Selling out of the money puts with low risk

[jimmyjazz]

The black swan pays every investor a visit when she decides to show up. If you're fully invested long in the market and the market drops 40%, they your account drops 40%.

If you're selling puts that aren't cash covered, well, that's a different story.

At least recognize that the study included a few "black swans" and PUT won out, regardless.

 

[luisHK]

Quote from newwurldmn:

How does the PUT index outperform the BXM index?
I can buy the PUT index, sell the BXM index and ARBITRAGE!
]

I didn't reread the study today but remember also reading PUT outperforms BXM in CBOE website.

Do you mean you would buy atm calls and sell atm puts, ie buy a synthetic long ? Because I seem to remember another study that claims monthly synthetic longs outperform both PUT and BXM, but with much higher volatility

 

[jimmyjazz]

Quote from newwurldmn:

Why does the put index outperform the bxm?

Because it . . . does?

Almost every month he will create a taxable event. As a result the total amount will be taxed. Either he gets exercised or he doesn't. Of he's outperforming by only 1perxent then he's getting exercised most of the time.

For offshore accounts this is okay.

I brought the PUT index into the discussion to show that as an investing strategy it can be shown to be superior to B&H, CC, etc. in terms of return and volatility. Of course taxes come into play for the individual investor, but those are different situations that can't be normalized. If the original poster uses naked puts to improve his entry position into stocks he is interested, then the short tax concerns are largely inconsequential once he is long and selling calls for that excess return.

 

[newwurldmn]

Quote from jimmyjazz:

Because it . . . does?





I brought the PUT index into the discussion to show that as an investing strategy it can be shown to be superior to B&H, CC, etc. in terms of return and volatility. Of course taxes come into play for the individual investor, but those are different situations that can't be normalized. If the original poster uses naked puts to improve his entry position into stocks he is interested, then the short tax concerns are largely inconsequential once he is long and selling calls for that excess return.

Okay. I figured out why the PUT outperforms the BXM.

RE: Taxes

If he's selling calls he's going to get exercised a lot and each time he does that's a taxable event not on the "outperformance of buy and hold" but on the WHOLE gain.

I'm a short vol guy, but one should recognize that selling options isn't a magical outperformance strategy. If it were, then the big guys would be selling options instead of buying them.

 

[jimmyjazz]

I don't think monthly 2% OTM calls are going to get exercised "a lot". They may not bank every time, but if one is willing to manage their positions, then it should be possible to buy the random ITM call back for a loss. At least now you have a loss to leverage against short term gains, and you don't get tagged on the whole gain come April.

 

[Maverick74]

Quote from shortbleu:

I'm risk averse and have a diversified portfolio of high quality dividend growth stocks JNJ, KO, PEP, MCD, XOM, LO, MO, KMP, WMT, PG, TGT, and so on. I never sell the stocks, collect the dividend along the way, and will continue to do so for decades. It fulfills my objective of making an AVERAGE yearly total return (price appreciation + dividend) of 10%+
I have a cash account and do not trade on margin (I'm risk averse).

As opposed to some other value oriented dividend investors who place a limit order say 5-10% under the current market price with a goal to obtain more value (higher dividend), when I want to own a stock I pay the market price to get in, and never miss the boat. I have friends who consistently said KO or PG were overvalued, placed limit orders and never get filled, now they missed on price appreciation and dividend increases.

I read selling monthly put options on stocks I want to buy (not on margin, I have the cash on hand) can be a good way to decrease the cost basis but what is the opportunity cost of failing to buy the stock?

Say January: Price of stock XYZ is 60 and I sell puts with a strike of 55. If the price goes under 55, great, I improved my cost basis, happy days.

But if the stock goes up to 65, I didn't get in, missed on the stock price appreciation and eventually missed on the dividend if paid that month... I received the option premium but how does it compare to the missed stock appreciation and dividend?

Every month for say the next 6 months, stocks XYZ continues its bullish trend, and each month, my OTM written puts didn't get filled, I could'n't buy the stocks, I missed on the stock price appreciation and dividend, but yes I collected some options premiums every months.

Will the options premiums received compensate for the missed stock price appreciation and dividend?

I guess it all depends on the specific numbers (eg how far out of the money I sell the put, how large is the stock price appreciation, and the dividend etc.) But as a general rule of thumb would you advise to sell puts and collect premiums with an opportunity cost of not getting in a bullish stock?

I read everywehere that low risk and long term dividend investors as I am should consider selling puts to get in a position, but does that really work, what if I never get filled at the strike price?

Can I make your life a little less complicated? Instead of exerting all this energy and stress into buying this and selling that and rolling this that and the other, take a look at IRONX. It's a mutual fund that sells cash covered puts in ETF's and indices. It makes about 8% to 10% a year. Spend the time with loved ones or use your time more productively. I never understood why so many guys try to invent the wheel.

 

[cdcaveman]

Quote from jimmyjazz:

I don't think monthly 2% OTM calls are going to get exercised "a lot". They may not bank every time, but if one is willing to manage their positions, then it should be possible to buy the random ITM call back for a loss. At least now you have a loss to leverage against short term gains, and you don't get tagged on the whole gain come April.

the entire point of this thread was lost... The guy doesn't wanna become a trader... You know nothing of black swans.. as by definition, you know nothing of black swans...

discussing some percentage of moneyness in regards to likelihood of excise is complete randomness...

 

[jimmyjazz]

Quote from cdcaveman:

the entire point of this thread was lost... The guy doesn't wanna become a trader... You know nothing of black swans.. as by definition, you know nothing of black swans...

discussing some percentage of moneyness in regards to likelihood of excise is complete randomness...

Please explain the difference in account damage caused by a black swan event when one is (a) long stock (b) long stock with covered calls or (c) short cash covered puts. I'll hang up and listen.

 

[cdcaveman]

Quote from jimmyjazz:

Please explain the difference in account damage caused by a black swan event when one is (a) long stock (b) long stock with covered calls or (c) short cash covered puts. I'll hang up and listen.

i digress.. i shouldn't have shot back at you , its high jacking the thread.. Maverick makes a good point...

a black swan event can never be predicted... such as worlds end.. or a broker going bankrupt etc..

the ideas and thoughts behind covered call and write strategies has been discussed in great detail on this forum... If you wanna manage book of options, your trading! period.. and in this case the guy doesn't wanna actively manage his book..

a short put, is the same thing as a covered call.. limited upside, unlimited downside.. look at the profit graphs for both of them..

long stock is outright better for someone who doesn't want to "trade" as the guy as explained..

 

[jimmyjazz]

I fully understand the P/L graphs. I disagree with your use of the phrase "unlimited downside" -- it's limited to 100% minus premiums generated over time.

I also understand the original poster doesn't want to "trade", but he was certainly talking about "trading" up until assignment.

I also think the study I linked is HIGHLY instructive in terms of historical performance of various strategies. I fully dispute the idea that naked puts and covered calls are bad mojo, "just because". I realize that conventional wisdom says upside is limited and downside is 100%, but in fact that's NOT true -- stocks SO rarely crash up and downside is LESS limited than long stock. The math proves this out. Returns are juiced and volatility is reduced.

Sorry, but I just don't buy it. Higher returns, lower volatility. Sounds good to me. Keep emotion out of it.