Options strategy to return 6.5% annum with low risk.
- Thread starter shMark
- Start date
Being that Options are most risky of instruments in general markets, IMHO, you could make small profits on 99% of your trades and lose it all and then some on the 100th. Beginning trader should read about options then demo them till you triple your account three separate times. If your stock system is doing well, when you get a buy signal for the stocks, instead of buying the stocks, do Put Credit spreads instead few months out, but instead of waiting till expiration, have a target to get out of them.
So you already achieve your annual returns target with stocks and funds. And have "almost zero risk" on this as well. Why are you investigating a more complex and riskier solution to achieve the same result?
For a return of 6.5%, you should be able to achieve that without too much risk with using just bull put credit spreads. And pretty safely with SPY ETF. Could simply SELL a 201 SPY PUT and BUY a 200 SPY PUT.
The amount you earn will depend on how volatile the market is (so it might be more if the market moves a lot and less if its quiet or very optimistic).
The risk is that if you do it too often in a downward market you could end up loosing on back to back trades.
Also you need to factor in the cost of commissions (2x trade for opening the position and possible trades to close the position depending if the options expire worthless or if you get assigned (or if you have to roll them)).
Also you may have tax issues. After tax & commissions you may not get the return you desire. But it is definitely a viable idea.
It works safely as you are asking for a return of 6.5% which is lower than the average return of the S&P 500 over the long term (7-9% with dividends).
Another alternative may be to simply buy and hold SPY with covered calls that are OTM. You collect the dividend while waiting, get a premium on the SPY from writing the covered calls, and if it goes up you also get the equity gain.
The amount you earn will depend on how volatile the market is (so it might be more if the market moves a lot and less if its quiet or very optimistic).
The risk is that if you do it too often in a downward market you could end up loosing on back to back trades.
Also you need to factor in the cost of commissions (2x trade for opening the position and possible trades to close the position depending if the options expire worthless or if you get assigned (or if you have to roll them)).
Also you may have tax issues. After tax & commissions you may not get the return you desire. But it is definitely a viable idea.
It works safely as you are asking for a return of 6.5% which is lower than the average return of the S&P 500 over the long term (7-9% with dividends).
Another alternative may be to simply buy and hold SPY with covered calls that are OTM. You collect the dividend while waiting, get a premium on the SPY from writing the covered calls, and if it goes up you also get the equity gain.
The issue with Iron Condors is the cost of transactions given four legs and eventual unwinding.
The put spreads cant be managed so one and done..
Another strategy that like which can be seen as a means of generating decent one year returns with a longer term perspective is selling straddles against a stock ( could even pay a dividend).
Buy 100 shares of stock and sell 1 straddle ATM or slightly above the market, up to one year out, if you want to be directional. Look at the total premium as your return on capital if the stock goes sideways or upwards. If it drops, you own more stock at the strike minus the premium you collected.
An example would be a stock that one forum member brought up.
I bought BCRX at $5 on a plunge from $7 down to $4.20 on earnings and sold the three month 5 Straddle at 1.80.
On expiry, if stock is above $5, the options and stock get called away with no transactions required on my side for profit of $1.80 or 35% for 3 months or 140% annually. The only cost is an expiration fee per strike which is only the 5 call. If it drops towards zero, own more stock at Strike $5 - $1.80 premium sold or $3.20. Repeat.
Stock is trading at $7.06 today so after one week, have the option to unwind the trade for 50% of maximum profit today or wait and see what happens. Rich man problems....
The put spreads cant be managed so one and done..
Another strategy that like which can be seen as a means of generating decent one year returns with a longer term perspective is selling straddles against a stock ( could even pay a dividend).
Buy 100 shares of stock and sell 1 straddle ATM or slightly above the market, up to one year out, if you want to be directional. Look at the total premium as your return on capital if the stock goes sideways or upwards. If it drops, you own more stock at the strike minus the premium you collected.
An example would be a stock that one forum member brought up.
I bought BCRX at $5 on a plunge from $7 down to $4.20 on earnings and sold the three month 5 Straddle at 1.80.
On expiry, if stock is above $5, the options and stock get called away with no transactions required on my side for profit of $1.80 or 35% for 3 months or 140% annually. The only cost is an expiration fee per strike which is only the 5 call. If it drops towards zero, own more stock at Strike $5 - $1.80 premium sold or $3.20. Repeat.
Stock is trading at $7.06 today so after one week, have the option to unwind the trade for 50% of maximum profit today or wait and see what happens. Rich man problems....
We're talking a fair amount of money, if I recall. And we're looking for "safe" returns.
So!
Buy an SPX Jun15 future contract at $2380*100
Sell an SPX Jun15 option @ ~$121
You are insulated (to a degree) to 2260 (doing this in my head, but...)
and still peel 25% of the option value off in via theta burn.
Simple is good.
So!
Buy an SPX Jun15 future contract at $2380*100
Sell an SPX Jun15 option @ ~$121
You are insulated (to a degree) to 2260 (doing this in my head, but...)
and still peel 25% of the option value off in via theta burn.
Simple is good.
Would you invest in a fund that sells only naked puts?
I think if you do not understand options it is risky to invest in a so called expert trading them with your money since you will have no idea why they are losing your money.
I think if you do not understand options it is risky to invest in a so called expert trading them with your money since you will have no idea why they are losing your money.
I don't know options, but I know the very basics about them. Selling puts, Buying puts, selling covered calls, buying calls, bull put spreads, and leaps. I just bearly know iron condors, and that is about all I know. What I do know is selling covered calls is a pretty safe strategy, and that people I respect buy close end funds that sell them.