Anyone using covered puts

[crimsonghost747]

fenders53 Wrote:Please do not misinterpret my tone. It is not my intent to anger you and your last post gives me that impression.

No not at all. I quite like debating with you, we might have different views but as long as we can back them up with something then we both stand a chance to learn a thing or two. And that's the whole point, right?

That last post was more directed at Mike's last post... I'm not a big fan of it when someone sets their minds to something and refuse to listen to facts or other opinions, simply claiming that they are right because they have decided that they are right. Reminds me of religious fanatics.

fenders53 Wrote:I'm not sure why we are talking about KO but KO just blew their quarter. You may have missed the earnings report details a few days ago? I do not believe KO is going to run hard for quarters.

KO is there simply because from what I understood it's your latest "buy and hold" stock that you're aiming at with these options? I could be mistaken. And the fact that it's a very well known and often used DGI stock makes it a good fit as a real world example.

fenders53 Wrote:-This part of my port has yielded an 18% return since SEP 18. That works for me annualized.

That is definitely a great return. And while it's only for 5 months, if you can keep that up long term then you'll definitely beat the market. But I would like to point out that we are still down from September and as I proved in the other thread, selling puts is a strategy that is the most profitable in the short term when we are in a flat or slightly declining market. There is no denying that your timing has been great and you've definitely out gained the market (and probably most of us) in this time period but based on historical data, the most common market is one that is trending upwards, not downwards. 5 months is a very short time to be used in determining if a strategy is effective or not.

fenders53 Wrote:-DEC 18 was horrible. The worst market in about a decade I think. You would think I would be assigned in most every position. That's not what happened. I was assigned shares of MO, BAC, MET, ABT, KHC In DEC. Some bounced, some didn't, we can't see the future, especially short term so irrelevant.

Firstly, yes it was 10-15% drop in general so yeah I would have expected that the majority of your puts expire in the money.
And isn't that exactly what you are after? From what I understand you sell the puts to generate cash flow while waiting for good entry points. Wasn't December one of the best entry points we have had in a long long time?

At least ALL of those positions that you got assigned are now in the green. Of course it's still too early to say for sure but at least in the short term it looks like December was a pretty damn good moment to add to your long term holdings.

As a pure income generating strategy, ie selling the puts and having them expire worthless, I agree it's a good strategy as long as you can pick the right timing and prices so that you don't get assigned. As I said I do those trades too once in a while. But what you have been saying all along is that your ultimate goal is to go long in stocks that you like, so I'm not too sure if this is really the best way to do that. The old wisdom says that time in the market beats timing the market.

[fenders53]

Well first of all I am a Baptist.  I'll pray for you to get some put selling wisdom soon.  Never mind, I need to save my stock market prayers for for MO and KHC lol.  

I am headed to work in a few minutes, but I'll hit you with a few comments to consider.  

Mike is a good guy though he may have come off a little short with you.  We have had very good luck with our strat, especially recently.  He doesn't do the same as I do, but we share some basic rules.

I appreciate your input.   I'll PM you a bit of personal info so your future comments with be based on some context.  But I think you get the picture I am not trying to invest $20K here.  I recently got full control of my retirement accounts and am trying to invest into core positions.  This ain't easy because valuations are just too high, even after DEC as many of them quality stocks did not properly correct.  I strongly prefer most of my positions be in the green just a few years from now.  I'm not 30 anymore.

I started trying to re-invest all this in SEP.  The timing was bad, a half dozen of my core blue chip long positions got a real beating.  The income from selling a lot of puts made it all better quick.  Yes the market bounce helped for sure.  Everything I have touched lately turned into gold.  A couple call sales were my only cause for concern but I dodged that for now by rolling them forward a month.  My call selling strategy needs to be more tempered.  My put selling makes a bad month very tolerable and that is much of my attraction to the method.  It may sound like I am being aggressive, when being a little conservative in my re-investment plan is the real goal.  I tell myself that if I was gambling, then 40-60% of my port wouldn't be cashy at any given moment.   Deep down I expect the big bear market and I plan to be ready for it.

[NilesMike]

(02-17-2019, 01:30 AM)crimsonghost747 Wrote: That last post was more directed at Mike's last post... I'm not a big fan of it when someone sets their minds to something and refuse to listen to facts or other opinions, simply claiming that they are right because they have decided that they are right. Reminds me of religious fanatics.

As a pure income generating strategy, ie selling the puts and having them expire worthless, I agree it's a good strategy as long as you can pick the right timing and prices so that you don't get assigned. As I said I do those trades too once in a while. But what you have been saying all along is that your ultimate goal is to go long in stocks that you like, so I'm not too sure if this is really the best way to do that. The old wisdom says that time in the market beats timing the market.

Firstly, since this is a DGI forum I assume you are investing for income, whether for now or down the road. Correct? If incorrect you are more of a total return investor and need to be more of a stock picker than an income investor.

Selling puts is for income and/or buying stocks as they drop(ped)
Get put a stock? Keep it and collect the dividend, ride the appreciation or sell the call and hope to be called away.

The INCOME from selling puts or calls is what I'm after and 1.5% per month target does that quite nicely.
The DGI at the end needs to be an 18% return on your initial outlay to be equivalent.

Except I'm collecting it from day 1 not year 20.

Somehow, in your zeal, you missed when I posted different strokes for different folks. The opinions provided are not just for your consumption.

[crimsonghost747]

fenders53 Wrote:Mike is a good guy though he may have come off a little short with you.  We have had very good luck with our strat, especially recently.  He doesn't do the same as I do, but we share some basic rules.

I don't doubt that. And I know that I also share some very similar strategies to him, after all he is the one who taught me a lot about options trading.
But as I said, for me options are purely a trading strategy. Though I exclusively trade in stocks that I either own or wouldn't mind owning, the point is still to get out of the trade relatively fast and deploy the money again. 

fenders53 Wrote:I appreciate your input. I'll PM you a bit of personal info so your future comments with be based on some context.  But I think you get the picture I am not trying to invest $20K here.  I recently got full control of my retirement accounts and am trying to invest into core positions.  This ain't easy because valuations are just too high, even after DEC as many of them quality stocks did not properly correct.  I strongly prefer most of my positions be in the green just a few years from now.  I'm not 30 anymore. 

Yes I'm more or less familiar with your situation, I've read your threads here. And yes it indeed must be a different beast when you are basically juggling with your whole retirement. Especially today when, once again, a lot of stocks feel too expensive. But every time I say "too expensive" it also reminds me of all the other times I've felt like the market has been too expensive and really in need of a correction. One of the strongest feelings was in late 2015... I can't be arsed to check but I'm fairly certain that every single stock I bought late 2015 has been profitable between the time of buying and now. And I truly considered not buying anything because it felt so expensive I was almost certain that the correction had to come soon.

While I am significantly younger than you, I'll race you to retirement day. And with my lifestyle I'll probably race you to the grave too hahahaha. 
The point is that we are still in a pretty similar situation. And missing out on a good run because I tried to get a slightly lower entry price is still something that I would worry about... If I feel the stock is a good buy going forward then I don't mind paying the daily price... especially if the other options is possibly grabbing it later at a 2 or 3% discount. 2 or 3% makes a difference in a year but it won't make much of a difference in 10 or 20 years. Being long or not being long in a stock you like will make a big difference in 20 years. And you'll still be around in 20 years, don't worry.

[fenders53]

Let's get back to discussing the details of option trading in a minute....

It's just like you said, I am juggling a scary amount of money. It makes my home's value look like chump change. This port is supposed to constitute about 50% of my income in only 3 1/2 years when I retire for real. I was already fully retired for three years but I am working at HD in Millwork Sales Specialist now. I enjoy the work and when I no longer do, I won't be there anymore. I'm in an enviable spot at my age. Just trying to stay out of the retirement fund for a few more years.

Back to business... this is just what Mike said, an income strategy, and some months a VERY good one. Not so much different than a DGI port. When you "lose" your put bet, your punishment is owning a good stock at a small discount if you are doing this right. While I am truly trying to build my long port over time, valuation prevents it and I bide my time with put sales like KO. I'm smart enough to know KO is neither cheap, nor likely to deliver above market returns. We've had that discussion lately. Mike and I both traded KO puts because we know their is strong KO support whether justified or not. (it's not). PEP is my real soda water company target and I own an entry position in it already. I have no illusions KO will be a core position unless they change up their game plan. But it is an without any doubt an All-American beloved company. I'm not so sure it is rationally worth much over $30 but it will never go there. I've already profited on expired KO put sales. I have two open right now. When the dust settles I may keep 50 or 100 KO shares because these fools will run it up again someday, and the above average DIV is already good, and safe for the foreseeable future. There are others like it such as MMM. 75% of my put sales are an attempt at going long, but some trades are admittedly intended for generating income. I'm happy to own the shares long when the market makes it happen. But it's optional until valuations get reasonable. That day will come.

Utility stocks have been my biggest surprise. I was just sure I would be in them in a big way by now. Didn't happen and I keep cashing income checks every month. I desire them to be about 1/3 of my stock holdings in the end because I can sleep well in any market. Up market or down market the puts keep expiring worthless. I think I counted like 28 consecutive puts expired worthless the past 5 months. I sell puts on every Ute dip. Some dips not even that substantial. This month will likely be my last attempt for awhile as they are about to leave my buy price range. It's tempting to just go long now but that would be foolish until they pull back. In fairness if we did the math a couple of them would have yielded the same money in increased share price had I just went long, but I can't see the future and my way is a bit more conservative. A couple other Utes are trapped in a trading range and grabbing the put income is so easy it's like stealing. I only have a couple more safe non-ute stocks that are so predictable for generating put income. Right up until they aren't but I am going to keep milking this cow lol.

I know this has only been five months. I have bought and sold options for decades on a small scale and I definitely know how to do it wrong. Now I am doing it on a big scale. I know the odds are in my favor by design as I am "the house" in this casino. For now I think the volume of trades is what is strongly in my favor. Place 20-40 bets a month with odds 70% in my favor, you can get by with some small mistakes. Can I screw this up if I allow emotion to cause me to not follow basic rules? Absolutely! I've had about five trades I regret since SEP 18. About all of them can be attributed to my failure to follow my own simple rules. I can't blame it on the market because it was all me. I've written the rules down. Maybe I need to tape them to the wall behind my monitor. My wife will think I am nuts lol.

[crimsonghost747]

(02-17-2019, 08:09 PM)fenders53 Wrote: I've already profited on expired KO put sales.  I have two open right now.  When the dust settles I may keep 50 or 100 KO shares because these fools will run it up again someday.

But now again relating to this KO example... what I am reading now is that it's a trading strategy, with very little intention to keep the shares for the long term. You're looking at possibly getting assigned 200 KO shares but you only want 0, 50 or 100. Or something in between. So now we are very much talking about pure trading for profit, not using the puts to build your portfolio.

So that is what confuses me. Because sometimes you say it's for building your portfolio but for example in this case (I know it's just one example) it definitely looks like pure trading pattern to me. And of course there is nothing wrong with that, in fact as you know I'm a believer in trading with options. But short term trading and building a long term portfolio are two completely different things, in one the goal is to sell an option that expires worthless to generate income and in the other the goal is to end up with stocks for long term hold. Two completely different strategies with the exact opposite goals.

[fenders53]

(02-18-2019, 05:32 AM)crimsonghost747 Wrote:

(02-17-2019, 08:09 PM)fenders53 Wrote: I've already profited on expired KO put sales.  I have two open right now.  When the dust settles I may keep 50 or 100 KO shares because these fools will run it up again someday.

But now again relating to this KO example... what I am reading now is that it's a trading strategy, with very little intention to keep the shares for the long term. You're looking at possibly getting assigned 200 KO shares but you only want 0, 50 or 100. Or something in between. So now we are very much talking about pure trading for profit, not using the puts to build your portfolio.

So that is what confuses me. Because sometimes you say it's for building your portfolio but for example in this case (I know it's just one example) it definitely looks like pure trading pattern to me. And of course there is nothing wrong with that, in fact as you know I'm a believer in trading with options. But short term trading and building a long term portfolio are two completely different things, in one the goal is to sell an option that expires worthless to generate income and in the other the goal is to end up with stocks for long term hold. Two completely different strategies with the exact opposite goals.

Yes, KO is a trade for now.  A trade in a company I am willing to own.  A stock I believe is overvalued, but has downside protection because it is KO, and a consumer staple.  I believe it will yield a profit on the put.  I know it has a good dividend if am exercised.  I wouldn't mind holding some shares.  If I owned it and it ran up too fast I'd likely sell a call and continue the income.  I don't see it as a core holding but that could change.  They have competent management.  The earnings season usually offers up a few of these as even a small change in projections for the next quarter cause a market reaction.  I believe PEP will one day be a large holding in this sector.  I'll add to that position slowly unless it pulls back.  I'd sell another PEP put that day.  I already have on small dips but they expired worthless.   

I think it would be fair to say about 80-85% of my put sales are an attempt to go long.  Their is generally a KO in the mix, and a stock or two I consider more speculative.  Even the spec stocks are targeted for their above average DIV.  It's rare for me to target a stock with no dividend.  That may or may not be a good decision.

[Kerim]

So I've been following this discussion with one eye, and more or less agree with everyone. (How's that for diplomacy?!)

So far, I've just been dipping my toe in using cash-secured puts, but it seems like a no-brainer to me, at least insofar as a complement to my overarching buy-and-hold approach to DGI. I'll only sell puts on stocks that I'd like to own anyway, and only at prices that I'm happy with. When a stock that I want to own gets actually cheap, I'll probably still just buy shares outright, so as not to miss out on the bargain. But when it is in a reasonable "take it or leave it" range, selling a put seems like a great way to play it -- get paid to wait for it to maybe reach a slightly better price.

But I have to admit that when I run my spreadsheet and look at some of the annualized returns, I do often daydream about devoting a lot more cash and energy to the practice. My returns have ranged from 15 to 70 (!!) percent, annualized (if I'm doing the math right!). A few years of that with a good chunk of my portfolio and I'd be ready to retire! Of course, the question is risk. I love the idea of selling insurance in this manner, but I know enough to know that I have no idea how many different ways I could get creamed.

So for now, I'll continue to dabble, and perhaps expand my covered put practice as I gain more experience and confidence.

But maybe we should start a thread, kinda like the "what did you buy today" thread, where we just exchange good covered put ideas when we spot them? Such as "Hey, did you see that the April KO $40 puts are selling for $$ right now? That's a %% return annualized if it expires out of the money!" Thoughts?

[NilesMike]

(02-18-2019, 05:27 PM)Kerim Wrote: Of course, the question is risk. I love the idea of selling insurance in this manner, but I know enough to know that I have no idea how many different ways I could get creamed.

Everyone comes back to risk when discussing selling options. Good to be risk aware, but...

You like XYZ stock, it's trading for $45. You buy it @ 45 and now it's 40, you like it a little but still wish to keep it so all is good.

I like XYZ stock too and sell a 44 put for .85. Stock falls to 40, maybe I'm assigned maybe not. If I am assigned, my cost basis is 43.15.

Now who has more risk?

If we both decide that we no longer like XYZ and wish to exit.
I would sell a 45 call for say .80.
You would like to get out at 45 also for a scratch.
I collect 1.85 on the stock and .85 on the call. 2.70 profit on some minor gyrations of XYZ. 6% return in 2 cycles. 36% annualized

Now, who has more risk?

The only risk is that XYZ shoots like a rocket after I sell the put and I miss the upside. I like that trade off.
Good luck to all.

[fenders53]

(02-18-2019, 06:03 PM)NilesMike Wrote:

(02-18-2019, 05:27 PM)Kerim Wrote:  
 Of course, the question is risk. I love the idea of selling insurance in this manner, but I know enough to know that I have no idea how many different ways I could get creamed.

Everyone comes back to risk when discussing selling options. Good to be risk aware, but...

You like XYZ stock, it's trading for $45. You buy it @ 45 and now it's 40, you like it a little but still wish to keep it so all is good.

I like XYZ stock too and sell a 44 put for .85. Stock falls to 40, maybe I'm assigned maybe not. If I am assigned, my cost basis is 43.15.

Now who has more risk?

If we both decide that we no longer like XYZ and wish to exit.
I would sell a 45 call for say .80.
You would like to get out at 45 also for a scratch.
I collect 1.85 on the stock and .85 on the call. 2.70 profit on some minor gyrations of XYZ.  6% return in 2 cycles. 36% annualized

Now, who has more risk?

The only risk is that XYZ shoots like a rocket after I sell the put and I miss the upside. I like that trade off.
Good luck to all.

You know that's exactly what I do as well, but you did leave out some of the exit risk.  Mister Long sells at 45.  I sell a call that day and get my 85 cents, then my company is accused of selling asbestos laced soda pop.  Every day in a stock represents risk.  They can leave on a moments notice, we have to let some time ride out to claim the 85 cents.   

But I am still with you on your thesis.  Option is just a word that invokes fear, and done correctly it is irrational fear.

[fenders53]

(02-18-2019, 05:27 PM)Kerim Wrote: But maybe we should start a thread, kinda like the "what did you buy today" thread, where we just exchange good covered put ideas when we spot them? Such as "Hey, did you see that the April KO $40 puts are selling for $$ right now? That's a %% return annualized if it expires out of the money!" Thoughts?

I would like that, because I feel like I am annoying people when I post up the other thread.  "just sold a JNJ put today"  when I know that nobody cares. 

[fenders53]

(02-18-2019, 05:27 PM)Kerim Wrote: But maybe we should start a thread, kinda like the "what did you buy today" thread, where we just exchange good covered put ideas when we spot them? Such as "Hey, did you see that the April KO $40 puts are selling for $$ right now? That's a %% return annualized if it expires out of the money!" Thoughts?

double post