a year gains in the markets? Those same people on here who buy bonds paying 1.7%?

 

[youbet]

Covered calls will look stupid during periods of 20% a year market returns and will look pretty dang smart during lower return years.

Who thinks we will continue to see 20% a year gains in the markets? Those same people on here who buy bonds paying 1.7%?

If we go into a prolonged period of "lower return years" as you suggest, might that cause the remuneration received for selling covered calls to be less (in general) than received today? That is, will the dumb folks who are buying the calls today (and giving the sellers nice, almost risk free income) get smart and only continue to buy them if the sellers accept much less?

 

[Fermion]

That is, will the dumb folks who are buying the calls today (and giving the sellers nice, almost risk free income) get smart and only continue to buy them if the sellers accept much less?

Are you asking if suckers are no longer born every minute?

Other good questions to ask: Will politicians continue to lie?, will water continue to get you wet?

Casinos have proven that there will always be someone betting on a quick buck by buying call options and trying to leverage their money.

If, as often stated, 90% of call options expire worthless, why WOULDN'T you want to be the casino here and write them?

 

[ownyourfuture]

I've been writing covered calls since September 2011.
I'm about $3,000.00 to the good. Would have been much higher had I not been beaten really badly with Eli Lilly calls twice.

I use a 3 month candlestick chart with bollinger bands & MACD.

Not that you were asking for it, but the only advice I'd give to those considering it, would be to stick to somewhat boring, mature, predictable companies.
(I do realize the premiums are less than spectacular with these)

What got me into trouble with Eli Lilly, was/is the fact that it could look way overpriced one day, but go up another 10% or more the following day if any positive news about a 'trial' - 'pipeline' drug came out.

Since Lilly is a stock I plan to hold for at least another 10 years, I had to 'cover the call' buy to close at a much higher price.

 

[youbet]

Are you asking if suckers are no longer born every minute?

No. Definitely not.

Sounds like you've discovered a very productive money tree guaranteed to yield you profits forever. Good job!

 

[Gone4Good]

If, as often stated, 90% of call options expire worthless, why WOULDN'T you want to be the casino here and write them?

Seven Myths about Stock Options

A common claim is that 90% of options expire worthless, and that therefore it is better to be a seller of options than a buyer of options. This claim misstates a statistic published by the Chicago Board Options Exchange (CBOE), which is that only 10% of option contracts are exercised.

But just because only 10% are exercised does not mean the other 90% expire worthless. Instead, according to the CBOE, between 55% and 60% of options contracts are closed out prior to expiration. In other words, a seller who sold-to-open a contract will, on average, buy-to-close it 55-60% of the time, rather than holding the contract through to expiration.

So if 10% of options contracts end up being exercised, and 55-60% get closed out before expiration, that leaves only 30-35% of contracts that actually expire worthless. The big question is: of the 55-60% that get closed out before expiration, how often did the option seller profit, and how often did the option buyer profit?

I'd add to that question "How much profit did the option seller forego on the 10% options that were exercised?"

Opportunity costs are still real costs.

 

[ERD50]

Covered calls will look stupid during periods of 20% a year market returns and will look pretty dang smart during lower return years. ...

It's not that straightforward.

Let's say the market rose ~ 0.4%/week ( ~ 20% over a year) and you sold weekly calls 1% OTM. You would capture all the gain and all the premium.

Of course markets don't go up that steadily, and you would be called out many times along the way (and the calls may or may not provide a boost). And markets don't fall steadily either, so it can't be assumed a covered call approach would be any more likely to work in a falling market either.

-ERD50

 

[FIRE'd@51]

I don't do much with options but I have been educating myself on one ETF - PUTW, which looks kinda interesting. I need to understand it more fully before jumping in though ..

" The WisdomTree CBOE S&P 500 PutWrite Strategy Fund seeks to track the performance, before fees and expenses, of the CBOE S&P 500 PutWrite Index (PUT), a collateralized put write strategy on the S&P 500 Index. The strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index. The Fund’s strategy of selling cash-secured SPX Puts serves to partially offset a decline in the value of the S&P 500 Index to the extent of the premiums received."

I am a fan of this strategy. I believe it is an alpha-generator. Because of the demand for S&P 500 puts, they tend to be overpriced - the implied volatility of the put sold tends to be greater than the subsequent realized volatility. Over time this is the source of the alpha. It is very easy to implement, so I would suggest you do it yourself rather than pay part (or all) of your alpha to a manager.

We have a forum member named utrecht who did this strategy quite successfully with slightly out-of-the-money weekly SPY puts. There is a lengthy thread on the subject. Maybe someone can post a link.

 

[Totoro]

If you can find the utrecht discussion, please post

Never was a fan of options (prefer simplicity), but now starting to get interested. Especially the cash covered put writing. Figured out the right buttons to push at my broker (still need to fill in the forms), thanks for the hints.

In essence, I have a bit of cash parked on a CD account which I plan to move to equities if (when) the markets tank (and then stay at the higher equity allocation). Needless to say, it doesn't yield much right now. Much of it is below 1%.

So I may be better off using that cash to write covered puts, boost it to 4% or so while I wait for the shoe to drop. When it does I'll get forced to buy, which is good since I don't have to worry about timing as much.

Only pitfall is hindsight cursing when the market drops even further, but one cannot predict right?

[Edit] To be clear: I'd only use it on a broad index like SPY