Anyone using covered puts

[NilesMike]

I sell index options, options on stocks I want to own at a better price and I sell options on stocks that i don't want to hold.

You can buy the option back for a loss or you can roll it down and further out in time or you can take the stock, sell the nearest call and see what happens.

[fenders53]

(09-13-2018, 08:20 PM)NilesMike Wrote: I sell index options, options on stocks I want to own at a better price and I sell options on stocks that i don't want to hold.

You can buy the option back for a loss or you can roll it down and further out in time or you can take the stock, sell the nearest call and see what happens.

Good point on selling calls to leave an unwanted position.  Short of a free fall you can navigate out of a lot of situations with judicious use of options and a little time.

[fenders53]

Well I have sold about 15 or 16 put contracts since I started this thread. You would think I would be assigned some long positions by now but so far just collecting premiums, and few positions are n any danger of being assigned after the markets run the past few sessions. Overall I would no doubt be a little better off if I had just went long on all these positions because several have run. Better off this week anyway. If my only intent was to collect put premiums I am tearing it up. I think I will stay the course and someday the market will swing and make me a DGI investor. In the meantime the put premiums are nice. I'll be able to buy 100 shares of a stock just with put premiums soon

Lost track of which ones I already mentioned but here are a few recent puts for stocks I am not likely to own this month. Most will expire with no assignment.

CSCO-SKT-AAPL-MET-KHC-UPS-MO-T-BAC-SO-JNJ that's most of them I think.

I have multiple puts for SO at various strikes. They have potential news coming Monday so we'll see. I chickened out on MMM. Stock got pretty volatile and I got cold feet on a 100 share purchase. Took a $150 put profit after a few days and closed the position very early. I am scared of the high dollar industrials right now. China can easily mess up some individual US companies quarter if they even briefly cut off exporting the right commodity or component. The trade war is jsut getting started I'm afraid.

Still intend to add a restaurant and a quality REIT soon but waiting for the right valuation.

[fenders53]

I should update this thread since I started it. After three months of executing this covered put strategy aggressively, I have seen sideways market, gentle rise and the OCT correction. Even during correction it works pretty well, though I can see how risky it could be if done on margin, which I am not. By following about 5 simple rules I estimate the results that follow. When I disregarded a rule or two the chance of success is cut in half. I would bother to dig the details o my account statements and post more specific info with real numbers if anyone is truly interested enough to read and offer feedback.

Here's the snapshot. Basically two months of options and the last month was a nasty market drop.

-35 total contracts sold, usually one contract, never more than two.
-10 have already expired worthless
- another 10 are likely to expired soon with stocks recovering some.
-I was "forced" to buy ATT-BAC and Abbott, about 5 contracts total, I didn't always like the price but I was willing to buy them anyway before they dropped.
-I made a very quick profit on about 5 put sales on stocks that ran high fast. (MCD-APPL-MMM etc) Those were higher priced put sales. I saw no need to be greedy and wait for them to expire weeks latere Cashed out and move on rather than be greedy. I definitely closed out positions that would have expired worthless anyway with more patience. But the market was volatile.
-Now the bad news. My timing on CVX, XOM, MRO and DPDW was horrible. I took a loss on CVX, MRO and Dupont. I rolled XOM forward to buy some time. UPS will be rolled next. Dupont was a total train wreck on a stock I don't even care to own longterm. I chickened out before earnings and lost more than I should have. I broke my rules on all of these positions.

Yes I did make considerable money and I also cut profits in half breaking my simple rules on just a few stocks. I won;t forget the lesson.

Interestingly enough some of the non-volatile stocks have worked best. I have been trying to buy utilities for two months. Hasn't happened even once yet. Collecting premiums that far exceed dividends so it's a win I guess. Same with pharma stocks. 80% on contracts expire worthless if I sell them on dips. Eventually I'll be forced into gong long which is where I desire to be.

[Kerim]

Thanks, this is really interesting and useful to me! I'm really intrigued by he idea of comparing the premiums you collect to the dividends you would have collected.

Some questions:

• When you say "expired worthless," you mean that the option was not exercised, you pocketed the premium, and were free to move on and use the cash that had been securing the put for your next endeavor, right?
  
• What exactly do you mean when you say that you took a loss on CVX (for example)? Do you mean that the share price was lower than the strike price at expiration and so your "loss" was the difference between the strike price and the market price that you were required to pay (after accounting for the premium that you collected for selling the put)? Do you really consider this a loss, since you acknowledge (I think?!) that you would have been happy buying at the strike price at the time you sold the put?
  
• If you don't mind me asking, are you making these trades in a taxable or tax-deferred account?
  
• If in a taxable account, I assume the premiums collected are taxable income. Do you have to track those for reporting on your return, or does the brokerage send a statement at year end of some kind?
  

Thanks again!

[crimsonghost747]

(11-30-2018, 11:26 AM)Kerim Wrote:

• When you say "expired worthless," you mean that the option was not exercised, you pocketed the premium, and were free to move on and use the cash that had been securing the put for your next endeavor, right?
  
• What exactly do you mean when you say that you took a loss on CVX (for example)? Do you mean that the share price was lower than the strike price at expiration and so your "loss" was the difference between the strike price and the market price that you were required to pay (after accounting for the premium that you collected for selling the put)? Do you really consider this a loss, since you acknowledge (I think?!) that you would have been happy buying at the strike price at the time you sold the put?
  

Thanks again!

Yes, when he says "expired worthless" then that means that the option ran it's course and expired while being out of the money. In this case, on the final day, the option's price hits $0 because exercising it would only lead to a loss thus making it absolutely worthless.

And that brings us to our second point.. well we all have our opinions but if the plan is to hold long term then I would certainly consider that a loss.
For example stock X is trading at $28 today. You have sold a put option with a strike of $30. You will be paying $3000 for something that is currently worth $2800. So I don't see any other way than saying "I lost $200 minus the premium".

[Kerim]

(11-30-2018, 12:42 PM)crimsonghost747 Wrote: And that brings us to our second point.. well we all have our opinions but if the plan is to hold long term then I would certainly consider that a loss.
For example stock X is trading at $28 today. You have sold a put option with a strike of $30. You will be paying $3000 for something that is currently worth $2800. So I don't see any other way than saying "I lost $200 minus the premium".

Yeah, but at the moment the put is sold, the stock was trading at, say, $31. When you sell the put, you're saying that you'd be comfortable buying at $30. So if you had instead not sold the put and just waited for your price, and bought outright at $30, you'd STILL ride the shares down from $30 to $28. In this case, you come out ahead for having sold the put, by the amount of the premium. Or am I not seeing it right?

[Kerim]

More detailed thoughts:

I recently bought some shares of MO outright at $53.25. I’d be glad to buy a few more shares at an even lower price. Right now it is at $55.35. So I can just sit and wait and see whether it will get back down there, or I can try selling a put.
 
I can sell the January 4, 2019 put with a strike price of $52.50 for $0.87. So I’ll collect a premium of $87.00 minus $7.00 in fees, for a net of $80.00 in my pocket right now, and I’ve agreed to tie up $5,250 until expiration.
 
If the stock trades lower and the option is exercised, I’ve got my shares at a price of about $51.70 – I’m cool with that. Sure, if the stock is at $49.00 when the option is exercised, I’ll wish I had waited, but I would have likely bought outright if it had gotten to the $52-$53 range anyway, so I’m not going to consider that a “loss” in the traditional sense. As between the two paths, I would come out ahead using the option strategy – if I really would buy the stock at around the strike price anyway.
 
And if the stock doesn’t trade lower and the option is not exercised, I’ve tied up $5,250 for about 35 days and been paid $80.00 for doing so (and for taking on some risk). Please check my math, but I think that is approximately a 15 percent return, annualized.
 
If I would buy the stock at the strike price anyway, selling the put seems like a great way to go about it. Would love to know if my assessment is mistaken or if I’m overlooking anything.
 
(Yes, I’ve ignored the taxes I’ll pay on the premium, but I’m hoping I can get this going in a tax-deferred account. And if I can’t, I’ll call it a success tax!)

[ChadR]

Kerim, you've got it down pretty good. The only thing that I see that you're missing is that you sell the option for $52.50 and it goes up from $53.25 to $55. You missed out on the run up in value if you hadn't of bought the option and just bought the 100 shares.

[Kerim]

Good points, thanks!

I decided to take the plunge and "learn by doing"! Sold my first contract today -- the very one I used in my MO example earlier this afternoon.

I feel like this was a good first one for me since I think it is already pretty oversold, and it is a company I'd be glad to own more of for the long haul.

Wish me luck!

[fenders53]

(11-30-2018, 01:07 PM)Kerim Wrote:

(11-30-2018, 12:42 PM)crimsonghost747 Wrote: And that brings us to our second point.. well we all have our opinions but if the plan is to hold long term then I would certainly consider that a loss.
For example stock X is trading at $28 today. You have sold a put option with a strike of $30. You will be paying $3000 for something that is currently worth $2800. So I don't see any other way than saying "I lost $200 minus the premium".

Yeah, but at the moment the put is sold, the stock was trading at, say, $31. When you sell the put, you're saying that you'd be comfortable buying at $30. So if you had instead not sold the put and just waited for your price, and bought outright at $30, you'd STILL ride the shares down from $30 to $28. In this case, you come out ahead for having sold the put, by the amount of the premium. Or am I not seeing it right?

You are seeing it 100% right as far are it pertains to my strategy.  As I mentioned earlier I try to follow a few simple rules.  When I do it works out well a very high % of the time.  

1.  Only sell puts in a stock I truly desire to be long in.  Don't get sucked into high premium, high beta stocks I don't wish to enter long.  It;s tempting but it's gambling IMO.

1.  Stock has to already be extremely close to the price I am comfortable paying, and about half the time it is just a little under already.  That is what makes it no risk IMO.  

2.  Sell a put that is a few percent under current price, and yields an option premium no less than 1% of stock price.  Hopefully more but if the stocks beta is low much over 1% may not happen without stretching the expiration date out over 40 days.  I prefer 20-30 days when it works. I can often get 2% premium.

3.  If stock is oversold, or near the bottom of it's trading range, the chance of success is MUCH higher.  Sell it towards the top of the range and it's trouble fairly often.  Selling a put on a stock in free fall is nothing but stress when you try to tap dance out of the situation.  

My sample size is limited as I have only sold about 75 contracts.  

- DWDP was a complete bust as I broke my rules.  I lost about $400 and bailed.

-I rolled 4-5 forward contracts forward and bought some time.  It ended fine but XOM was a near miss.

-I was forced to buy about 10 contracts but I got my discount on the stock.  If the story has changed I write a call when I can.  I got cold feet on F and dumped some shares after collecting a call premium.   

-The rest expired worthless and I banked the premium.  There were a few times when the stock rebounded quick and I just closed the position at a big profit after a week or two.  (AAPL, MMM, MCD)  I've sold puts on some stocks 3-5 times because they trade in a range.  Premiums far exceed the dividend and the share price is going nowhere in this market so no loss. In a hot market they will run away and I'll move on to something else.

[fenders53]

(11-30-2018, 04:41 PM)Kerim Wrote: Good points, thanks!

I decided to take the plunge and "learn by doing"! Sold my first contract today -- the very one I used in my MO example earlier this afternoon.

I feel like this was a good first one for me since I think it is already pretty oversold, and it is a company I'd be glad to own more of for the long haul.

Wish me luck!

Good luck Kerim!  

MO is on my repeat offenders list.  I usually own a 100 shares long, have a put sold for another 100-200, and a call sold for at least 100.  I desire to keep some shares and get a dividend.  There will be a day when I get called out and I'll sell more puts.  I'm really not trying to be long more than 200 shares so I have to be careful.  I do the same thing with T-BAC-MET-HD-ABT.  They are good straddle stocks.  It's not really an option straddle at all, just long with puts and calls written with the swings. but I am riding the fence like a straddle and it works out a lot of months.  Keeps me entertained and no matter which direction the stock swings something is working.