At least I am finally old enough to not be surprised that a plan only lasts so long in the world of investing.
My options strategy has been working for well over a year now and I have wondered when that process will fail. It seems that time has now come. The inflation rates are up, the AI hype is dying, the tariff story continues to add volatility.
I managed to continue as normal until last couple weeks. Now I have a couple of PUTs that are starting to go against me. It’s not panic time, but I am trying to evaluate.
What is your strategy in this timeframe? Do you do PUTs at all while volatility is causing the market to crash? Do you lower your expected returns on CALLs during this time of pessimism?
What are people doing when they have to change up their process and still want to make some income each month or so?
My options are laddered, with some set to expire in each of the next three months. That helps provide a natural cadence for adjustments.
In addition, I run my options strategy in the same account as my bond ladder, to help deal with the absolutely insane volatility I had been dealing with when I ran the options strategy on its own.
When the options are doing well, I use the excess cash they generate to extend the bond ladder. When the options are not doing well, the maturing bonds and bond interest provide cash to help deal with the declining options values.
Also, I generally tie my options investing to a value-focused strategy on the underlying companies. Several of my positions are currently trading above their max potential profit price. While that does cap the upside when the market is doing incredibly well, it also tends to give me somewhat of a buffer in times like these when things take a downturn.
And finally, I allow myself to temporarily transfer money from my savings account to that options/bond ladder account if there’s a technical reason why the account finds itself in trouble. For instance, if my broker raises the margin requirement on a position I own, but the underlying investment still looks reasonable, I will allow myself to transfer money in to cover that requirement.
That said, if I am operating with money ‘borrowed’ from savings, I strictly limit my transactions. For the options (and any stocks that may be in the account by virtue of an options transaction), I only allow myself to roll or close positions until the money is returned to savings. Likewise, for the bonds, I only allow myself to buy replacements for bonds that get called early — no extending the ladder.
It’s not perfect. And it’s certainly not pretty. But thus far, it has helped me navigate through some tough windows of volatility while limiting the forced closes.
First of all volatility is good for option writing. However, risk also increases, that means you need to be nimble. So I simultaneously sell naked calls to mitigate naked put risks. If you don’t have permission or worried that is too much risk, sell call spreads. Use resistance to sell calls. Naturally losses will increase and yearly return expectation has to be moderated. But individual option strategy return expectation has to go up.
Separately, don’t write lot of options, switch to spreads, because moves can be swift on both directions. For ex: if you look at $AAPL, $MSFT, $SPY all had $10 moves in a day.
I no longer need to change my process! I stopped selling puts years ago after some bad experiences. Over a year ago i added a Covered Call Roll Selector to my trading WebApp. Now my covered calls follow the underlying’s volatility, UP or Down & OUT. I posted about it at METaR.
It’s a paradigm shift. Traditional stock market investing is about stocks with options playing a secondary role. By focusing on rolling the call options, up and down, the focus is no longer on buying the best stocks but on generating the most income. Traditional covered call lore suggests that one should not risk LTB&H positions by using them for selling covered calls. The paradigm shift makes LTB&H positions the best underlying stocks for covered calls. So far it has worked out very nicely. See the details at:
