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Anyone using covered puts
#41
Thanks very much, everyone -- this discussion is super useful. I completely agree with how you have laid out the situations, cg747. Like fenders, though, I feel comfortable with situation 3, given what decisions I would choose to make otherwise.

Another factor that crosses my mind is that I always keep a cash position larger than most would advise. I just sleep better that way. If my experience is anything like fenders', with most puts expiring without being exercised, then this could be a good way to generate income from the cash portion of my portfolio better than the 2 percent I can get at the bank. Yes, there is more work and risk involved, but I am eager to explore it further.

Thanks again!
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#42
(12-01-2018, 01:29 PM)Kerim Wrote: Thanks very much, everyone -- this discussion is super useful. I completely agree with how you have laid out the situations, cg747. Like fenders, though, I feel comfortable with situation 3, given what decisions I would choose to make otherwise.

Another factor that crosses my mind is that I always keep a cash position larger than most would advise. I just sleep better that way. If my experience is anything like fenders', with most puts expiring without being exercised, then this could be a good way to generate income from the cash portion of my portfolio better than the 2 percent I can get at the bank. Yes, there is more work and risk involved, but I am eager to explore it further.

Thanks again!

Kerim

I was never cashy until about the time I showed up here.  I was "all in" until about age 55.  That was a better idea when I was 25  Smile

I am actually doing exactly what you described.  About 20% of my port is cash returning 2.1% and I mostly leave it alone.    Another 20% of cash has been put to work as put collateral.  If I can do it without pushing trades I shouldn't make, I keep this 20% working as much as possible.  The expiration dates are staggered and I can go shopping most any time I want as they expire.  I don't want all of this cash invested, but if it happens it happens.  I usually sell a few calls on long positions I have low confidence are going to run to the moon.  Another small income stream.  Mostly I sell calls a ways out of the money though.  I am not trying to churn my account like a day trader.  Put if a small amount keeps rolling over I'm OK with that as long as it's working.

On a side note I tend to compartmentalize my money.  Year 4 and 5 from now, I need $25K per year extra income so I can start my retirement for real before my last pension kicks in year 6.  I intend to fund it with an extremely short term bond fund I am feeding with nothing but put and call premiums.  It's fun to watch it grow without moving any of my equity money.   

It sounds like you are going to do this with more than one stock.  I suggest you do so you get a fair assessment of what to expect.  A single position won't do it.  I suggest a few more fairly conservative stocks in the $40-70 range.  They won't get cut in half and sour you starting out.  I've had profitable fun with MET, SO, T etc.  Most very low priced stocks have too small premiums if you pay any commissions at all.  (Ford and GE won't work without selling a lot of contracts.)  I've had really good luck with MMM, HD, and AAPL, even in all this volatility.  But now you are talking about some serious money to buy 100 shares.  Save the expensive stocks for later.  Maybe paper trade a few and watch the option prices.  A stock that will swing $10+ in a few weeks is a different animal.  I like them because I can sell puts way out of the money for a nice premium.  And they already are, or will be core positions anyway. I put myself of some risk of owning an extra position in a stock I love. I can lighten back up on it when the opportunity arises. Sell calls or just dump 50 shares when it runs back above even. Can't stress enough you have to do this with stocks you truly like or someday the market will put you in an uncomfortable spot you.
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#43
(12-01-2018, 01:29 PM)Kerim Wrote: Thanks very much, everyone -- this discussion is super useful. I completely agree with how you have laid out the situations, cg747. Like fenders, though, I feel comfortable with situation 3, given what decisions I would choose to make otherwise.

Another factor that crosses my mind is that I always keep a cash position larger than most would advise. I just sleep better that way. If my experience is anything like fenders', with most puts expiring without being exercised, then this could be a good way to generate income from the cash portion of my portfolio better than the 2 percent I can get at the bank. Yes, there is more work and risk involved, but I am eager to explore it further.

Thanks again!

yeah it's definitely an interesting method for getting a little bit more from your cash. I'm quite new to the put game and I use it purely to collect some premiums for increased cash flow. It has worked ok so far but I think I've only sold 3 or 4 puts all within the last couple of months.

I tend to use covered calls much more often. A good example would be T last week. Bought 100 shares on Tuesday for $29.97. Sold a Friday call with a strike of $30, got $32 as premium. Obviously it got exercised since T was trading above $31 on Friday.

So I tied up $2997 for 4 days and made $34. (That is $32 from premium, $3 from increased share price, - $1 from commissions) Over 1% in 4 days, that is pretty cool when annualized. :Big Grin But there is a good reason I chose this example, so you can also see the downside. I would have made around $123 if I had not sold the call and instead just bought and held T for 4 days. But the calls make it a much more safe play as you collect the premium no matter what.

These covered calls I've been doing for well over a year now, with a maximum of $10k in at any time. So far, so good. I've made some costly mistakes along the way and there have been a couple of months where the cash flow has been negative but overall I've managed to make a good profit.
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#44
(12-01-2018, 10:10 PM)crimsonghost747 Wrote: yeah it's definitely an interesting method for getting a little bit more from your cash. I'm quite new to the put game and I use it purely to collect some premiums for increased cash flow. It has worked ok so far but I think I've only sold 3 or 4 puts all within the last couple of months.

I tend to use covered calls much more often. A good example would be T last week. Bought 100 shares on Tuesday for $29.97. Sold a Friday call with a strike of $30, got $32 as premium. Obviously it got exercised since T was trading above $31 on Friday.

So I tied up $2997 for 4 days and made $34. (That is $32 from premium, $3 from increased share price, - $1 from commissions) Over 1% in 4 days, that is pretty cool when annualized. :Big Grin But there is a good reason I chose this example, so you can also see the downside. I would have made around $123 if I had not sold the call and instead just bought and held T for 4 days. But the calls make it a much more safe play as you collect the premium no matter what.

These covered calls I've been doing for well over a year now, with a maximum of $10k in at any time. So far, so good. I've made some costly mistakes along the way and there have been a couple of months where the cash flow has been negative but overall I've managed to make a good profit.
I try not to sell calls often unless I already owned the stock and it has run up some, and preferably trending towards overbought.  Not so simple in this recent market.  Now  it's my turn to ask risk questions. The risk/reward does not pass my standards for that ATT trade you just made.  1% upside.  What do you calculate as your downside risk?   Based on ATT recent performance I would estimate it at 5% the way T has been swinging around.  

I do have calls sold on part of my T position, but they are strike 32s.  I got smoked selling calls in the 1990's.  The premiums on those networking and PC hardware stocks were awesome.  I was not diversified and option premiums clouded my stock selections.   I was a Jeanyus til the tech bubble popped. Smile  Water over the dam now but it's hard to not beat myself for it once a month.  I should be on the beach smoking Cubans now lol.  Spoke to a friend of a friend recently.  He turned 1 mil into 2 mil, then back to 300K from about 1998-2001.  Yikes!

Back to reality, I can see myself selling a few calls this week if the market reacts favorably to the trade talks. It's rumored there is progress, but nothing like a long-term agreement yet. Probably a best case outcome at this point though.
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#45
(12-02-2018, 07:09 AM)fenders53 Wrote: Now  it's my turn to ask risk questions. The risk/reward does not pass my standards for that ATT trade you just made.  1% upside.  What do you calculate as your downside risk?   Based on ATT recent performance I would estimate it at 5% the way T has been swinging around.  

I think with short term options you can't really do "upside potential" vs "downside potential". Two reasons: first of all, theoretical downside potential is always 100%. But more importantly, with short term options anything above a couple % upside makes the premium essentially worthless. Take that T trade for example: a $31.5 call (5% upside) would have probably given me a premium of less than $5. That is 0.17% minus fees...there just is no point in selling that option.

It's more about how likely a move in each direction is. 
In my opinion T below $30 is just too cheap. Even right now at $31.xx it looks cheap. Every time it has dipped below $30 it has bounced back fast. So while still possible, I saw that a decline would be highly unlikely from those levels, especially a decline which would last for weeks/months.

I wouldn't do this with a random stock. I've owned T for years and plan to continue owning for years to come. In this case I saw an easy 1% and took it. Usually my options are a bit further out of the money (and that would have given better results here) but I stuck with the easy money this time.

If it would stay below $30 then I would simply keep collecting the premiums weekly with similar options, as long as the price doesn't go too much below $30 (again, unlikely in my opinion) those options will give me anywhere from $15 to $30 per week.  So 0.5% to 1.0% per week and you can add in the almost 7% dividend yield and we are talking about some serious incoming cash flow while I wait.
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#46
OK, you are good with holding the stock longer term so it's back to my put "no risk" logic. Smile And I don't disagree with your opinions on T. It does tend to snap back off the dips. And yes, short-term options are tough to sell on T. Very few non-tech stocks under $40 offer much premium on a short option. I won't enter a position with only 1% upside potential, but yeah if you successfully did that monthly you just beat the S&P 500 return most years.
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#47
(12-02-2018, 08:57 PM)fenders53 Wrote: OK, you are good with holding the stock longer term so it's back to my put "no risk" logic.  Smile  And I don't disagree with your opinions on T.  It does tend to snap back off the dips.  And yes, short-term options are tough to sell on T.  Very few non-tech stocks under $40 offer much premium on a short option.  I won't enter a position with only 1% upside potential, but yeah if you successfully did that monthly you just beat the S&P 500 return most years.

Yes, it's extremely rare for me to touch options on stocks which I do not wish to own long term. Though in most cases 100 shares of anything is "too much" for me to buy on one go, so the goal with these options trades is to get rid of them at some point. But as I like the fundamentals behind the company, I don't have to get rid of it in a week or two. I still consider there to be risk (I've had some losses along the way) but the fact that I'm not in a hurry to sell certainly mitigates it.

I agree it's pretty hard to find sub $40 stocks with decent premiums. I have several I've used in the $50 to $70 range: WFC, DAL, WBA, RDS, OMC. But yeah below $40? Only T for the moment.
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#48
I should be more careful not to encourage anyone to trade 100 share lots if that grossly violates their ability to diversify. When I got hurt long ago, I was probably 5 years too early to be taking on 3-4 covered call positions at once. Regarding the option premiums, you wouldn't even believe what was going on during the tech bubble. You could grab a 5-7% one month call premium on a $30-50 stock, set the strike price 3-5% out of the money. The market was nuts and it was too easy. We confused it with knowing what we were doing. When the market gets truly volatile it can be lucrative (but not THAT lucrative). But you have to be sooo careful not to be tempted to play with a stock you won't hold for 5+ years. I can control my enthusiasm because I was eventually taken behind the tool shed for some discipline. Smile

BTW, I appreciate the conversation. I'll share a few of my upcoming put trades real time. I think this week may be a bad time to write puts though. Maybe a few calls.
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#49
(12-03-2018, 08:32 AM)fenders53 Wrote: I can control my enthusiasm because I was eventually taken behind the tool shed for some discipline.  Smile  

Same here... or at least that's what I like to think. I've only been trading options for a little over a year and a half but I've gotten burned a couple of times... once very badly. But there is always some educational money to be spent when learning... and we never stop learning. :p
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#50
Nothing substantive to add at the moment, but just want to add another thanks. I'm very inexperienced with options at this point, so hearing about both of your various exploits is super helpful!
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