01-29-2015, 01:34 AM
(This post was last modified: 01-29-2015, 01:38 AM by earthtodan.)
I use a form of interest-free leverage. Specifically, I sell margin-secured puts. Normally if you sell a cash-secured put, your broker will tie up enough cash in your account to secure against the strike price. Or with some brokers, if you are fully invested but sell a put in a margin account, they will charge you interest on the amount secured against margin. However at MerrillEdge, since cash is not actually lent in order to secure the strike, no margin interest is charged.
This means I collect the put premium as cash and get to reinvest it (while retaining liability if the option expires in the money). In a bull market, put options sold at-the-money tend to expire worthless, and you keep the premium. If the position moves in my favor quickly (say the stock rallies and the put loses 60% of its value in 20% of the expiration time), I tend to buy it back cheap, take my profit and then find someplace to do it again.
If the underlying stock tanks and I get assigned on margin, I would end up paying margin interest for holding the shares. In this situation I would have to add cash to the account or sell another position in order to de-lever. That is the risk. Since I contribute to my account every month, I see my contributions as slowly mitigating the risk. I sell puts with laddered expirations (Jul '15, Jan '16, Jan '17, etc) in order to distribute the risk over time.
In a way it's like running an insurance company. People buy puts as insurance against loss; I sell that insurance, take on the liability, and like an insurance company I reinvest the float.
This means I collect the put premium as cash and get to reinvest it (while retaining liability if the option expires in the money). In a bull market, put options sold at-the-money tend to expire worthless, and you keep the premium. If the position moves in my favor quickly (say the stock rallies and the put loses 60% of its value in 20% of the expiration time), I tend to buy it back cheap, take my profit and then find someplace to do it again.
If the underlying stock tanks and I get assigned on margin, I would end up paying margin interest for holding the shares. In this situation I would have to add cash to the account or sell another position in order to de-lever. That is the risk. Since I contribute to my account every month, I see my contributions as slowly mitigating the risk. I sell puts with laddered expirations (Jul '15, Jan '16, Jan '17, etc) in order to distribute the risk over time.
In a way it's like running an insurance company. People buy puts as insurance against loss; I sell that insurance, take on the liability, and like an insurance company I reinvest the float.