Cash a/c and options

[osho67]

I am investigating implementing following strategy. :-

IB allows only one strategy in options in a cash a/c. That is covered calls,

I would like to open a cash a/c with IB for $200k. I want to write covered calls only on DIA, SPY, QQQ, and IWM. Average cost is about $100 per share. I can have 20 positions to write covered calls. I will write covered calls every week. Initially I might receive $80-90 in premium per position. But prices may fall and I am anticipating receiving $50 per position. That is $1000 per week. That is $50000 per year. I am ignoring compounding effect and receipt of dividends .

The question is - Is this strategy viable. What could possibly go wrong?

Please give comments, suggestions and any feedback. Thanks And much appreciated.

 

[atticus]

Quote from osho67:

I am investigating implementing following strategy. :-

IB allows only one strategy in options in a cash a/c. That is covered calls,

I would like to open a cash a/c with IB for $200k. I want to write covered calls only on DIA, SPY, QQQ, and IWM. Average cost is about $100 per share. I can have 20 positions to write covered calls. I will write covered calls every week. Initially I might receive $80-90 in premium per position. But prices may fall and I am anticipating receiving $50 per position. That is $1000 per week. That is $50000 per year. I am ignoring compounding effect and receipt of dividends .

The question is - Is this strategy viable. What could possibly go wrong?

Please give comments, suggestions and any feedback. Thanks And much appreciated.

What happens if the SPX falls 2, 5, 10%?

The dividends -- you get the dividends, but they're already discounting the calls = dividend payout (and embedded in the put premium).

 

[slickpick]

What this strategy boils down to is that you're selling tail risk, simple as that. It's a strategy that will work until it doesn't. And when it doesn't you will see massive drawdowns.

 

[justrading]

Is there any reason why you don't want a margin account? You don't actually have to use the margin - as far as I know there are no penalties for that.

 

[osho67]

Quote from justrading:

Is there any reason why you don't want a margin account? You don't actually have to use the margin - as far as I know there are no penalties for that.

Good question. I could use a portfolio margin a/c but in cash a/c stocks are fully paid and I donot have any worries. I donot want to be tempted in entering more positions at times.

 

[comintel]

Quote from osho67:

Good question. I could use a portfolio margin a/c but in cash a/c stocks are fully paid and I donot have any worries. I donot want to be tempted in entering more positions at times.

I do not think cash accounts are viable anyway because you will have to wait 3 days for settlement in a cash account after you sell anything before you can use the proceeds.

 

[DeltaSpread]

Your proposal is flawed from an efficiency and cost perspective. All you are doing is opening a synthetic put of sorts and paying double commissions to do so. Just open a margin account and sell naked puts but for a quantity of underlying shares for which your cash completely covers. Do not utilize leverage.

 

[DeltaSpread]

One other point to consider is that quite often, especially the deeper ITM you go, on the naked put side, the credit you get vs. the debit price of what you will pay for long stock/short call will be better.

Do not let the term naked put scare you. It simply means you are opening one single position which is selling to open. You would still be covered in your case because of the cash. Just do not utilized leverage.

 

[osho67]

Quote from DeltaSpread:

One other point to consider is that quite often, especially the deeper ITM the money you go, on the naked put side, the credit you get vs. the debit price of what you will pay for long stock/short call will be better.

Do not let the term naked put scare you. It simply means you are opening one single position which is selling to open. You would still be covered in your case because of the cash. Just do not utilized leverage.

I think IB will not allow naked puts in cash a/c

 

[DeltaSpread]

Quote from osho67:

I think IB will not allow naked puts in cash a/c

That is why in my post above, I mentiond to consider opening a margin account. If a cash account is a mandatory variable in this equation, than buy/writes or synthetic puts indeed is going to be it.