Anyone sell options for retirement income?

[specialkayme]

Big gains aren't a crash, although April and November 2020 certainly looked dramatic.  Since 2012, according to Yahoo Finance, those are the two best months for the S&P 500, gaining +13% and +11% respectively.

Which is another beauty of rolling more frequently. Say you do sell the $373 put, 45 dte today, and the next 30 days the S&P has a killer month, increasing 15%. Your put will fall so far OTM that it'll decrease in value significantly. You can continuously roll them out and up, increasing your profit faster. Now, each time you roll it comes at a cost. Commissions for one, but you're increasing your exposure to future market crashes, especially in the event of whipsaws.

I might have gotten a confused view on delta online, as your explanation is much more useful in a concrete way.  Using the puts at $260 (9%) and $280 (12%) deltas also paints a more complete picture: 9% the entire spread is covered, and 3% of the time the spread is partially covered.

Delta is actually much more complicated than my very simplistic analysis, and it can be used in many other ways. But at it's basic premise delta can be used (i) to explain how much profit/loss you get based on a change in the underlying (it's main function) (i.e. a 25 delta put will lose $0.25 in value for each $1 the underlying increases, and vice versa), and (ii) the odds (roughly) the option will be ITM at the expiration date. All of that is based on the implied volatility, and a number of other factors. But thats why I can often make trades based on the delta alone.

There's still a gap between understanding delta and using it: I don't know where you go online to look it up.  I've been using Yahoo Finance's option chain, and an app, and Vanguard's ... none of which display delta.  Is there a free website where I can find it online?

Only look at the deltas calculated by the broker you plan on using. Deltas will vary from one location to another. You can often calculate it different ways (as all of the greeks are derivatives, they calculate based on each other in circular fashion). If I look the delta up on ToS and IBKR, I'll often get two different numbers. Not crazy different, but enough. I'd never trust Yahoo or Google to place a trade off of.

I'm not familiar with Vanguard for options. I've only ever used ToS or IBKR. But I know Vanguard will display the deltas. It's often a setting you have to change. You can set most brokers to display as much or as little information as you'd like (Bid/Ask, Last Price, Open Interest, and Delta is what I like to see, some people like to look at the Theta, IV, Gamma, Rho, Intrinsic Value, Volume . . .  you get the idea). Try messing around with the settings, and if you can't figure it out call Vanguard up.

[dignam]

Fidelity also displays delta in their options chain (not in the Active Trader app, though, for whatever reason).  The way I understand it is how forcefully the option will change based on a change in the underlying stock.  I.e. a delta of 1 or -1 will be 1:-1 (so probably an option ITM).  I'm sure it's deeper than that, though.

[CloudLiu]

As far as I understand, Delta is not important.

Delta is by far the most important metric. Multiples more important than any other greek. There are times that I won't even know the price of the underlying, and won't pay attention to the cost of the option, instead only trading based on the delta.

Put selling ROI is very close to the underlying stock ROI.

I have not found this to be correct.

If you sell puts in SP500 index, your ROI will around 10% per year. 

ROI YTD on the SPX is ~4.3%. ROI YTD on selling puts (one strategy, at least) on SPX is ~19.3%.

But your strategy may vary.

I never looked at the delta when I sold put. Delta  just tells the leverage ratio for long calls or puts.   I only looked at the delta when I bought some calls in order to know what's the leverage for those calls. e.g. how many percentage the call option goes up if stock goes up 10%.

I looked at the ROI by dividing the premium I received over the potential assignment cost.   

Now it's a good time to sell put option that  the market is correcting. I just sold couple more at-the-money puts with 115% to 120% per year ROI(BIGC, AFRM).  IV determines the ROI of short puts.  IV is just volatility. Volatility itself is not real risk. 

[Tr10av]

I started a covered call strategy approximately 4 months ago and have had great results. I've found it's best to follow momentum stocks and sell ITM calls one week at a time. I mostly trade DKNG and PENN, but have started being a bit more conservative and am trading AAPL, BAC, KR, and others that barely move. I'm also beginning to incorporate a true wheel into my strategy by selling cash secured covered puts first and waiting for assignment before starting on the covered calls.

My base strategy is as follows:

Identify stock with strong upward momentum and purchase. Stock is purchased for $53.75 I'll sell a call for $54 expiring that week. Typically only investing in stocks that offer a 1%+ return each week. I only sell calls for 1 week at a time. Stock closes above strike price, buy in again on Monday rinse and repeat. If the option expires worthless sell a call for the next week at the same strike price and continue in this manner until the shares are called away. It is obviously best for a stock to stay flat or slightly increase. Large drops mean you'll be holding for a while so I only do this with stocks I'm comfortable holding for the long-term.

It's also helpful to do this 2 weeks before earnings as you usually can get some solid premiums with 3-5% returns for 1-2 weeks of holding.

I've also used the covered call strategy to generate additional income on the long-term buy and hold portion of my portfolio. I will sell a weekly covered call that is ~10-15% OTM and usually collect about .25% premium. I then set a stop quote limit buy order for $.50 under the strike price. If the stock runs up that week unexpectedly I not only keep my shares and the upside, but also make an extra few dollars on the short term trade. I use margin for this as you won't always have the cash on hand should the shares run up.

Obviously this is a riskier strategy but one that has paid off immensely for me in 2020/2021. I had 75% returns in 2020 and am already at 25% returns YTD. You definitely will miss out on stocks that go crazy which is why I have 2 unique covered call strategies which have worked for me. I am comfortable missing on on huge gains (ie I missed out on $2m in GME gains because I had my covered call assigned at $40) for what has been consistent 1-2% weekly returns.

[MustacheAndaHalf]

specialkayme - I've added "delta" as a display column in my IBKR Trader Workstation options chain display.  Vanguard's supposed "options chain" is so bad, I don't use it - I use their buying screen, where I have to select expiration date and strike price manually to get each quote.  Free apps and Yahoo Finance have better options chains than Vanguard, in my opinion.  I'll take another look, but I doubt they show options delta.

CloudLiu - In another thread people mention buying put options on GameStop.  They watched GameStop's stock fall, while their put options lost money.  That's ignoring volatility, which dropped so fast it made those put options unprofitable.  Maybe that's a dramatic example, but it shows volatility can have a financial impact on options.

Tr10av - Are you comparing against what you would have made with buy and hold?  Both stocks hit a low point roughly when you started.  Since the end of October, Penn is up +123% and Draft Kings +72%.

[Tr10av]

Tr10av - Are you comparing against what you would have made with buy and hold?  Both stocks hit a low point roughly when you started.  Since the end of October, Penn is up +123% and Draft Kings +72%.

Yes, I understand in my strictly covered call strategy I have left money on the table. But I was heavily using margin so I was OK with limiting my upside for some downside protection which the premiums provide. Even with that I am +60% in DKNG since October. I slept much better at night with $200-300k riding on margin with some downside protection rather than blindly hoping the price would continue to go up. With how I have approached things I also appreciate that I am not making the choice of when to sell which no one ever gets right. Many times I have been forced to sell on a Friday and then the following Monday shares drop $3 so I get in at a lower entry point for the next ride up.

I had a nice 5 week run where DKNG didn't move and I was able to make 15% while reducing my costs by 8% which buying and holding would have resulted in no gains and no reduction in margin balance (increased interest costs). Now that I'm moving to a more conservative strategy I am planning on switching any stocks I can decrease the cost basis by 15% to long-term buy and hold. This is the summary of that trade if anyone is interested in seeing a visualization:



If I had just used buy and hold on that tranche I would be looking at an unrealized $7 per share gain which would be a 13% and holding for an extra month. My margin balance would have been also continued to rack up interest charges.

With my OTM call strategy I have actually done better than the long term returns as I'm getting the option premium + keeping my shares with the stop buy limit.

[specialkayme]

specialkayme - I've added "delta" as a display column in my IBKR Trader Workstation options chain display.  Vanguard's supposed "options chain" is so bad, I don't use it - I use their buying screen, where I have to select expiration date and strike price manually to get each quote.  Free apps and Yahoo Finance have better options chains than Vanguard, in my opinion.  I'll take another look, but I doubt they show options delta.

I'm glad you could find it.

I slept much better at night with $200-300k riding on margin with some downside protection rather than blindly hoping the price would continue to go up.

You and I have very different definitions of "sleeping much better."

But that's what is wonderful about the market. What floats my boat doesn't have to float yours, and vice versa.

[mizzourah2006]

I'm not doing it for retirement income specifically, but I've been writing cash secured puts on shares I want to own and I've also been writing pretty far out of the money covered calls on some of my shares. I just wrote a couple June $175 Apple calls. I figured the probability of it going up 35% in ~5 months was pretty low and I got $2.02/share in premiums. Given my cost basis of $29/share that effectively lowers it to $27/share. I have a $50 March 19th cash secured put out on draft kings right now. I'll probably move closer to ITM for April as I actually want to get assigned, but love getting the premiums to lower my cost basis. I've also had good success writing lucrative covered calls on SPACs.

[chasesfish]

I've also been writing a bunch of covered calls lately.

I have a lot of individual stock positions I added in the last year, waiting until LTCG rates before I actually sell them.  Now I'm either letting the call expire or if it's in the money, buying to close and selling a new call out for a month later.

[ChpBstrd]

Me too. I kept getting my arse handed to me during the summer/fall when I was selling covered calls at the 0.30 delta and getting assigned while the stocks ran away, but I've been making steady money since I dialed back to the 0.10 delta. Covered calls in a bull market require selling above the appreciation trend line and not getting suckered into selling calls on the dips.

[effigy98]

Making 7%+ consistent income from options via an ETF wrapper for about a year now with nearly zero effort that pays monthly which is pretty nice. This is now my largest stock position in tax advantage accounts.

ETF = NUSI.

[MustacheAndaHalf]

Tr10av - Ah, the call premiums provide a buffer against losses.  Going too far on margin can be very risky when the market turns downwards.  I only went on margin after I understood what I would do in various scenarios (-33%, -50% even -90%).

effigy98 - Is an "ETF wrapper" an ETF that invests in options?  Generating 7% a month would be a 125% return per year.

[specialkayme]

I only went on margin after I understood what I would do in various scenarios (-33%, -50% even -90%).

Part of the beauty of writing short term options on broad index funds. Not only are large drops less likely, but circuit breaker rules prevent a drop greater than 20% in a day. So my calculations for max loss of SPX with an option expiring today is a 20% drop, expiring tomorrow is a 36% drop, and expiring monday is a 48.8% drop. That has never happened before, and is incredibly unlikely to happen (not that it can't, of course).

Meanwhile individual stocks can in theory go to zero in a week, month, or even day.

[MustacheAndaHalf]

I only went on margin after I understood what I would do in various scenarios (-33%, -50% even -90%).

Part of the beauty of writing short term options on broad index funds.
...
Meanwhile individual stocks can in theory go to zero in a week, month, or even day.

I think a more appropriate comparison would be options on index funds, compared to same index fund.

I only went on margin after I understood what I would do in various scenarios (-33%, -50% even -90%).

Not only are large drops less likely, but circuit breaker rules prevent a drop greater than 20% in a day. So my calculations for max loss of SPX with an option expiring today is a 20% drop, expiring tomorrow is a 36% drop, and expiring monday is a 48.8% drop. That has never happened before, and is incredibly unlikely to happen (not that it can't, of course).

The circuit breaker rules don't apply to trading outside market hours.  While I should find an example on a broad index fund, it's far more dramatic and easy to find if I just use GameStop stock as an example:
https://finance.yahoo.com/quote/GME/history?period1=1614124800&period2=1614297600

On Feb 24, GME closed at $91.71
On Feb 25, GME opened at $169.56

The circuit breaker rules don't prevent "gap down" or "gap up" moves, like the +85% move outside market hours that happened in the above example.

[TXWP]

I'm doing in the money spreads on Dividend Aristocrats.  Most of these are bear put spreads.  The idea is I can make money so long as my blue chips don't rocket away at 7%+ over the one to two month holding period AND my returns accelerate when the inevitable market crash happens.

I've seen lots of info on OTM spreads but not ITM. So I'm Curious about why do you use ITM credit spreads?

[Financial.Velociraptor]

I'm doing in the money spreads on Dividend Aristocrats.  Most of these are bear put spreads.  The idea is I can make money so long as my blue chips don't rocket away at 7%+ over the one to two month holding period AND my returns accelerate when the inevitable market crash happens.

I've seen lots of info on OTM spreads but not ITM. So I'm Curious about why do you use ITM credit spreads?

The ITM spreads are net DEBIT spreads.  An ITM net credit spread would be a recipe for portfolio destruction.  The amount I go ITM equals my downside protection if the underlying starts to move against me.

[TXWP]

The ITM spreads are net DEBIT spreads.

Ah, that makes sense now.

I never considered debit spreads for income. Can you post or pm the details of a trade so I can plug it into an options calculator?

[Financial.Velociraptor]

@TXWP

My trade yesterday was ITB bull call spread with strikes of 65/70 and 16JUL2021 expiry.  Underlying was 69.97 at the time so basically ATM.  I paid 3.27 per share.  If shares finish above 70, I'll earn 52.9% on capital at risk over 54 days or 358% annualized.  With shares currently at 70.57, I have 3.26% downside protection in the trade.

You could likewise model the trade for 60/65 strikes for more downside protection and lower profit.

[TXWP]

My trade yesterday was ITB bull call spread

Thank you.

This opens up a new world of possibilities for me. I never considered debit spreads before. What is the advantage of this over a credit spread? Are they better in a low IV situation?

Are you still trading Dividend Aristocrats?

[ChpBstrd]

Thank you.

This opens up a new world of possibilities for me. I never considered debit spreads before. What is the advantage of this over a credit spread? Are they better in a low IV situation?

Are you still trading Dividend Aristocrats?

In theory, there should be parity between debit spreads and credit spreads. That is, the expected profit from either should be roughly equal if all other factors are the same. Otherwise, someone could do something called a box spread to exploit the arbitrage, entering into opposite debit and credit spreads to extract a few pennies per share risk-free.

[markbike528CBX]

To clarify - my current strategy is buy and hold S&P 500 index funds.  That's it.  I have about 1-2% of my NW in a brokerage playing around with stocks trying to learn what choices I have.  I just want to be "fluent" when I FIRE.

I'd expand into total market indexes, vs just S&P500.

I use cash covered puts as a way of entering long stock positions.
The result is I get my gambling thrills several ways.
        1 will the put sell?
        2 when will the put sell?
        3 will the put be exercised? - this lasts for the several months until put expiration.

I only do this with my minor sweep fund cash, only when I'm bored.

If I had just bought the underlying at the strike price last time I did this I could have doubled my profits, AND had the long position I desired.

[TXWP]

In theory, there should be parity between debit spreads and credit spreads.

I keep hearing that you should buy options when IV is low and sell when IV is high. But I don't if that applies to spreads.

[Financial.Velociraptor]

My trade yesterday was ITB bull call spread

Thank you.

This opens up a new world of possibilities for me. I never considered debit spreads before. What is the advantage of this over a credit spread? Are they better in a low IV situation?

Are you still trading Dividend Aristocrats?

When you trade a naked short call, you have theoretically unlimited losses (assuming the stock went to literal infinity.)  Debit options and spreads have a predefined risk profile.  You can never lose more than your debit.  They likewise have a defined profit profile.  The in the money debit spreads, with 5-7% downside protection a couple months out often return 9-12% over two months with good downside protection.  I like the Dividend Aristocrats for this because most of them are slow moving.  You can make hundreds of percent a year return with a higher probability of success and have limited losses when you are wrong.  Will probably look for a DA that is in a year to date downtrend for a net debit bear put spread on Monday. 

With a spread, it doesn't matter a lot whether you are looking at low or high volatility.  You are playing both ends against the middle so if you are trading a spread with the strikes 5 dollars apart, you will always be getting pricing around 3-4.50 regardless of where the ^VIX is.  It may not be obvious but a low volatility environment favors this strategy.  If you bet your underlying wont move more than say 3% against you in two months, you want prices to be stable.  A "sideways" market is thus the ideal time to use net debit spreads that are ITM.

[TXWP]

I like the Dividend Aristocrats for this because most of them are slow moving.

That sounds good to me.

Do you have any tips for a beginner on how to screen for good candidates? Do I look at the charts for a sideways market? Anything else to look for?

[Financial.Velociraptor]

I like the Dividend Aristocrats for this because most of them are slow moving.

That sounds go to me.

Do you have any tips for a beginner on how to screen for good candidates? Do I look at the charts for a sideways market? Anything else to look for?

Just don't trade against the trend.  And avoid holding through earnings announcement because you can get sudden large moves.

[TXWP]

The in the money debit spreads, with 5-7% downside protection a couple months out often return 9-12% over two months with good downside protection.

I'm not finding any Aristocrat trades that produce those kinds of numbers. Are there specific conditions needed to achieve that?

What software do you use for modeling positions?

[Financial.Velociraptor]

The in the money debit spreads, with 5-7% downside protection a couple months out often return 9-12% over two months with good downside protection.

I'm not finding any Aristocrat trades that produce those kinds of numbers. Are there specific conditions needed to achieve that?

What software do you use for modeling positions?

It is a laborious process to find the ones that are trading "rich".  I find the best spread prices are available Monday morning.  Especially the MM after the third Friday "regular" options expire.  But if you have to settle for just 5% over two months, that is a 60% annualized return.  Don't get greedy.

[TXWP]

But if you have to settle for just 5% over two months, that is a 60% annualized return.  Don't get greedy.

Sounds good.

Do you ever exit losing trades early?

[Financial.Velociraptor]

But if you have to settle for just 5% over two months, that is a 60% annualized return.  Don't get greedy.

Sounds good.

Do you ever exit losing trades early?

Absolutely.  I usually take my lumps when I'm down 50%.  When there are sudden moves that often means a 70% loss.

[Padonak]

What is your opinion on covered calls ETFs such as QYLD
https://finance.yahoo.com/quote/QYLD?p=QYLD

There are other examples as well, but this one holds NASDAQ stocks and writes covered call options on them.
11.73% dividend yield.

What's the catch?



Fund Summary
The investment seeks to provide investment results that closely correspond, before fees and expenses, generally to the price and yield performance of the CBOE NASDAQ-100® BuyWrite V2 Index (the "underlying index"). The fund will invest at least 80% of its total assets in the securities of the underlying index. The CBOE NASDAQ-100® BuyWrite Index is a benchmark index that measures the performance of a theoretical portfolio that holds a portfolio of the stocks included in the NASDAQ-100® Index, and "writes" (or sells) a succession of one-month at-the-money NASDAQ-100® Index covered call options. It is non-diversified.

[TXWP]

What's the catch?

This video shows the catch and discusses a similar alternative.
https://www.youtube.com/watch?v=QhZ2ZYjyq-o

[Padonak]

What's the catch?

This video shows the catch and discusses a similar alternative.
https://www.youtube.com/watch?v=QhZ2ZYjyq-o

I watched the video. Still don't understand the catch. Why don't we all just invest in those funds if the yield is so high?

[chasesfish]

What's the catch?

This video shows the catch and discusses a similar alternative.
https://www.youtube.com/watch?v=QhZ2ZYjyq-o

I watched the video. Still don't understand the catch. Why don't we all just invest in those funds if the yield is so high?

I think they'll struggle to yield that amount when the VIX is back at 15 or so...

[effigy98]

effigy98 - Is an "ETF wrapper" an ETF that invests in options?  Generating 7% a month would be a 125% return per year.

7% a year yield. It buys calls and puts on the NASDAQ so it barely drops on crashes, however your upside is capped if we have a monster rally like in the last year. I will take that tradeoff as my "bond" replacement anyday.

My goal this year was to replace my expenses with just dividends.
BlockFI (crypto dividends)
NUSI (Selling calls puts on tech)
SCHD (Dividend ETF)

[TXWP]

I read through this thread for the second time. I still don't understand what it takes to be successful selling options. There was a lot of discussion about skew, kurtosis, etc that was over my head. Do you need to be a math wiz to do this?

[ice_beard]

I was approved for level 1 options on Vanguard recently and have been looking at covered calls that are available to me.  Personally, I don't think it's worth it at current prices.  The stocks (oil companies mostly) I would sell these options are primed for another leg up q3/4.  I can make $34 by selling a call at 10% above the current price and risk losing 1/5 of my holdings, when there is potentially a significant amount to be made beyond that strike price?  No thanks, at least not now.  I'll keep looking though, I've got a lot to learn.

In my cursory investigations, I'm under the impression that platforms matter considerably.  ThinkorSwim has so much more information regarding options compared to VG.  ToS just doesn't operate very well on my chromebook.

[ice_beard]

What's the catch?

This video shows the catch and discusses a similar alternative.
https://www.youtube.com/watch?v=QhZ2ZYjyq-o

I watched the video. Still don't understand the catch. Why don't we all just invest in those funds if the yield is so high?

I have been reviewing the QYLD etf for awhile.... I was really into the idea of earing 10%, monthly, however, there is a catch.  When you compare say 100k invested into QYLD vs. historical returns of something like QQQ over a period of say 10 years, the differences are pretty stark.  This video really helped clarify this for me.  https://www.youtube.com/watch?v=0_yfqO5l5LY    you can skip to 11:50 to get to the analysis of QYLD vs QQQ.  Good analysis of tax implications as well (earlier in video). 

I've come to the conclusion that QYLD is a reasonable diversification option for me, but I've decided to not put in nearly as much $$ as I had initially planned.  You can really miss out on principal gains at the cost of maintaining that fat dividend payout.  Of course, comparing QQQ of the last ten years vs QYLD is not an apples to apples comparison. 
If I was ready to FIRE, I would consider putting a large chunk into QYLD to get a monthly payout, but I'm not there yet.  There is nice feeling of not having to sell shares to cover expenses that will come with owning QYLD. 

[chasesfish]

I was approved for level 1 options on Vanguard recently and have been looking at covered calls that are available to me.  Personally, I don't think it's worth it at current prices.  The stocks (oil companies mostly) I would sell these options are primed for another leg up q3/4.  I can make $34 by selling a call at 10% above the current price and risk losing 1/5 of my holdings, when there is potentially a significant amount to be made beyond that strike price?  No thanks, at least not now.  I'll keep looking though, I've got a lot to learn.

In my cursory investigations, I'm under the impression that platforms matter considerably.  ThinkorSwim has so much more information regarding options compared to VG.  ToS just doesn't operate very well on my chromebook.

Why lose your holdings?  Just buy to close the option a week or two before expiration and sell a new one a month or two out.  Continue the process.  You want to earn the time decay and have a net positive win rate over the course of a year or more.

[ChpBstrd]

I was approved for level 1 options on Vanguard recently and have been looking at covered calls that are available to me.  Personally, I don't think it's worth it at current prices.  The stocks (oil companies mostly) I would sell these options are primed for another leg up q3/4.  I can make $34 by selling a call at 10% above the current price and risk losing 1/5 of my holdings, when there is potentially a significant amount to be made beyond that strike price?  No thanks, at least not now.  I'll keep looking though, I've got a lot to learn.

In my cursory investigations, I'm under the impression that platforms matter considerably.  ThinkorSwim has so much more information regarding options compared to VG.  ToS just doesn't operate very well on my chromebook.

Yes, with The VIX around 17, there’s not a lot of premium to harvest. The bitter irony of covered calls is that the least premium is available when stocks are up and therefore have less upside potential, and the most premium is available when stocks are falling and have the most upside potential. The best you can do is pick a delta and pick up the pennies. Either that or pick a more volatile stock. I’m doing CC’s on TQQQ and UPRO at the 0.1 delta and having fun, for now at least! Will pivot into collars soon.

[TXWP]

I was doing some research yesterday on the expected value of options and came across an interesting article on selling covered calls that are deep in the money.
https://seekingalpha.com/article/4410163-busting-options-myths-for-covered-calls-be-in-money

[MustacheAndaHalf]

I was doing some research yesterday on the expected value of options and came across an interesting article on selling covered calls that are deep in the money.
https://seekingalpha.com/article/4410163-busting-options-myths-for-covered-calls-be-in-money

I'm not sure what the article says since I didn't create an account on their website just to view it.  But here's my counter example to the idea of selling deep in the money calls.

SPY is iShares S&P 500, which has lots of options activity.  Right now I can buy call options that expire in 2.5 years for almost no time value - I'm paying the option seller almost nothing.  I can buy a Dec 2023 call on SPY with a $200 strike, and it breaks even with a +0.5% gain.  In other words, the option seller can only make money if SPY averages less than 0.2%/year.  Would you rather sell that option, or buy it?

[TXWP]

I can view the article without an account.

I don't know why you picked a call that is 2.5 years out. They say to pick calls that return at least 1% a week. They provide an expected value formula to determine if a particular call is worth it.

I get the impression that most calls would not be suitable for this strategy. That means you would need to find the call first and then buy the underlying. Which seems kind of dumb.

[ChpBstrd]

I was doing some research yesterday on the expected value of options and came across an interesting article on selling covered calls that are deep in the money.
https://seekingalpha.com/article/4410163-busting-options-myths-for-covered-calls-be-in-money

This is an intriguing idea, and goes to show that for any option at any strike, someone out there has a plan. My mind returns to a professor who argued with the class for 30 minutes that options prices are always rational, computer-calculated, very efficient, and nearly impossible to arbitrage. The authors of the SA article seem to prefer to play this covered call game with volatile stocks like AMC and GME, because the time value is so high. IDK about that approach, because 30%+ moves within a couple of days would not be unusual for such stocks. Having 30% downside protection on GME is not in the same ballpark as having 30% downside protection on SPY. GME is simply more likely to go down 30% than SPY, and the time value on the options reflects that.

I don't know why you picked a call that is 2.5 years out. They say to pick calls that return at least 1% a week. They provide an expected value formula to determine if a particular call is worth it.

I get the impression that most calls would not be suitable for this strategy. That means you would need to find the call first and then buy the underlying. Which seems kind of dumb.

I think @MustacheAndaHalf was commenting on how today's low interest rates and relatively low volatility results in long-duration call options that have surprisingly little time value, and make going long the long-duration call options more appealing. Buying such calls in lieu of buying stock would be a relatively cheap way to experience almost all the stock's upside potential with a firm floor on the downside (the most you can lose is the price of the option, no matter how bad SHTF).

Back in 2019 I was considering/discussing entering a long-duration "calls and cash" strategy during periods of low volatility as a way to (a) increase upside leverage to 1.5x, 2x, or 3x, while (b) limiting downside potential. In hindsight, some underwater long calls would have been easier to hold through March-May 2020 than a portfolio full of shares, and I would hopefully have been tempted to sell the elevated time value near the bottom and switch into shares.

Volatility is the biggest factor determining how much time value is on an option. To harvest more TV, pick a volatile stock. But do so with greater risk. The deep-ITM covered call strategy described by the SA authors would yield the most in an environment where VIX is high. When VIX is low, buying the calls rather than selling them might be a higher-yielding defensive strategy.

[MustacheAndaHalf]

I can view the article without an account.

I don't know why you picked a call that is 2.5 years out. They say to pick calls that return at least 1% a week. They provide an expected value formula to determine if a particular call is worth it.

I get the impression that most calls would not be suitable for this strategy. That means you would need to find the call first and then buy the underlying. Which seems kind of dumb.

The reason "why I picked a call that is 2.5 years out" is because "I'm not sure what the article says since I didn't create an account on their website just to view it".  Shortly after arriving on that page, the article is blurred and the bottom part of my screen has a pop-up that reads:
"Create a free account to continue reading."

Buying the underlying and selling calls is a "covered call strategy".  It limits your risk - if the stock triples, you hand over your stock.  If you sell calls without the underlying, you can lose large multiples of the premium you were paid for the calls.

[MustacheAndaHalf]

Back in 2019 I was considering/discussing entering a long-duration "calls and cash" strategy during periods of low volatility as a way to (a) increase upside leverage to 1.5x, 2x, or 3x, while (b) limiting downside potential. In hindsight, some underwater long calls would have been easier to hold through March-May 2020 than a portfolio full of shares, and I would hopefully have been tempted to sell the elevated time value near the bottom and switch into shares.

Some data to show something I suspect is true in general: SPY is trading at $420.  If you look at next month's July 16 calls, today 14,568 calls have been traded at the money ($420).  Looking deep in the money at $200 strike ... 5 contracts traded.  Deep in the money calls are unpopular, with most of the activity happening at the money.

If a professional has a view on the direction of a stock, and wants to maximize their profit, they would buy at the money calls that have high leverage.  If they buy deep in the money calls, being right isn't as profitable.  Even with calls at 50% of the strike price, there is a chance the stock market drops 50% and wipes it out.  I would expect it takes a lot of discipline to see no 50% drops for a decade, and still maintain a cash position to go with the call option.

[ChpBstrd]

Back in 2019 I was considering/discussing entering a long-duration "calls and cash" strategy during periods of low volatility as a way to (a) increase upside leverage to 1.5x, 2x, or 3x, while (b) limiting downside potential. In hindsight, some underwater long calls would have been easier to hold through March-May 2020 than a portfolio full of shares, and I would hopefully have been tempted to sell the elevated time value near the bottom and switch into shares.

Some data to show something I suspect is true in general: SPY is trading at $420.  If you look at next month's July 16 calls, today 14,568 calls have been traded at the money ($420).  Looking deep in the money at $200 strike ... 5 contracts traded.  Deep in the money calls are unpopular, with most of the activity happening at the money.

If a professional has a view on the direction of a stock, and wants to maximize their profit, they would buy at the money calls that have high leverage.  If they buy deep in the money calls, being right isn't as profitable.  Even with calls at 50% of the strike price, there is a chance the stock market drops 50% and wipes it out.  I would expect it takes a lot of discipline to see no 50% drops for a decade, and still maintain a cash position to go with the call option.

There's some confusion in the conversation about (a) buying long call options as a way to make leveraged profits when the stock goes up, and limited losses when the stock goes down, and (b) buying far-ITM covered calls as a way to make profits from the time decay of the call option, while avoiding losses to a point.

The SA article you couldn't read was about far-ITM covered calls, for example buying an AMC covered call with the call option 30% below the current price. Eventually the call is exercised and you keep the time value. And you don't start losing money until AMC falls at least 30%. The author claims to be able to repeat this process weekly, extracting a couple percent of time value per month, whilst not losing money unless the underlying falls a dramatic amount. This is different than the usual description of a CC, where you sell a call above the current price. The author's point is that if you are going to extract $1 of time value from selling CC's, why not pick the call that's ITM rather than OTM so that you are insulated from losses? Trades are free after all. It would be an interesting way to defensively trade a high-volatility environment where dangerous things are going on.

If one is speculating on a stock's upside, then I agree: at-the-money offers the best leverage-risk function. The downside is you have to pay the highest time value to get that leverage.

[TXWP]

The author's point is that if you are going to extract $1 of time value from selling CC's, why not pick the call that's ITM rather than OTM so that you are insulated from losses?

The author has another article about selling deep ITM CSPs.
https://seekingalpha.com/article/4414160-busting-options-myths-cash-secured-puts-sell-anything
What do you think of their method of calculating expected value to determine whether the premium is worth selling?

[MustacheAndaHalf]

There's some confusion in the conversation about (a) buying long call options as a way to make leveraged profits when the stock goes up, and limited losses when the stock goes down, and (b) buying far-ITM covered calls as a way to make profits from the time decay of the call option, while avoiding losses to a point.

The SA article you couldn't read was about far-ITM covered calls, for example buying an AMC covered call with the call option 30% below the current price. Eventually the call is exercised and you keep the time value. And you don't start losing money until AMC falls at least 30%. The author claims to be able to repeat this process weekly, extracting a couple percent of time value per month, whilst not losing money unless the underlying falls a dramatic amount. This is different than the usual description of a CC, where you sell a call above the current price. The author's point is that if you are going to extract $1 of time value from selling CC's, why not pick the call that's ITM rather than OTM so that you are insulated from losses? Trades are free after all. It would be an interesting way to defensively trade a high-volatility environment where dangerous things are going on.

That makes sense - thanks for the summary.  They are advocating selling covered calls on very volatile stocks.  If the stock drops by 50%, they wind up stock with the stock at half value - nobody exercises the call option.  If the stock doubles, they get none of the gains.

The markets haven't opened yet, so I'll have to wait to see the price on deep ITM calls on AMC.  With the stock price doubling in 5 days, it's certainly a good example of a volatile stock.

[chasesfish]

The author's point is that if you are going to extract $1 of time value from selling CC's, why not pick the call that's ITM rather than OTM so that you are insulated from losses?

The author has another article about selling deep ITM CSPs.
https://seekingalpha.com/article/4414160-busting-options-myths-cash-secured-puts-sell-anything
What do you think of their method of calculating expected value to determine whether the premium is worth selling?

I read the article....their example is from abnormally high spreads in meme stonks

[ChpBstrd]

The author's point is that if you are going to extract $1 of time value from selling CC's, why not pick the call that's ITM rather than OTM so that you are insulated from losses?

The author has another article about selling deep ITM CSPs.
https://seekingalpha.com/article/4414160-busting-options-myths-cash-secured-puts-sell-anything
What do you think of their method of calculating expected value to determine whether the premium is worth selling?

I read the article....their example is from abnormally high spreads in meme stonks

I tried submitting a covered call for AMC at the $10 strike expiring in 2 days at the occasional midpoint of $9.75. No bites. Probably too greedy.