Selling out of the money puts with low risk

To me, i'd rather buy LEAPS on the index in market crashes, then play some routine selling of puts or CC type of strategy... Buying cheap premium is way overlooked to me..
 
Quote from shortbleu:

Thanks everyone for your input.

I came to the conclusion options are not for me as:

I don't want the accounting hassle as I never sell and never pay capital gain tax. The only tax I pay is on the dividend and I don't want to get involved with paper work.

If options can only make me 8-10% a year, assuming its by rolling the options each month, I can make easily as much by just being long the stock long term collecting the dividend (buy and forget).

I don't have the time to monitor adjust the strategy.

I have a portfolio of 70+ dividend stocks, none of them weight more than 2.5% of portfolio value. I could not put 70+ strategies in place and doing it for only one stock would be a lot of effort for little money compared to the 70+ others stocks.

Margin to get a juicy P&L. I will never do this. My main goal is income and capital protection. Taking high margin risk to make 11% instead of 10% isn't worth the risk.

Like Warren Buffet, I will stick to invesment I understand and will leave options to rocket scientists.

Thanks again for your input, now I do know these strategies are not for me.
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I can't help but say that if you're consistently making 10% why not explore call-writing as you NEVER sell the stock? I'd be curious to see how much more you would have made over the last few years.
 
Thanks all for your comments.

As the OP, I've been astonished by the level of complexity of the options strategies discussed in this post. You guys have much more technical knowledge than I have but still, I can see a lot of disagreement between you guys on whether writing options should be used or not to increase returns of a long term buy and hold dividend growth stocks portfolio.

You guys are the experts and a lot of disagreement in your posts makes me believe I stand no chance to increase my return using options as my knowledge in this area is very limited and my experience in-existent. If I were using options, I would be like a lamb circled by wolves or a fish in a sea of sharks.

The post below from Maverick74 makes a lot of sense to me (big thanks to you Maverick74) and what you described (the big potential upside of being long stock) has just happened to me:

I bought shares in symbol MOLX (Molex Incorporated) at $27 in March 2012, and on Sep. 9th 2013, the share price jumped from $29.34 to $38.65 (+32%) following the announcement Koch industries was acquiring MOLX. Since March 2012, I made a +43.1% paper profit (I haven't sold my shares). Not bad at all as a return for an investor like me who did nothing (just hold the stock and be patient). In the meantime, I've been collecting an increasing dividend. If I had used an options strategy, I am sure I would have missed the big upside.




"Maverick74


Alright, let me try this again. Yes, your volatility is lower with the short put because you are laying off all the "upside" volatility that you actually WANT to have. If you sold puts on TSLA when it was $30 and locked in a measly $2 while the stock runs to $150, your short put has MUCH less volatility, but not in a good way! And before you talk about how rare that move is, all it takes is one 100 pt move like that to make up for 50 different trades where the stock doesn't even move at all. Trust me dude, it's a mathematically inferior strategy.

Most of the studies done on this type of strategy are done with an index and yes, an index will probably perform the most efficiently because indices in general have the least upside potential. So it only makes sense that if you are giving away the upside, you want that upside to be as small as possible."
 
I know the experts know this but posting it for the less informed. For US taxpayers, you have to have one year's worth of ownership in a stock WITHOUT covered call writing on it or else you don't get any long-term capital gains upon sale. Covered call writing suspends the LT capital gains clock. After 1 yr, go for it, doesn't matter anymore.
 
Quote from SteveH:I know the experts know this but posting it for the less informed. For US taxpayers, you have to have one year's worth of ownership in a stock WITHOUT covered call writing on it or else you don't get any long-term capital gains upon sale. Covered call writing suspends the LT capital gains clock. After 1 yr, go for it, doesn't matter anymore.
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Interesting. What a strange rule.
 
Quote from SteveH:

I know the experts know this but posting it for the less informed. For US taxpayers, you have to have one year's worth of ownership in a stock WITHOUT covered call writing on it or else you don't get any long-term capital gains upon sale. Covered call writing suspends the LT capital gains clock. After 1 yr, go for it, doesn't matter anymore.
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Wow, thanks for the heads-up. It would seemingly make a lot more sense to pay ST gains on the calls and LT on any gain made on the underlying when it gets liquidated, but maybe I'm missing something (double tax, etc.).
 
let me just add my 2 cents because I do a little of this myself. What is do is sell the puts on margin. I'll give an example.

If my account has 100,000 I will invest the 100,000 in the exact kind of companies you mentioned and then sell puts on 50,000 of margin on those stocks I want to own. There's several reasons I do this

1. you dont have to pay margin on the puts
2. I want to own the companies anyways
3. If I am put the shares, I do monthly contributions to pay off that margin.
4. I never own actual stock on margin for an extended period of time. of the 50,000 worth of puts - if I am put 10,000 worth of stock I will make monthly contributions to account until the margin is paid off and then continue selling puts.

I think this strategy only really works if you are making additional contributions to the account or else you will be paying too much in margin interest when you actually are put shares.

But I've been able to turn 15-20% returns a year into 25%ish returns. Been doing this for the last 3-4 years and I detail most of my activity in my journal if you want to look there also.

Currently right now I have puts sold on DLR and KO that expire in January (I typically do 4-6 month puts)
 
Quote from Took2Summit:

let me just add my 2 cents because I do a little of this myself. What is do is sell the puts on margin. I'll give an example.

If my account has 100,000 I will invest the 100,000 in the exact kind of companies you mentioned and then sell puts on 50,000 of margin on those stocks I want to own. There's several reasons I do this

1. you dont have to pay margin on the puts
2. I want to own the companies anyways
3. If I am put the shares, I do monthly contributions to pay off that margin.
4. I never own actual stock on margin for an extended period of time. of the 50,000 worth of puts - if I am put 10,000 worth of stock I will make monthly contributions to account until the margin is paid off and then continue selling puts.

I think this strategy only really works if you are making additional contributions to the account or else you will be paying too much in margin interest when you actually are put shares.

But I've been able to turn 15-20% returns a year into 25%ish returns. Been doing this for the last 3-4 years and I detail most of my activity in my journal if you want to look there also.

Currently right now I have puts sold on DLR and KO that expire in January (I typically do 4-6 month puts)
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hmm.. good utilization of available margin. so u r sure u dont have to pay any margin interest.. ?? also 50K.. margin.. in event of a black swan, say the very stocks u are put fall like crazy. then 2 things. first of all your original portfolio is reduced and u will get a margin call, and u will have to come up with a LOT of principal in a short period of time.. since 2009. SPY has been jumping 20% easy.. so in a bull market this all looks v rosy and we tend to extrapolate a few years to eternity. So all I can say is... the 15 to 25% jump comes with a big risk taking venture.. but hold on. even holding simple stocks which are growing 15% annually comes with a risk !. market has priced everything in.!!
 
once like clock work in 2007 period.. i held 100 shares RIG.. rode it up from 50s to 155 some how my timing was good and each month I was selling OTM calls on RIG and never getting assigned. my run came to an end when I got assigned. so in effect I rode up the appreciation and got premiums.
dont ask me later what happened when I tried selling naked puts of RIG in the hope to getting the stocks for cheap.. i did buy it for over 100.. LOL.
 
Quote from darwin666:

hmm.. good utilization of available margin. so u r sure u dont have to pay any margin interest.. ?? also 50K.. margin.. in event of a black swan, say the very stocks u are put fall like crazy. then 2 things. first of all your original portfolio is reduced and u will get a margin call, and u will have to come up with a LOT of principal in a short period of time.. since 2009. SPY has been jumping 20% easy.. so in a bull market this all looks v rosy and we tend to extrapolate a few years to eternity. So all I can say is... the 15 to 25% jump comes with a big risk taking venture.. but hold on. even holding simple stocks which are growing 15% annually comes with a risk !. market has priced everything in.!!
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I am positive I don't pay any margin interest. Could just be my brokerage but I've been doing it for a while and dont get charged. I also only sell puts on very blue chips companies, my portfolio also owns very blue chip companies. I would not have had a margin call in 2008.
 
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