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Anyone using covered puts - fenders53 - 08-31-2018

Selling cash covered puts is something that has intrigued me but I have never done it.  I need to enter a number of  new positions and this seems like a strategy with very little downside since I intend to purchase the stock anyway.  I thought I might wait for a day when a few watch list candidates have dropped a few percent,  then sell a put just out of the money.  Seems like an easy way as any to drop the basis a few points.  Am I missing anything?


RE: Anyone using covered puts - ChadR - 08-31-2018

I've done this in the past and it's a good way to make some extra money and get the stocks a little bit cheaper. The only downside is if the stock doesn't go down. You miss out on a good stock, but you at least get the option money. You also miss out on any dividends if your option goes past the ex dividend date.


RE: Anyone using covered puts - Kerim - 08-31-2018

I am really eager to start exploring this myself. Maybe we can trade insights and ideas. The first thing I want to understand, but haven't had time to research yet is tax treatment.

I assume that this is something you'd only want to do in a tax deferred account, as tracking and reporting the collection of premiums is not my idea of a good time. Am I correct to think that if I did this in an IRA, the premiums collected are not taxed (not now, I mean) and I wouldn't have to worry about tracking / reporting?


RE: Anyone using covered puts - fenders53 - 08-31-2018

(08-31-2018, 09:03 AM)Kerim Wrote: I am really eager to start exploring this myself. Maybe we can trade insights and ideas. The first thing I want to understand, but haven't had time to research yet is tax treatment.

I assume that this is something you'd only want to do in a tax deferred account, as tracking and reporting the collection of premiums is not my idea of a good time. Am I correct to think that if I did this in an IRA, the premiums collected are not taxed (not now, I mean) and I wouldn't have to worry about tracking / reporting?

Unlike CCs, I see no real issue with this strategy in a taxable account.  You make a hundred bucks on a premium and pay taxes.  That seems better than not making the hundo in the first place?  When I first started investing in the 80s, a wise accountant told yeah me taxes stink, but as far as investing is concerned, if you aren't worrying some about a tax problem then your investment decisions may need some improvement.   I get it we should avoid taxes, but there is some wisdom in that advice.

The only thing I am sure of is never ever go long on a stock just because you like the option premium. It's an easy trap and it's just gambling. Learned that the hard way when the tech bubble crashed about 20 years ago. CCs are great until you lose your head chasing an option premium.


RE: Anyone using covered puts - Kerim - 08-31-2018

Totally agree with you on stock selection -- I'd only play with high-quality companies that I'd be happy to buy at the strike price.

And I'm tempted to agree with you about the taxes, but am hesitant. If I did this in a taxable brokerage account, are the premiums treated just like any other taxable income? Where line does it get reported on in your 1040? And will the brokerage send me a report at year-end, or do I have to reply on my own records?

I guess all of that should not feel daunting, but seems simpler to just do it in an IRA if I can then just ignore all of that and have the premiums just lumped in with the general "growth" of the account.

Thanks!


RE: Anyone using covered puts - crimsonghost747 - 08-31-2018

I've tried them a couple of times in the past and recently I've looked into starting this again. I see two risks with the strategy mentioned. The small one being that the stock never drops and then you end up missing out on it, or potentially purchasing it later on at a higher price. The big one being that you end up buying a stock significantly above it's current valuation.

Another way to play it would be to try to sell the options with the intention of not getting it assigned and simply profiting from the premium.

as for the taxation: I can't answer how it goes in the USA. But I don't see why it would be any different. You sell an option for X dollars, and then you basically buy it back at $0.00 since it expires worthless. So you made X dollars of profit on a short term trade... so should be same taxation as any other short term trade, right? If you sell a put which gets assigned, then the shares appear on your account and the buy price will be the strike price of the option.


RE: Anyone using covered puts - fenders53 - 08-31-2018

(08-31-2018, 10:45 AM)Kerim Wrote: Totally agree with you on stock selection -- I'd only play with high-quality companies that I'd be happy to buy at the strike price.

And I'm tempted to agree with you about the taxes, but am hesitant. If I did this in a taxable brokerage account, are the premiums treated just like any other taxable income? Where line does it get reported on in your 1040? And will the brokerage send me a report at year-end, or do I have to reply on my own records?

I guess all of that should not feel daunting, but seems simpler to just do it in an IRA if I can then just ignore all of that and have the premiums just lumped in with the general "growth" of the account.

Thanks!

Yes it's normal income like you just worked some overtime Kerim.  Short term capital gain.  I make some extra monthly income with options and have to give the man some of it at the end of the year.  It's a good problem to have.  Forcing yourself out a a long position where you have a huge capital gain you didn't intend to realize now is what needs to be managed.

And yes I do this in an IRA to the best of my ability. You are still paying the taxes in the end but it's in the future and you can compound the gains in the meantime.


RE: Anyone using covered puts - NilesMike - 09-01-2018

Some drawbacks are that you can only do it round lots of 100 shares.

You will not participate in the stock price growth.

A plus is you will far exceed 2-3X any dividends with the put selling.


RE: Anyone using covered puts - fenders53 - 09-01-2018

(09-01-2018, 03:08 PM)NilesMike Wrote: Some drawbacks are that you can only do it round lots of 100 shares.

You will not participate in the stock price growth.

A plus is you will far exceed 2-3X any dividends with the put selling.

Appreciate the input.  I often buy round lots.  But I am definitely NOT scheduling $20-30K stock purchases 30-45 days in advance.  The premium may look good but too much can happen to change the story when going past a month at times.


RE: Anyone using covered puts - NilesMike - 09-05-2018

(09-01-2018, 04:14 PM)fenders53 Wrote:
(09-01-2018, 03:08 PM)NilesMike Wrote: Some drawbacks are that you can only do it round lots of 100 shares.

You will not participate in the stock price growth.

A plus is you will far exceed 2-3X any dividends with the put selling.

Appreciate the input.  I often buy round lots.  But I am definitely NOT scheduling $20-30K stock purchases 30-45 days in advance.  The premium may look good but too much can happen to change the story when going past a month at times.

Are you only selling weekly puts?