Many software names deep in the money puts have very high implied volatility. There are options with 40%, 50% downside and still have IV at 60%, 70%. For those who have margin account, should look at the names that you like or comfortable with, to sell some cheap puts. There are some unprofitable SW names, where 2x sales Put options are available at decent premium.
As always understand the risk, don’t overdo, don’t chase premium blindly. Have some stops in place.
Just an example, not a recommendation, CRM annual revenue is $41.5 B, at 2x it is $90 B. At current price of $180, Market cap is $166 B, there is $50 B buyback program, now at $100 per share, it is just 2.x of sales, Market cap would be $92 B, probably bit more lower due to ongoing buyback. The company is expected to make around $7 ~ $8 B in profits and around $12 ~ $14 B in free cash flow. Now, you can make your assumptions about how much of this revenue, profit, cash flow may be impacted by AI, and make some adjustments. But on many scenarios $CRM at < $100 B market cap seems a low hurdle.
Now, you can sell $CRM $100 puts for $2.2, and even last week it was trading at $2.75, i.e, it can easily go back there, at least $2.5. If you are selling these puts in a margin account, you are looking at 50% return on the margin.
Again the above is an example, not a recommendation.
What expiry are you looking at? I see $100 puts for around that price for 15Jan27.
Is this a theta play or anticipating a drop in volatility (I’m assuming the latter)?
I anticipate the price will stabilize, that could lead to volatility coming down, and together the premium could compress and I can close the trade with profit. Also, given there is a huge buyback program, that will act as a bid. While this is my general approach towards put selling, in some specific cases, I am willing to take the shares if I consider the market price is dislocated in the short-term.
Also, the put selling forces me to look into many different companies. If I don’t have a skin in the game, it is difficult for me to follow the companies.
Thanks, that’s what I was assuming. I have been using options to supplement my growth investing for a while now, but recently have started using portfolio leverage to sell puts so that I’m not tying up cash (I still sell CSP often). I am much more conservative with these given the risk and manage them closely, but this has given me a very meaningful additional return on top of the rest of my portfolio’s performance.
I have been toying with the idea of having an account that holds only lower beta blue chip stocks or ETFs, selling conservative covered calls on the positions, and then selling portfolio secured puts on other tickers (I would probably limit to 50% of portfolio buying power) to essentially double dip on options premium. This would be risky in a sharp downturn but with long enough expiries and managed closely I think you could return 1 - 2% per month in premium while also enjoying capital gains from the core positions. There’s a youtuber that I follow that uses a similar strategy but sells very long expiry puts (1 - 2 years). Personally I prefer much shorter expiry and have been sticking with 30 - 45 DTE (I know tastytrade preaches this is the most optimal range, and my experimenting with Claude to develop a trading strategy tends to also recommend around 30 DTE for most optimal ROC based on risk.
First of all understand, selling puts is selling insurance. You take all downside risk for a small premium. The longer the period, the risk is higher without sufficient premium compensating the risk. Generally premium is slightly higher for risky names, for ex: SW names or companies that are having potential issues. Most individual stocks (even blue chips) can easily move 30%, 40% over 6 to 9 months period. Limit risks with spreads.
Lastly, don’t overdo. Good luck.
It is indeed a form of insurance, after all, that’s why people are willing to pay you real money for it! But it can also be looked at as a way to purchase shares of companies that you like. I started looking at it that way about a decade ago after reading that Apple contracted with a large Wall Street firm to sell ITM puts and buy their stock via exercise as a portion of their buyback effort. So for many of the stocks I own, and am willing to increase my holdings (at the right price), I routinely sell puts on those shares. Most of the time they expire worthless, and I am happy to use that money to cover some of my living expenses. Sometimes they are exercised and assigned to me, and again I am happy because I get to buy shares at a slightly lower price (strike minus premium). One example is Berkshire, I periodically sell Berkshire puts at various levels, and they almost all have expired worthless. The only one that was exercised and assigned to me were some March '23 305s, and I still hold those shares today, now at $480 or so. Just last week, the 460 strike puts that I sold expired worthless. But I’ll keep trying to snag some more shares at a lower than prevailing price.
I had beaten this particular idea to death. It is incorrect way of looking at it. Even though, I also do that. But, from my experience I know it is wrong. I sell put’s, in fact, tons of it. Except for few scenarios like $TLT, where I can take the shares and turnaround start writing calls, I now routinely close the trade. Because, most of the time, my thesis has failed is the reason the stock is hitting the price. For ex: I have a large $C Jan 26 $60 Put, if citi gets to that price, then my entire thesis is wrong. Ideally, I should step away from the trade, move to the sideline, wait for sometime and re-assess my thesis.
This is not for buyback, when options/ RSU’s are exercised a certain number of shares are sold by the employees to cover taxes, and to cover that they do that. For a company like $APPL, trying to make few bucks through puts is the last thing their treasury wants to focus on.
But thats just the thing! My thesis is CORRECT in those cases. That’s because my thesis is - “I like Berkshire as a long-term holding and I believe when it has a brief drop it is a good time to buy more.” So, if it happens to fall while I am short puts then that is simply a month of good luck because I get to buy at a slightly lower price. Now, on the other hand, I only sell puts at strikes that are VERY attractive to me, and therefore I don’t make as much “yield” as I could make selling puts closer to being in the money. For example, I old the 460 strike Berkshire puts last month because 450-something net is a nice price for me right now. I didn’t sell the 480 strike puts because ~470 isn’t as nice a price to me. Even though selling the 480s and having them expire worthless would have yielded quite a lot more money to me. In general, I strike a balance between earning “a little” yield from the expired options, and safety regarding getting a really good price if assigned. I never sell puts on stocks I don’t like, heck, I can’t remember the last time I sold puts on a stock that I don’t already own some of! So if I don’t like Citibank, I wouldn’t see puts on its stock.
In this case, the SEC filing specifically said that it was done for buyback purposes. “The company has entered into a contract with Big Wall Street firm to use ITM puts as a method of buying back X,000,000 shares as part of our share buyback plan authorized in 2011 and updates in 2012 and 2013 … blah blah blah”. (I don’t remember the exact years in that filing, but this was the gist of it.)
I doubt Apple made those extra bucks, much more likely the big Wall Street firm took most of it.
This is a fallacy people fall for. Let me paint a picture, tomorrow Berkshire is slapped with $100 B cost for their utility and another $100 B catastrophic loss on their reinsurance business, and price drops to $250, will you still be interested to buy at those ($460, $480, or whatever your put strike) prices??? You are assuming that the business will be steady and therefore the price won’t go there.
Your ex-ante thesis may not be relevant ex-post.
Most folks don’t understand or just argue past the point. When you internalize and understand the above, you will understand why you will close the trade and move sidelines.
The price I am willing to pay for the stock of a company varies ALL THE TIME. As the years go by, if there are things that happen that are good for the company, I am willing to pay more for the shares of the company. And if things that are bad happen, I am willing to pay less for the shares of the company. But the decision on price that I make is when I sell that option, not when the option is near expiry. Near or at expiry, the decision is made by the person who purchased the option, not by me. So, in 2023, I was willing to pay 305, so I sold the 305 strikes. And in 2026 I am willing to pay 460 so I sold the May '26 460 strikes. In a few weeks I may be willing to pay 470 so I might sell the 470 strikes. And in 2028 I may be willing to buy at 550 so might decide them to sell the 550 strikes, etc. And if something catastrophic happens, and the stock drops to $250, I might decide to sell the 240 or 245 strikes, who knows? (I did that with Apple each time it dropped 30-40% over the last decade or two).
But I generally agree with you regarding the trading of options, once your desired gain is reached, you exit the trade and find the next trade. That’s the smart play. And I do that regularly for all my covered calls, as soon as time value has decayed enough, I roll them to the next month and pull some cash out of the trade. And I do that for all my spreads, I just had a May 430/460 BRKB spread that probably would have reached expiry at full value of $30, but I had a standing order to sell it at $29.50 and it sold a week or so before expiry.
But for my very conservative puts, I don’t see the point. For example, I sold some Apple June '26 130 strike puts a couple of years ago, and since they are so likely to expire worthless next month, I don’t see any purpose in closing the trade. I’ll just wait until they expire worthless. I am not selling any new Apple puts anytime soon, I only sell puts during/after a downdraft.
It’s possible that I have this attitude because stocks generally go up, not down (over longer periods of time). So most calls I roll, most puts I allow to expire.
Wrong. This simply shows you cannot accept your thesis is wrong or accept loss.
You are missing the point. I am not talking about closing the trade when in all likely scenario it will expire worthless, I am talking about your confidence that you will be willing to buy at a certain price. Between the time you write and the expiry date, if the thesis change, or the price is declining to get near your strike price, your willingness to close the trade…
There is a theme that i can see through your posts is risk management. If you want to survive in the business of writing insurance, you need to have a stronger risk management. That includes willing to accept a loss in a trade, because you can make money elsewhere.
When you write puts on names you already own, you are writing because you have some understanding of the company, not because you want to buy more at lower price. Think will you be buying the stock and write a deep in the money covered call???
Do not confuse option trades with your investments. They are two different games. The rules of engagement are different.
Naturally, if some event occurs that makes me not willing to buy at that price, I will ALWAYS consider ending the trade, or at least shifting it price/date as appropriate. I think the last time I had to consider that was during the UNH breakdown a year or two ago. Luckily I had no outstanding short puts at the time. But after the breakdown, I naturally shifted the price range in which I sold puts (Jun '25 were strike 250, and Aug '25 were strike 250, down from strike prices of 440-480 in 2023!)
Well, yes, if I find it advantageous to do so. In 2024, a year in which I wanted to take substantial long-term capital gains, I sold a bunch of stock via selling calls in-or-near-the-money.
I think this is where we differ. Some of my options are part of my investments. And other of my options are trades. Often when I buy a BCS (bull call spread), if the trade starts going too deeply against me, I get out rapidly. Take the loss, and wait for the next trade.