Selling Premium from a Macro Trader's Perspective

[tnatrader]

Sold 3 more puts and 5 calls. Wow, recently these markets are not doing any kind of back and fill, just straight up Vs up and down. My macro analysis tells me to continue to do these small position sizes, but my gut wants to do bigger positions asap. I must learn from last year and continue to remain disciplined. #1 goal is a smooth equity curve, even if it's not as steep as it could be.

Looks like all but 300 of my shares will be called away and those might also be called away as I plan to sell another 3 calls tomorrow. Looking to make up my delta with selling 3-4 more puts. This rally can't have more to go, can it? Luckily with these options, I will still be making money.

 

[tnatrader]

I'm neutral on the short term outlook. On one hand, the longer we can hang around these highs, the more likely it's consolidation before taking it out. On the other hand, it's hard to have conviction when we clearly have had a big rally (trying to stay away from saying overbought) and are bumping right around resistance.

Longer term, I'm bullish or at least, not very bearish. Therefore, let's keep selling covered strangles/straddles.

Today, I sold 3 48.5 straddles for $1, all expiring tomorrow. For tomorrow, looking to something similar.

As an aside: it's getting to a pet peeve when people keep explaining option selling as an "income strategy." I know what they mean, but it's extremely misleading to newbies as they start thinking that they can put a lump sum in an account and collect a paycheck every month. Really, income strategy is just a strategy where the equity curve is as smooth as possible and the slope determines the "amount of income." This goes for dividend investing too--I can't tell you how many investors, including my own family members, get bamboozled by high payout etf's that cannibalize their total returns just to send out monthly income. Total returns is how you should analyze investments, NOT by just looking at income (realized) and forgetting about your original investment (unrealized).

 

[tnatrader]

As expected, all of my calls got assigned while my puts expired. This puts my equity position back to flat with 4 48.5 straddles...and a put. If we open flat on Monday, I'll buy 100 shares and sell 4 more puts.

We broke resistance on the SPX and if we have follow through on Monday, I most likely will have to abandon my short term neutral to bearish thesis. If that happens, my put selling position size will double from 4-5/day. This year reminds me of 2011 or 2012, one of those years where we just kept getting V shaped recoveries when everybody was expecting W's.

 

[tnatrader]

Instead of buying the 100 shares/sell 4 puts as I planned, I just bought 500 shares. Later on sold another call. What to do when your brain is bearish, but your heart is bullish? I guess you just end up selling covered calls... Portfolio now looks like 5 CCs and 5 CSPs. If UPRO stays above 48, I make money this week, but a part of me really don't mind if this thing takes a dump.

Big risk is if Fed flip flops again (or the market just might throw a tantrum anyways to remind Powell who's in charge). Inflation measures are all around 2-2.5%, limiting the Fed's flexibility. Also breadth is weak on this latest thrust and we are technically still in a "resistance zone." A few more big updays and I'll surrender my short term (irrational?) bearishness, but until then, we are going to sell a bigly lot of...3 puts tomorrow.

 

[tnatrader]

Sold 4 more puts before the late afternoon sell-off, but these position sizes are so small, it's not a big deal. Looking to sell another 3 puts at least tomorrow at the open and possibly another call if we keep dropping. New breakeven for the period since 3/18 if UPRO stays above 47.5.

 

[tnatrader]

So my short term bearish thesis is completely blown out of the water, but luckily my longer term sanguine outlook saved me from throwing money down the drain. Last 2 days did the usual selling covered strangles. Tomorrow will be more put selling, but if we keep rallying, I will have to buy some shares back on Monday as I will end up short from my ITM calls.

 

[tnatrader]

Was too busy to update this for a while, so let's get to it: bought a bunch of shares in this recent dip and sold covered calls. It worked out well, but looking back I recognized a bunch of mistakes. On one hand, that's great that I'm still learning, but on the other hand, it's disheartening that after all these years, I still make some stupid elementary mistakes.

As I left off last time, I was feeling bearish, but the markets kept trucking. I eventually relented right as the market dipped on the 22nd. So elated to buy in "at a discount" (always a mistake when you feel that way), I bought shares instead of my usual method of selling puts. Felt like shit for a few days, especially when SPX was near its lows of 2780s. The only thing that saved me was that even if my last bearish tilt was wrong, I trusted my current bullish analysis. The bad feeling wasn't due to an underwater position, but due to uncertainty of my opinions. When UPRO recovered to above 48, I started selling calls.

Lesson learned: my analysis tells me to go long upro. My emotional makeup tells me to do this by selling puts, not buying shares. The error of stocks going up more than my premo don't make me feel as bad as losing more from a long equity position.

My goal now is to slowly replace my shares with short puts. This was a stupid thing to learn as I felt I learned this many times already. It's always a moment of temporary greed and it worked out this time, but maybe in the long run, it does more good if I got hammered instead.

Next week: sell CCs every day as long as UPRO stays above 48.5. Sell a few puts every day as well. Here's to new highs for the portfolio every week.

 

[tnatrader]

Probably should just make this a weekly thing since I'm so busy (aka I'm lazy). All my calls got assigned so I'm back down to 200 shares. To get some delta back, I sold 10 ATM puts near end of Friday exp next week.

Here are the closed trades.

I think this bull market continues. There's no secret sauce analysis here. It's just one of those times where the market wants to fuck over as many people as it can and right now the pain trade is up.

My Official Analysis (patent pending) is that we won't correct more than 20% so I'm comfortable slowly selling puts, which translates to around 5 puts a day. Once again, my analysis is much more bullish than I'm emotionally able to handle so let's just "hope" we don't go up too much...

As an aside, I think option sellers need to be careful touting the "cost-basis reduction" benefits of selling premium. It's much more logical to break down the premium and assignment into different trades. So if you sell puts for a year before getting assigned, your BE is super low, but recognize that if you sell a CC that gives you 2% return near that BE strike, you are basically making 2% for a whole year. It's as stupid as buying a stock at 100 which tanks then holding it for a year before it pops back up to 102 then selling it.

The correct way to approach this is to mark to market all positions at all times. If you are holding any position, ask yourself would you buy this position today? No? Then it's probably best to gtfo.

For my personal trading, I find it best to break down the cost basis reduction by weeks. So if I sell puts that expire, they are locked into my gains column and that's it. On weeks that they get assigned, the premium "reduces" my basis for that week. I begin to sell CCs at strikes that depend on my outlook, NOT where they break even. Of course, I end up selling more when we rally more, but it's analysis-dependent, not BE dependent.

 

[tnatrader]

Just a quick update: sold a bunch more covered strangles. I did sell 10 puts on Monday since I was so close to flat and wanted to add some delta quick. In the future, I may just buy 500 shares instead. Vol really seems dead, but I'm willing to baghold about 3600 shares so I'm ok with assignment either way. Analysis still says bull market marches on.

 

[tnatrader]

Did not think that we would gap up on Friday, but looking back, it seems like an "obvious" consolidation period and Friday was where we broke above. Regardless, I had to buy 700 shares at the open or else I would've been net short, which would've been ridiculous as my thesis said I should be long. Bought another 600 at the open today and will be slowly selling calls.

Some things to identify for the future: it seems better, at least for my psychology, that when I want to urgently add delta, do so buy buying shares instead of doubling my put selling size. If it goes against me, it's still 500 shares instead of suddenly 1000 from being assigned. If we go up, my 500 shares are still good whereas my 10 puts don't do squat if we go up further than the premo suggested.

Tomorrow morning, assuming no crazy gaps, sell a call and 5 more puts.