Welcome to my little corner of the internet.
Short Strangles
I started this site because I THOUGHT I’d had great success selling short strangles at 10 delta on TD Ameritrade’s Thinkorswim “paper-money” trading platform, but after transitioning to real money I found that the results weren’t replicable, at least not with similar returns. Plus there are catastrophic outlier risks with selling naked Calls that some helpful folks on a trading forum finally got through my thick head, so I abandoned that.
Covered Calls
But now it’s March 5, 2022 and last week I started trading covered calls with real money and had a good week, so I’ll document that journey here. How good a week? 3.2% average return over 8 positions, where 7 were winners and one is losing a bit but might be recoverable.
3.2% isn’t much, right? But multiplied by 52 weeks is 160% simply annualized . Will that performance continue? We’ll see, but the SPY was down 0.2% last week, so it wasn’t a rising tide lifting all boats. And in hindsight some of my ticker choices were less than optimal with respect to their recent price action, and all of my strike choices were simply at-the-money (ATM), the closest strike just above the spot price, which is another parameter I’ll be tweaking.
What I’m finding is that there’s quite a bit of time premium you can sell even in the last week of a Call option’s life. And your return is more when selling four weekly CCs compared to selling one monthly. I have a page here on Covered Calls, but I wasn’t serious about them when I wrote that. Now I am because I’m just a few years from retirement and looking for a fairly safe way to generate investment income from what will be our smallish nest egg.
Something like one of the covered-call ETFs XYLD/QYLD/RYLD yielding north of 10% per year would do nicely (each has a Forward Yield on Yahoo Finance of 12.x% as of 9/18/22), and discovering them was what propelled me down this path, because I suspect I can do better than that. Not that we need the extra money, but having it would mean we could help out our kids and relatives as needs arise, maybe fund the grandkids’ college funds, that sort of thing.
Also there’s the desire to avoid big drawdowns of principal: for the past 1 year, back from 9/18/22, XYLD/QYLD/RYLD have lost 18%, 26%, & 21%. 12% yields are nice, but not so much if you’re losing 20% on your principal!
So I’ll be starting a journal of all my trades, mostly so I can keep up with them, but also so interested folks can follow along and see what I’m doing and if/how it’s working. I’m not selling anything, I’d just like to attract like-minded traders to discuss either this strategy or other options strategies that have worked well for you.
Cash Secured Puts
Similar concept to Covered Calls (CCs), but I’m starting to believe that Cash Secured Puts (CSPs) are better. What I found I don’t like about CCs is that by owning a stock to write Calls on, you’re subject to the vagaries of that stock’s price action. While I was making money by selling CCs that expired worthless and I got to keep the entire premium, I found that in a lot of cases the stock had dropped so much that the loss there wiped out the gain from the CC. (Similar to holding the xYLD funds, which have nice premiums, but if you’re losing money on the underlying then it isn’t sustainable.)
With CSPs you don’t have to own a stock, you just have to set aside enough cash to buy it if it gets put (sold) to you. And you can buy back a sold put at any time, or roll it out in time and/or down in strike, so you have some control over when/if you take assignment. More on that later, but I’m starting to gravitate toward mostly CSPs.
The Wheel strategy
Selling puts, maybe getting assigned stock, then selling calls against it is a well-established strategy called The Wheel, and many people use it. Some who are buy-and-hold types start the wheel by selling CCs on stock they own. They’ll sell at a high enough strike to hopefully not have their shares called away, but if they are, then they’re happy with the premium from the calls, plus the price increase of their stock. They’ll then try to re-buy those shares (or others they’re interested in holding) by selling puts at some strike below the stock’s current price. If/when shares are put to them, they’ll go back to selling calls. Rinse and repeat.
Some folks run the wheel starting from the CSP side, and with little desire to ever be assigned the stock. You should only run The Wheel on stocks you wouldn’t mind holding, but you can mostly do it to capture the premiums of sold puts, without expecting to ever have to buy the stock. This is the camp I’m in. If assigned, then CCs can be sold to recoup the presumed loss, but the intent would be to have the stock called away at a price where you at least break even on the overall trade. Then go back to selling puts. User ScottishTrader on Reddit seems to be a master of this; click on his name and read his posts for a great education on CSPs and The Wheel.