Anyone using covered puts

[fenders53]

Double post

[fenders53]

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

First off crimsonghost, thanks for participating in the thread.  I'll deal with you later..  Just kidding lol    I'm not avoiding your dissenting opinions.  Just trying to help Kerim at the moment since he dove in. 

Kerim, 

I do this in a Vanguard Rollover IRA primarily.  Also a Roth IRA.  Taxable accounts take the fun out of it if you do it too often.  CVX was a bad example.  I didn't really "lose" vs just going long in the first place.  The position recovered and I am about even on CVX a month later.   I chased it when oil spiked up and violated my out rules.  FOMO disease got me.  (fear of missing out).   I did get stung on DWDP.  I did not research it properly.  I can't give you a rational explanation why I sold the put.  It was just a mistake after reading an article a couple months ago.  I closed the position before it got any worse and dropped 20 points instead of 6.  I lost like $400 after my premium came out.  I am going to be honest hear even if I sound stupid explaining it.  I could type a list of the 50 great trades this quarter but the tough positions will help you more.  So here is one of those I survived during the crazy oil price swing debacle.  Learning to keep your cool when the story changes and roll a put forward is a useful tactic..........  

The exact numbers not so important but you'll get the point well enough if I round them.  

-XOM was trading around $86 and it was far from oversold. 
-I sell a strike 84.50 a few weeks out at $1.50 or whatever. My timing could not have been worse.
-Stock drops like a rock and it is in the money by $400 as expiration approaches.  The sky is falling in oil!
-Before I got assigned I closed the contract for $400, so now I am down $250.
-I immediately sell a contract a month out with a lower strike around $83.  Option premium slightly above break even. I'm just selling time to get out of this if I need to.
XOM bounces above $83 a few weeks later and it's all good.

At the moment I own BP and CVX in oil.  The goal was to own the oil majors.  I just messed up my entry when the market turned.  

It's more fun to talk about the range bound stocks I just collect premiums on every month.    I wanted to own them but some are just too easy to collect premiums on while I try.

[crimsonghost747]

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

In my opinion, these are the hard facts. Assuming "original" price of $31. Selling a put with a strike of $30. Stock being at $28 when you get assigned. No dividend payments during this time period. No trading fees or taxes.

Situation 1. You just decided to buy in at $31. 
You spent $3100, it's now worth $2800. Loss of $300.

Situation 2. You waited until your comfy price of $30 and bought there.
You spent $3000, it's now worth $2800. Loss of $200.

Situation 3. You sold a put with a strike of $30 and got assigned.
You spent $3000, it's now worth $2800. You got the premium of say $50. Loss of $150.

Situation 4. You just decided to wait and do nothing.
You spend $0. You didn't buy anything. Profit/loss of $0. 

If you have no plans to sell the underlying stock, then in all of the examples it would be an unrealized loss. Which is still a loss.

While situation 3 leads to a better outcome than situation 1 or 2, it's still a negative outcome. You have used more money than you have gained, so at the moment it most certainly is a loss. It might be a smaller loss than your original plan was but it's still a loss.

[fenders53]

(11-30-2018, 10:22 PM)crimsonghost747 Wrote:

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

In my opinion, these are the hard facts. Assuming "original" price of $31. Selling a put with a strike of $30. Stock being at $28 when you get assigned. No dividend payments during this time period. No trading fees or taxes.

Situation 1. You just decided to buy in at $31. 
You spent $3100, it's now worth $2800. Loss of $300.

Situation 2. You waited until your comfy price of $30 and bought there.
You spent $3000, it's now worth $2800. Loss of $200.

Situation 3. You sold a put with a strike of $30 and got assigned.
You spent $3000, it's now worth $2800. You got the premium of say $50. Loss of $150.

Situation 4. You just decided to wait and do nothing.
You spend $0. You didn't buy anything. Profit/loss of $0. 

If you have no plans to sell the underlying stock, then in all of the examples it would be an unrealized loss. Which is still a loss.

While situation 3 leads to a better outcome than situation 1 or 2, it's still a negative outcome. You have used more money than you have gained, so at the moment it most certainly is a loss. It might be a smaller loss than your original plan was but it's still a loss.

I can live with that.  But at the end of the day we do not know what the market or individual stock will do in the next few weeks.  All we can be sure of is what it cost today, and that we will pay a lower price next week or month with a put sale.  And if we change our mind for whatever reason, there is a pretty good chance we can roll the put forward, and lower the entry basis somewhat.

IMO, the biggest risk in this strategy is failing to buy a stock that immediately goes on a big run.  I'll cherry pick NVDA and AMD since we have the benefit of hindsight.  I could have chased them for a year and only made a few thousand in put premiums (assume single contracts.   Probably would have made 5 times that much just going long.  Personally I won't chase a momo stock with this strategy.  It's outside my risk tolerance for this point of my investing career.     

I have sold a LOT of utilities and drug stock puts lately.   My expire worthless percentage exceeds 90%, which of course wouldn't happen in a truly severe market.  Let this run a few more months and I'll do the math vs going long and collecting my dividends instead of premiums.  On a side note I often pick expiration dates that fall just before ex-div date so I am grabbing a dividend soon after being assigned should that occur.  Not always possible of course.  On another side note these are covered puts.  The collateral is collecting 2.1% while I wait.  I don't have to add much premium to that base to far exceed your typical dividend.

The most important cold hard fact to me is my portfolio value after a couple months of what I regard as a tough market. I have long positions in stocks and index mutual funds that are down well over 10% since OCT 1st. VERY few are up. My entire port is down less than 1% and this put strategy is much of the reason why. And this is after making a few errors I have discussed like DWDP and chasing oil stocks when my timing could not have been much worse.

[Kerim]

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!

[fenders53]

(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 

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.

[crimsonghost747]

(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. : 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.

[fenders53]

(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. : 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.   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.

[crimsonghost747]

(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.

[fenders53]

OK, you are good with holding the stock longer term so it's back to my put "no risk" logic. 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.

[crimsonghost747]

(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.    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.

[fenders53]

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.

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.