I own some shares of stocks for a very long time that have losses (some almost total losses). I’ve been waiting to sell them during a year in which I can offset those long-term losses against short-term gains, for a slight tax advantage. This (2025) is that year. I just realized this week that since I am selling the shares anyway (to take the losses), sometime between now and the end of December, I can use call options to either get a better price, or to eke out some small gains in the interim. Therefore, starting this week, my plan is to sell call options that are slightly out of the money each month until they are either called away or until they expire worthless.
Seems like a good strategy to me. Am I missing something? Is there a better strategy for this type of scenario?
Just for some color, one of the stocks in question is LC. I bought some at the IPO (12/11/14 according to my tracking spreadsheet), and then some more shortly thereafter, and then sold a portion (for a nice capital gain in 2021), and still hold the remaining portion. Since then, the company lost its luster, and did a reverse split, and now I am sitting on some losses. Yesterday I sold my first calls on these shares, an Aug 15 strike. Stock was trading at 13-something at the time.
Not that I can see, especially since you are doing this all in the same calendar year. The one quirky thing would be if you didn’t lose the shares by the end of the year but did harvest some premiums on the calls. Then you would be paying gains on the collected premiums this year without any loss from the shares being sold to offset it. However, you’d eliminate this problem by making sure you sold the shares outright before the end of the year if they haven’t already been called away.
Curious to hear if you or others might be thinking any differently.
Either way I will sell the shares by Dec 31st to realize the loss in 2025.
In general, gains from short options are considered to be short-term gains and taxed at the normal income tax rates. In fact, most of my short-term gains come from short options. Those are the gains that will be offset by the long-term losses in these loser stocks.
I’m wondering why I didn’t do this in previous years! Live and learn. Last year I purposely sold some shares (with very large long-term gains in them) via call options, but that was “one and done”, not a monthly thing.
Been using options as an income stream for some time. I regularly use Call options to unload stocks…for money I don’t need now. Basically, getting a bit of a premium for things I don’t want to keep, but don’t ‘need’ to sell is part of my strategy.
Right now I am trying to get a bit more return on Sentinal One at the moment.
No other way to try to eek out a bit of return. Just make sure you are not price anchoring, which it sounds like you are not. Good luck.
Yup. Sounds like you’ve already got this part down. The key is making sure everything hits the same tax year so the long-term losses offset the short-term gains.
I do something similar, though more in IRA’s. I’ll even use it for calculated trims or adds around core positions. For instance, if I thought “yeah, I’d trim some NVDA at $175”, I might sell a covered call for a strike plus premium totaling $175 or above. I’ve also thought “yeah, I’d add a bit more NVDA at $160” and sold a cash covered put at a strike minus premium totaling $160 or less.
The key is being willing to trim/add the shares if the strike price hits. I’ve been pleasantly surprised at how much I’ve been able to collect in premiums over the years while waiting for an trim/add to hit at my target price.
This! Some of the boards I follow don’t accept options discussions and many of my IRL friends think I am talking magic…but yeah, this. (I know you know Stocknovice.)
In my case, I regularly sell cash covered puts on stocks that I am willing to buy at that price (strike minus premium). In fact, more than willing in many cases, sometimes extremely happy to buy additional shares at those prices. But most of those puts end up expiring worthless and cause a steady stream of short-term gains. This year, I intend to offset those short term gains with old long-term losses. I couldn’t do it last year because last year I took a lot of long-term gains, but this year, I am avoiding long-term gains as much as possible.
One example is Berkshire. Over the last few years, I’ve periodically sold puts in an effort to increase my position. Unfortunately, they’ve almost all expired worthless. The only ones that were exercised and assigned to me were a bunch of 305 strike price ones from March 2023. Meanwhile I consider all the gains from those worthless puts as an effective reduction in basis (obviously I can’t treat it that way tax wise, but rather for the purposes of measuring my returns in that company).
The call premium will be added to the sale price and you will not incur any short-term gain/ loss. For ex: you have a cost basis of $100 and today the stock is $20, and you sold a call for a premium of $5, then your sale price is $25, and $75 is your long-term loss.
Lots of funny math. When it is a cash secured put that didn’t get assigned, and you have no idea when you will ever get assigned, how will you start measuring your holdings starting period? These are useless gymnastics. If you are doing cash covered puts, you will be better off doing covered call. You earn slightly higher return. Also, you have a clear starting date for the shares you own, therefore it allows you to have a long-term gains.
Since I do not know what kind of numbers you are looking at and what your intended use of the resulting cash is, I have no “actual” opinion.
It seems to me you are just prolonging a poor situation and if the intended use of the cash is to invest, I believe you may be passing over more in possible gains than you will get by engineering this strategy.
It just is not something I would do.
If I do not want to own an investment for sound reasons, I sell it. Period!
That allows me to get rid of the headache and move forward.
Yes, of course. I was referring to all the previous options that expire worthless until the last one that is exercised and assigned and results in the stock being sold. Same applies when selling puts, I may have sold puts 5 times with the first 4 times having expired worthless, and the 5th time finally being exercised.
It’s not funny math, it’s just a way to visualize, and measure IRR, in a specific stock investment. Here’s an excerpt from a recent example. I’ve been creating a position in OXY (coat-tailing WEB) beginning last year. Admittedly, I am currently holding that position at a loss, however, the sales of puts over the last year and a half have mitigated the level of that losing position, and sometimes have allowed me to buy shares at slightly lower than prevailing prices. For this example, I’ll use units of 100 shares for each trade, just to make it simpler option-wise (because they trade in units of 100).
1/26/24 -100 58 -5800.00 Share purchase
2/6/24 100 1.30 130.00 Mar 15,2024 PUT 55
2/8/24 100 1.85 185.00 Apr 19,2024 PUT 55
3/12/24 100 1.00 100.00. May 17,2024 PUT 57.5
3/15/24. 100 1.70 170.00 Jun 21,2024 PUT 62.5
4/15/24. 100 0.22 22.00 Dividend
6/18/24 -100 62.50 -6250.00 ASSIGNED 6/21/24 62.5 PUTS
7/22/24 100 0.70 70.00 Aug 16,2024 PUT 57.5
7/29/24 100 1.24 124.00 Sep 20,2024 PUT 57.5
8/6/24 -100 56.05 -5605.00 Share purchase
8/20/24 100 1.35 135.00 Oct 18, 2024 PUT 55
9/5/24 100 1.05 105.00 Oct 18, 2024 PUT 52.5
9/11/24 100 1.25 125.00 Oct 18, 2024 PUT 50
9/16/24 -100 57.50 -5750.00 ASSIGNED 9/16/24 57.5 PUTS
10/15/24 300 0.22 66.00 Dividend
...
4/16/25 -100 42.50 -4250.00 ASSIGNED 4/17/25 42.5 PUTS
4/16/25 100 1.60 160.00 May 16,2025 PUT 37.5
This continues similarly until today. About 75% of the puts expire worthless and about 25% of the puts are exercised and assigned to me, allowing me to build up my position, and the expired worthless puts gave me some additional cash flows in the interim. And sometimes I buy shares outright, but most of the time via assigned put options.
You can see roughly how I am accounting for all cash flows related to this stock investment, all the plain purchases, all the option premiums, all the shares purchased via assignment, and all the dividends. This is how I calculate my return for the overall trade in this particular stock. And thus it avoids the issue of how to determine start period and end period because it is inherent to all the cash flows for this particular investment (because I think of all the purchases, all the premiums, and all the dividends as one trade.
When building up a position in a stock, you can’t use covered calls to do so. I will likely use covered calls when I decide to start exiting the position.
I don’t see how this is the case. Seems financially more of less equal to me.
This is not correct. A covered call that expires worthless is also considered a short-term gain. Exercised calls and puts can result in a long-term gain, expired short calls and puts result in a short-term gain.
Yes, I am purposely prolonging a poor situation to gain a slight advantage taxwise. That’s what I described above. What I realized is that while prolonging the poor situation, I might be able to eke out a few extra bucks by selling options against the position until it either sells (exercised and assigned) or we reach the end of December when I sell it outright to realize the loss.
As far as the use of cash, it’s a relatively small position, and I have a surfeit of cash at the moment anyway due to taking some large long-term capital gains at the end of 2024.
In this particular case, I am foregoing about 4.3% annualized gains, because the money would otherwise be in treasury bills (where almost all my excess cash is found). However, the amount I can eke out from the options might equal or exceed 4.3% annualized, so I may not be foregoing anything between now and the end of December.
Usually I do the same. But this is a losing position that’s been held for over a decade, there’s no hurry. Of course, the shares could go down between now and the end of the year, but they’ve been lower and they’ve been higher periodically for many years now. Seems kind of random, ha. I’m really not being flippant, back in 2021, when the shares popped 4-5X, I, of course, sold some of them (I sold about 2/3 of my position then). In retrospect, I should have sold all of it at the time, but at the time I still retained some confidence that they might rise some more (there was still quite a lot of buzz about “fintech” at the time).
Are you including the margin requirement in cash flows to determine IRR for short puts?
Every short put will have margin requirement. This margin is supported by collateral you provide for the trade and is a cash flow that is part of an IRR calculation.
If you open an account with $0 balance and want to sell a put, your broker will require you to deposit collateral. This collateral that supports the short put is a cash flow.
The reason I called it as funny math is, your puts are cash secured. You don’t account for cost of those cash holdings. If this is the metrics that you are comfortable, fine. I used to do individual stock tracking, and now, I am moving away from that to total portfolio return. You don’t have to make money on a stock where you have lost to break even or make any return… this is just an attempt to satisfy our ego that we will not make bad picks and anchors us into bad picks. When you start focusing on your total portfolio returns, you will be bit more likely to get out of bad situations early.
Why not? The math works the same. In fact, it is better for tax planning. When the market price is below strike price is you get assigned. Similarly, your call strike price is above the market price and your call expires worthless and allows you to keep the premium. Now you adjust your purchase price (mental math).
If you do the option premium calculator, you assign a cost to the cash. Often that rate is closer to the current market rate. Most brokerages pay less than market rate and some like E*trade pays nothing to your cash. See below the quote for $BABA $120 Sept expiration. The stock closed at $120, so the call ad put should be offering same premium right? but see the call offering $0.85 more premium. That is 4.7% annualized yield. How many brokerages are offering 4.7% annualized yield on the cash?
Re-read. You are confusing the premium gain with the share ownership start date.
I [almost] always sell puts that are out of the money. The margin requirements are tiny. For an OXY 45 put while the stock is at 47.50, and the option at $1, the margin requirement is very low at $750. I suppose I could add a few weeks of interest received on the $750 into the cash flows, but it is mostly de minimus (in this case each option cash flow from this comes to $2.68 a month). How would you notate the cash flow in this case? That $750 is sitting in T-bills (4.3%) or the brokerage settlement account (4.02%) in either case (whether I do this option trade or not).
Keep in mind that since I am retired and I have zero income outside of investment income, I need to keep a large amount of cash on hand at all times. Most of my living expenses are covered by interest on T-bills right now, plus various other income from investments (dividends, capital gains, option gains, etc).
How exactly is it a cash flow? Where does it flow to and where does it flow from? When I look at my brokerage account, I see no cash whatsoever moving anywhere, it remains exactly where it was previously. And it earns exactly the same amount of interest as it did previously.
Why would anyone use a broker like that??? Heck, I get annoyed that my broker pays me ~4% instead of the ~4.3% I get with T-bills now!
The share ownership start date isn’t important to me. That’s because I tend to hold investments for long periods of time, 5 years, 10 years, 20+ years, etc. Remember when I recently discussed my copper investment thesis? Well, I just took a look at my tracking spreadsheet and my first trade based on that thesis was more than 3 years ago! Seems like I just started discussing it last week.
Nowadays, it’s extremely rare that I buy a stock and then sell it before a year has elapsed. Back in the 80s and 90s, I did that all the time - sometimes I would hold shares for only a few hours or a few days, I remember regularly trading Ford for a 50 cents or dollar gain, heck, the commissions constituted a good percentage of my gains back then. Today I never do that anymore.
Also, when I sell a put, and it gets exercised and assigned to me, my purchase date is the date of exercise. That may be a month or two or three after buying outright and selling a call against it. A month or two or three rarely makes much of a difference to me.
Finally, options of all sorts only comprise a very small portion of my overall portfolio. I looked at my total “cash reserved for option strategies” and it comes to just under 1% of the total account value. In the end, I use options mostly for “fun”, something to play with, and perhaps add some small gains to my account. If not for options, I’d probably be making under 10 trades a year. I suppose it’s to stave off investing boredom. Heh.
I do have a few short put options in an IRA, and there it is much more significant because they reserve the full exercise price in cash, and that could potentially become annoying. Therefore I rarely trade short cash-secured options in IRAs and I don’t recommend it to anyone. Instead I mostly do spreads in the IRAs that have much less onerous cash requirements.
Ok, I don’t disagree that there may be an “accounting” entry somewhere. Show me EXACTLY how you would use that to calculate the cash flows for my OXY investment over the decades. What specific line item would you add to the list above? Would you add a debit of 750 when I sell the option, and then a credit of 750 and a credit of the interest on that 750 when that option is disposed of (either bought back, expired worthless, or exercised and assigned)? And since the cash reserved for that option varies day by day, would you repeat the process each day with a different amount? Seems rather cumbersome, but do you think that is the correct way to account for it?
I used do to all those elaborate math, then I realized it is just waste of time. It is not individual position profit/ loss but portfolio growth what truly matters. I still keep track to evaluate certain strategies, stocks, in my decision to retain or sell. One good thing that came out of those exercises is I am reducing covered call, instead moving towards call spreads. The annualized returns on them are far better than the covered call. Generally I place those trades in IRA, also the annualized returns are better I don’t mind paying taxes on those gains.
