Congrats on missing much of the downturn! Now I suggest protecting your position with a costless collar.
https://www.investopedia.com/terms/z/zerocostcollar.asp
Not OP, and I don't know or plan to use a "costless collar", but do I understand this correctly?
That move limits your gains in a market down -15.6% YTD. Market volatility is not guaranteed, and if markets don't move then options expire worthless (or at least cost more than the buyer paid, if in the money). I think "costless" hides the risk, unless I misunderstood?
You buy a put to protect your stocks and sell a call to pay for the put.
The end result is your position cannot lose more than X% due to the put and cannot gain more than X% due to the call. As time passes, your long put loses value, which subtracts value from you, but your short call also loses value, which adds value to you.
You could set up a collar with a net credit or a net debit to obtain a different risk/reward profile (e.g. trade cash in hand for lower upside, or pay for more downside protection), but selling a call for about the same price as you buy a put is an attractive choice because it is sustainable and it neutralizes the forces of time decay, volatility, and interest rates that affect other options strategies.
Right, that confirms the limited gains. What about "if markets don't move then options expire worthless (or at least cost more than the buyer paid, if in the money)".
With the collar strategy, you hope the put you bought (long put) expires worthless, because if that’s true then your stocks are higher than the put’s strike price and your overall position did better than the worst case scenario. This is like buying car insurance and going a whole year without an accident.
It would also be fine if the call you sold (short call) expires worthless or is exercised. In the call expires worthless scenario you essentially got free money from your counterparty, which you used to buy insurance. If the stock rises above the call’s strike price, the entity who bought your call receives your stock and you receive the strike price. This would be the best possible performance of the position.
So, concrete example. Suppose you buy 100 shares of stock at $10, and you buy a put at the $9 strike, and you sell a call at the $11 strike.
If by the expiration date the stock goes down to $8, your short call at the $11 strike expires worthless. The put you own allows you to sell your stock for $9 instead of $8. No matter how low it goes, you can sell it for $9. This is the worst case scenario. You’re down 10%.
If by the expiration date the stock goes up to $12, the person who paid you for the call will exercise their rights to buy your shares for $11. The put option you bought expires worthless. This is the best case scenario. You’re up 10%.
If the stock doesn’t move beyond the $9-$11 range, the put you own expires worthless but the call you sold also expires worthless. So both an asset and a liability go to zero. If you paid as much for the asset as you got paid for the liability, it’s a wash and your results are the same as someone who just held the stock.
TL;DR version: options expiring worthless are part of the plan.