[QUESTION] - Options trading for INCOME

Cabin111 said:
I will share a repost from a few days ago. I believe I can (and have) earned more income by doing covered calls, that just a buy and hold on certain stocks. The stock MUST be stable. I have learned from GM and GE this can be a killer to my strategy.

Below is some copy and pastes:

Pekelo said:
If the writer has stocks too aka covered calls, it is not a loss for him, just a predetermined gain. Sure he is missing out on the stock's rally, but probably he is still happy with the profits.

Me

That is me for the last 20 years...

I have bought and sold (optioned away) ADM for the last 14+ years. 2006 the price was $41. Today it is at $39.43...Very boring you would think. In my two different Roth IRAs anything I earn is tax free. It has held it's dividend for about a gazillion years!! I do covered calls on this stock (my favorite hold). If it gets called away, I do not have to wait 31 days to buy again. Dividend is 3.73%...Not bad in this fed (free money) environment. Predetermined gain for the most part...Everybody eats!!

Illini Trader said:
I worked for ADM for 8 years and it is (at that time anyway) a very well run company and an excellent choice for your 14 year strategy. I am curious as to how you navigated the the decline from 46 on Feb 11th to 29 on March 23rd. This appears to be a covered call strategy nightmare scenario. I know over the long term you are fine but did you just bite the bullet and keep selling weekly calls to mitigate the capital decline in your base asset? Did you buy a OTM put to hedge the potential decline in ADM once it started down in force on Feb 25th?

Thanks for reminding me of good ole ADM. I am thinking of doing this strategy on ADM as an experiment myself. I might even do it in a Trading Journal to document how a "Covered Call -- Cash Secured Put" strategy works in real time over different market conditions. However, the high volatility right now is probably not the best time to start.[/QUOTE

Me

Much more basic than you might think. Very little thought process involved really. Buy when you believe it is low to value. If it is low and you know a dividend is coming soon, buy. Once a dividend is declared, many financial advisors push ADM to retirees and widow and orphan type people.

I was a contract worker for Hershey's years ago. They would work on their quarters. They would use duck tape and super glue to keep they plants running!! They had to make their numbers for that quarter (bonuses). Once the quarter ended, they did all the work. You knew there was deferred maintenance that would kill the next quarter...But the company was solid. You may have seen the same thing at ADM.

So my simple answer is to do leaps...Up to a year and a half. If the stock is way too high to buy, I will wait till it drops a bit. Even put my price in 20 cents lower than the bid/ask...Waiting for a dip. It's not going anywhere. My wife and I have ADM in 5 different accounts...Two trust accounts and three Roth IRAs. When one gets called away we wait then buy on the dip. VERY BORING!!

I am NOT Warren Buffett...Berkshire Hathaway. But he bought up Sees Candy and GEICO Insurance...Then he bought a railroad. A RAILROAD!! Who saw that coming?? Why?? Because he saw value where others did not. I'm eyeing one company right now. When I pull the trigger, I will post (value company).

I will also say this strategy may not make as much as buying QQQ or the S & P 500 and reinvesting the dividends. Yeah, I get it. But I've made between 5-6% over the years (when money market funds were at 2 to 3% you would make money on the float of the covered call money...Compounding, small amounts).
Just me...
More...

Just saw a few minutes ago...Like clockwork!! About 03.4% dividend...

https://finance.yahoo.com/news/adm-directors-declare-cash-dividend-163000231.html
 
Tall Mike said:
Hey ET Community,

Noob here with a noob question.

Why do beginners or the general public think that options trading can provide you with INCOME? Just like trading any other instrument you P&L and risk are going to fluctuate just like with any other position. Why does everybody think there is something magical about options that can provide you with a stable income as opposed to any other type of trading?

Maybe I am missing something, am I thinking about this the right way?

Yes, you may receive an initial "credit" upfront, but the position can still move against you and you can still lose money just like you would see with any other type of trading... equities, futures, forex, etc.

I would appreciate some clarification or anybody that trades options to weigh in on this.

Thanks, guys!
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The power of options is mainly in leverage and cash flows. It is a very powerful concept if mastered but grossly misused by dilettantes. Options can be used for income, but it usually means for ever 10k you make in "income" you miss something like 40k if you simply traded the underlier, or you make 2k when the market is flat (where you make nothing holding underlier), and of course lose 30k when underlier moves against you.
 
CashDelivery said:
The power of options is mainly in leverage and cash flows. It is a very powerful concept if mastered but grossly misused by dilettantes. Options can be used for income, but it usually means for ever 10k you make in "income" you miss something like 40k if you simply traded the underlier, or you make 2k when the market is flat (where you make nothing holding underlier), and of course lose 30k when underlier moves against you.
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It's all about Sharpe. If you make 1% per year in a bank account, that has Sharpe ratio = infinity because there's no volatility involved. So options for income is about higher yield than a bank account but lower volatility than plain holding the underlier.

For instance since 2000 (the last 20 years) the S&P 500 has a growth rate of about 7% but a Sharpe of about 0.4. That's not so great and depending on when you enter your position, you may start with a huge loss.

So if you can make 5% or even 7%, not to talk about 10% in options with a Sharpe of 3-5 or more, that's what "income" with options means. It usually also means the higher the yield the lower the Sharpe.
 
Aquarians said:
It's all about Sharpe. If you make 1% per year in a bank account, that has Sharpe ratio = infinity because there's no volatility involved. So options for income is about higher yield than a bank account but lower volatility than plain holding the underlier.

For instance since 2000 (the last 20 years) the S&P 500 has a growth rate of about 7% but a Sharpe of about 0.4. That's not so great and depending on when you enter your position, you may start with a huge loss.

So if you can make 5% or even 7%, not to talk about 10% in options with a Sharpe of 3-5 or more, that's what "income" with options means. It usually also means the higher the yield the lower the Sharpe.
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A lot of prop firms prefer the Sortino ratio over Sharpe. Positive performance volatility is a good thing. It's the nightmarish negative P&L volatility and max drawdowns that keep risk managers up all night.
 
VolSkewTrader said:
A lot of prop firms prefer the Sortino ratio over Sharpe. Positive performance volatility is a good thing. It's the nightmarish negative P&L volatility and max drawdowns that keep risk managers up all night.
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How do you deal with it, if you don't mind me asking, are you short futures pair trade (with short bias), or do you maintain a long vol portfolio and scalp gamma in order to pay the bill? How do you deal with the timing issue of your short vega positions?
 
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Atikon said:
How do you deal with it, if you don't mind me asking, are you short futures pair trade (with short bias), or do you maintain a long vol portfolio and scalp gamma in order to pay the bill? How do you deal with the timing issue of your short vega positions?
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It kind of depends on what you have on and what you're trading. If I've been buying OTM calls and selling OTM puts in a trading session, like what many SPX and NDX MM's are stuck doing all day, then I'll pay up to buy some far out "garbage puts" to minimize the damage on a correction. The same goes for "garbage calls" in right tail risk products like grains, BTC, and probably big upside stocks like TSLA and AMD.

Not a big fan of buying far-out wing teenies (less than < 5 delta) outright, but I'll definitely buy them ratio-ed against short "meaty" puts or calls to protect against an outlier move. If I'm stuck short gamma, then I'll keep my negative gamma scalps tight to stay ahead the underlying if its trending.

With short vega positions, I'll often butterfly or condor around the shorts to guard against an unexpected move, vs just being short straddles or strangles outright. And I tend to stay away from buying ratios with overweighted legs (e.g. 1 x 3's and higher).

You don't want to get a reputation as a trader that blows out accounts. You always want to live to fight another day.
 
VolSkewTrader said:
With short vega positions, I'll often butterfly or condor around the shorts to guard against an unexpected move, vs just being short straddles or strangles outright. And I tend to stay away from buying ratios with overweighted legs (e.g. 1 x 3's and higher).
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Which do you normally prefer, butterfly or condor?

Thanks.
 
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