A Different use for calls and puts

Investment Analysis Clubs Macro Economic Trends and Risks
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I’m not sure if this is the best place to post this, but since it’s the board I frequent the most I decided to put it here. I’ve been playing with a strategy that uses puts and calls to build and maintain a stock portfolio. I started using puts to buy stock last year and at the start of this year decided to track everything. My goal is to get a consistent return of 12% annually or more. This is the end of the first quarter and i thought I’d put the beginnings results out here for comment. I’m trying to buy mainly high dividend stocks and use calls to supplement the income once I own them. Without getting into a lot of detail, you can see from the table below that I’ve made a profit of 5.62% so far this year, well above the 12% annual rate. Wendy asked in a post earlier whether we’ve hit a bottom in the stock market. This is set up to buy at large dips and sell at peaks. We’ll see if it works long term. I look forward to any thoughts, questions or critiques you might have.

Symbol Company Name Price Div. Yield Put Strike Put Exp. Date Call Strike Call Exp Date Stock Valuation Profit Put Profit Call Profit Dividends Total Profit
RBRK Rubrick $63.66 0.00% $60.00 17-Apr $82.50 17-Apr -2.60% 1.91% 2.08% 0.00% 0.73%
TMDX TransMedics Group $68.58 0.00% $90.00 17-Apr 9.99% 0.00% 3.44% 0.00% 13.43%
CVX Chevron $166.09 3.93% $152.50 28-Mar $167.50 4-Apr 14.67% 1.51% 2.06% 1.18% 9.46%
NVDA Nvidia $109.67 0.04% $103.00 11-Apr 0.00% 2.65% 0.00% 0.00% 2.65%
KMI Kinder Morgan $28.37 4.05% $27.00 11-Apr 0.00% 2.06% 0.00% 0.00% 2.06%
AEP American Electrical Power $106.96 3.48% $100.00 17-Apr 0.00% 2.23% 0.00% 0.00% 2.23%
RF Region Financial $21.42 4.67% $20.00 17-Apr $24.00 17-Apr -2.64% 2.18% 0.52% 0.00% 0.03%
TOST Toast $33.58 0.00% $30.00 17-Apr 0.00% 3.23% 0.00% 0.00% 3.23%
OGN Organon $14.51 7.72% $15.00 17-Apr 0.00% 6.56% 0.00% 0.00% 6.56%
ADM Archer Daniels Midland $47.87 4.18% $42.50 17-Apr 0.00% 1.94% 0.00% 0.00% 1.94%
VICI VICI Properties $32.01 5.40% $30.00 16-May 0.00% 2.20% 0.00% 0.00% 2.20%
SWK Stanley - Black & Decker $76.43 4.29% $72.50 17-Apr 0.00% 1.00% 0.00% 0.00% 1.00%
Totals 3.13% 1.43% 0.89% 0.17% 5.62%

Darryl

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@dxmas413 thank you for this excellent post. It definitely belongs on METAR. This is an investment board – even though many members tend to digress at times ;-).

Wendy

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Your strategy is very similar to what people on the “thetagang” subreddit on Reddit call “the wheel.” They sell puts with an intent to roll the put, but if the stock gets put to them, they sell covered calls until the stock is called away.

It’s a reasonable strategy to attempt to generate income from investing, but like any other strategy, there are risks and trade offs.

For one, it’s important to remember that the premiums from selling the options are not free money. They are payment in advance for taking on an obligation — an obligation to buy in the case of selling a put and an obligation to sell in the case of selling a call.

For another, if you’re executing the strategy in a taxable account, recognize that much of the income it generates will be considered short-term and non-qualified in nature. That type of income is generally subject to your (highest) marginal tax rate.

I can’t give individual investing advice. That said. as a general rule, you’ll only want to sell puts on stocks you’d be willing to own at prices you’re willing to buy them at. Similarly, as the flip side of that general rule, you’ll only want to sell calls on stocks you’re willing to sell at prices you’re willing to sell them at.

If you forget those general rules, it gets easy to get caught up in chasing the premiums for the short sale of the options. That sort of thing can leave you in a position where you own a lot of shares in companies you don’t really want to own, while also selling shares of great companies at prices you’ll later regret.

Regards,
-Chuck

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Under normal market conditions. During period of high volatility, and the selection of the individual stocks which have a higher volatility, will destroy this strategy.

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The thoughts..

  • First of all selling puts is not an income strategy. It is a highly speculative strategy. There is no such thing as guaranteed income or returns.
  • Secondly, when deploying such strategy, first and foremost you need to focus on risk and not income, or returns.
  • I will repeat it again, you manage risks, returns are what you get.
  • Most of your put spreads have just 5% to 10% protection, I assume, you expect either to roll down or turn around and write covered call strategy. We are in a market where the indexes move 2% a day often 4% to 5% intraday, i.e., it drops 2% and then rally 3%, etc. In this environment, it is not sufficient protection.
  • Just 12 names is too short to spread the risk, Typically I use 25 to 30 names as a minimum.
  • I assume you are doing cash secured puts and not selling these in margin, and hoping you will not get assigned.
  • If you are doing cash secured puts, given the current interest rates, and the interest rate paid by the brokerage is less than the market rate, you will be better off doing covered call.
  • I took one of your position NVDA and showing you the returns assuming put expires and covered call gets called away. You will see a 5% difference in annualized return between the strategies.
  • Also, covered call gives you some flexibility in managing your taxes, i.e., you have an ability to convert your stock holding into long-term even when you keep rolling your options.

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Lastly, keep in mind when you are selling options, you are writing insurance. That means you need to be well capitalized, understand the risks better, and manage the risks. It is not a free money.

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Hey guys,

Thanks for the feedback and your concerns. Let me fill in more detail on what I’m trying to accomplish. While I’m selling puts and calls this is not really intended to be a trading scheme. I’m selling the puts on stocks I want to buy and hold long term. What I’m trying to accomplish is buying in pieces when a stock takes a big dip. In the mean time I pocket the option premiums. I set the premiums pretty low and the time line is usually at around 4 weeks. I’m only looking for ~0.5% at 4 weeks out. Once I’ve purchased the quantity I’m looking for or I think the price of the stock is high, I’ll stop selling the puts.

Right now I’m selling calls on the stocks I own, but I’m setting the price pretty far out. When I start accumulating more shares, I’m only going to sell calls on a portion of the shares I own. This hopefully will have the effect of trimming a little profit when the price spikes.

This is the new twist, I’m trying to use them as a portfolio management tool while at the same time adding to the total return.

Since January 1, I’ve only had 1 put get assigned and that was on March 21. If the market keeps dropping, I’ll probably have more in the next 2-3 weeks.

I’m looking at the high growth stocks and the dividend stocks differently.

RBRK - I’m looking to buy more and I set the strike at a price I’d like to buy at. The call is set at the price that is above the all time high.

TMDX - Not looking to buy more presently because of all of the short hit pieces out there. I’ve got the call set at a price that would give me a good profit.

NVDA - I already own quite a bit and was just looking to add some at what I consider to be a bargain price. I probably won’t sell calls on it if I purchase.

TOST - I’m looking to start a small position and have the strike set at a reasonable price.

The dividend stocks really don’t move much. If the market keeps dropping, I’ll probably end up buying quite a bit in the next few months. If not, I’ll keep selling puts and lowering my eventual net price.

I have a separate trading scheme that is a true wheel trade. In that scheme I trade everything weekly and I’m looking for 1.5% per week in premiums. It works extremely well, until it doesn’t. I’ve gone from up 11% YTD to down 15% in the last 6 weeks. I don’t have a ton of money tied up in it, but it’s fun.

Sorry, my original post was really lacking in detail. I was thinking it when I wrote, but left out a lot.

Thanks for the feedback,

Darryl

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How true. Just like with LTBH, when the “market/trade/position” goes “against you”, it still is uncomfortable.
And, “you won’t win em all” applies to Options as well as to LTBH.

I’ve found that the “until it doesn’t” part is ephemeral and mitigated by those positions that “work as planned”.

Like you, I have two “buckets”: the LTBH bucket with 80-90% of assets, and the Wheel Strategy/Options bucket at about 10%. And, like you, the Wheel Strategy is currently meeting my goals.

Many folks read a post, article, YT from THEIR POV… and then respond from THEIR POV.
Roll with it :slightly_smiling_face:.
You’re plan looks solid to me. As long as it’s meeting your goals, keep Wheeling.

:wheel_of_dharma:
ralph