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Anyone using covered puts
#31
(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?
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#32
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!)
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#33
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.
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#34
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!
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#35
(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.
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#36
(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.
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#37
Double post
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#38
(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 Smile   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). Smile  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.  Smile  I wanted to own them but some are just too easy to collect premiums on while I try.
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#39
(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.
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#40
(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.
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