Cash Secured Puts via Margin

[mizzourah2006]

Has anybody considered writing cash secured puts on margin? I'll go into some detail about why I'm considering it and I'd love to get some people's thoughts. The way I see it is that because it's a put the margin acts as collateral, so you aren't paying interest on it, unless you got assigned and couldn't come up with the cash for the assignment. Also, I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own, but I'd like to own them at a better price and that I may not have the current cash free to get to, but in 2-3 months I will (cashflow from income). So in my mind I'm getting paid ~$1k/month to take out an interest free loan of $60-$75k spread across 3-4 stocks.

In my specific case I have about $25k in cash in my brokerage, another $15k in cash in my savings account, and I have about $6-$8k in monthly free cash flow beyond 401ks, expenses, etc. I typically write these ~45 days out and can always roll down and out a few months (as tying up capital that isn't mine is no skin off my back). I guess I figure worst case scenario I get assigned on all $75k, which is somewhat unlikely as I spread it out over 3-4 different plays. But even if it all goes against me, I can buy time for a few months and shave off ~$5-$10k by rolling down and out for breakeven in premiums. Also, I'm not writing aggressive puts (which is why the premium is usually only between $700-$1k/month). So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

Just wondering if anybody has ever thought about doing this before. Seems like a pretty conservative way to borrow from your future self for free and collect an additional $8-$10k/yr in income while waiting for shares you want to own anyway to come to you.

[ChpBstrd]

Have you seen this?

https://earlyretirementnow.com/2016/09/28/passive-income-through-option-writing-part1/

This is written by an actuary and he's been earning about 15% annualized on the strategy, even in 2020. This is like a 9 part series.

[mizzourah2006]

Have you seen this?

https://earlyretirementnow.com/2016/09/28/passive-income-through-option-writing-part1/

This is written by an actuary and he's been earning about 15% annualized on the strategy, even in 2020. This is like a 9 part series.

I have not. I'll definitely give it a read. Appreciate it!

[Financial.Velociraptor]

Just a nit but you have your definitions mixed up.  If the put is "cash secured" that means you have undeployed cash in your account sufficient to buy the shares if you are assigned.  E.g. no use of margin.  Using margin gives you 5:1 leverage.  That is great when the trade goes your way but hurts 5x when it goes against you.  You can do pretty well without using margin, with a lot more safety.  I've written puts on margin a few times when the market was down 50% off highs and an uptrend was back in place.  For the most part, I avoid margin these days.  It just isn't worth the risk in most cases.

[mizzourah2006]

Just a nit but you have your definitions mixed up.  If the put is "cash secured" that means you have undeployed cash in your account sufficient to buy the shares if you are assigned.  E.g. no use of margin.  Using margin gives you 5:1 leverage.  That is great when the trade goes your way but hurts 5x when it goes against you.  You can do pretty well without using margin, with a lot more safety.  I've written puts on margin a few times when the market was down 50% off highs and an uptrend was back in place.  For the most part, I avoid margin these days.  It just isn't worth the risk in most cases.

I guess that's fair, technically it's partially cash secured partially margin secured.  But you aren't really using margin from an interest accumulation perspective, you're just using it as collateral. I'm definitely not considering using all of my available margin. That can go wrong fast. I'm considering using about 20-25% of my margin purchasing power and like I said in this instance I have about 50-60% of the cash quickly available, but I don't have the rest, although given my monthly free cashflow from working I'm only about 3 months from having the rest available if all move against me and I usually write the puts 30-45 DTE.

Again the way I'm looking at it is it's an interest free loan to write limit orders on stocks I want to own anyway and get paid $~$700-$1000/month for doing so and if the stock moves my way I'd have the actual cash to accept assignment after rolling down and out for another 30-60 days (or easily just close the position at a loss if it went really wrong). I kind of see it as being equivalent to if my employer gave me a 2-3 month advance on my pay.

A quick example would be with AAPL: I can write a 3/18 $150 put for $245. So, the stock would need to fall about 13% from here in the next 50 days for it to be ITM. So, in this instance you'd be using $15k as collateral via margin and they'd give you $245. If it went wrong I could easily roll down and out to 4/17 $140 for break even or maybe being debited $50-$100. In that instance it goes way wrong, I still come out with $145 in cash and I own 100 shares of Apple at $140/share when they are currently trading at $170/share.


I know that a lot of people with $300-$400k in one brokerage account wouldn't bother trying to squeeze an extra $700/month, but being a mustachian I see it as a type of additional interest free dividend and if I look at it from an income perspective and what it would cover, it pays for most of my kids daycare or all of our family groceries and eating out for a month. It's equivalent to about 15% of our monthly expenses covered.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.

[ChpBstrd]

For a while, I was tempted to write a way-outta-the-money put every week or month for a while to see if I could support a 4% or 5% WR. In theory, if one earns just 0.5% of their collateral on one's monthly trades, that'll support a 4% WR and leave 2% growth per year to offset inflation. The kind of put options that pay 0.5% are unlikely to be called. S&P500 options expiring in 30d where 0.5% of the strike price is the premium are currently at the 3,900 strike, a delta of .10, implying about a 10% chance of expiring ITM, and requiring a drop of 12% to be assigned.

Still, that 10% chance adds up month after month, and because corrections are fairly common, you'd probably be assigned in year one. Even worse, the stock market would likely take off without you, earning 15%-25% in some years while you scalped 6% from put options. Ask me how I spent the summer of 2020!!!

I was similarly tempted to buy some bank stocks yielding 3-5% and selling way-OTM calls to make up the difference. I would have needed a new plan in late 2020 when my shares would have been called away.

I know that a lot of people with $300-$400k in one brokerage account wouldn't bother trying to squeeze an extra $700/month, but being a mustachian I see it as a type of additional interest free dividend and if I look at it from an income perspective and what it would cover, it pays for most of my kids daycare or all of our family groceries and eating out for a month. It's equivalent to about 15% of our monthly expenses covered.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

[mizzourah2006]

Still, that 10% chance adds up month after month, and because corrections are fairly common, you'd probably be assigned in year one. Even worse, the stock market would likely take off without you, earning 15%-25% in some years while you scalped 6% from put options. Ask me how I spent the summer of 2020!!!

This makes sense. sitting in cash writing puts waiting for a market crash is probably a losing proposition in a market that always goes up over time. The only reason I'm looking at this as a somewhat viable option is because it's money I don't have today. I couldn't buy 100 shares of AAPL today, but I can write a put on margin to buy 100 shares of AAPL 45 days from now.

But you both have given me some things to think about.

[jim555]

Writing a put without having 100% cash to back the strike is considered a naked write.  The risk chart is equivalent to a cover call position.  It is identical to buying a stock on margin and selling a call against it. 

[mizzourah2006]

Writing a put without having 100% cash to back the strike is considered a naked write.  The risk chart is equivalent to a cover call position.  It is identical to buying a stock on margin and selling a call against it.

But if you do that you have to pay the interest associated with the margin, so it's not identical. One is interest free the other isn't.

But yes, I understand writing a CC and a CSP at the same strike price are identical derivative contracts.

[Financial.Velociraptor]

Just a nit but you have your definitions mixed up.  If the put is "cash secured" that means you have undeployed cash in your account sufficient to buy the shares if you are assigned.  E.g. no use of margin.  Using margin gives you 5:1 leverage.  That is great when the trade goes your way but hurts 5x when it goes against you.  You can do pretty well without using margin, with a lot more safety.  I've written puts on margin a few times when the market was down 50% off highs and an uptrend was back in place.  For the most part, I avoid margin these days.  It just isn't worth the risk in most cases.

@mizz
I guess that's fair, technically it's partially cash secured partially margin secured.  But you aren't really using margin from an interest accumulation perspective, you're just using it as collateral. I'm definitely not considering using all of my available margin. That can go wrong fast. I'm considering using about 20-25% of my margin purchasing power and like I said in this instance I have about 50-60% of the cash quickly available, but I don't have the rest, although given my monthly free cashflow from working I'm only about 3 months from having the rest available if all move against me and I usually write the puts 30-45 DTE.

Again the way I'm looking at it is it's an interest free loan to write limit orders on stocks I want to own anyway and get paid $~$700-$1000/month for doing so and if the stock moves my way I'd have the actual cash to accept assignment after rolling down and out for another 30-60 days (or easily just close the position at a loss if it went really wrong). I kind of see it as being equivalent to if my employer gave me a 2-3 month advance on my pay.

A quick example would be with AAPL: I can write a 3/18 $150 put for $245. So, the stock would need to fall about 13% from here in the next 50 days for it to be ITM. So, in this instance you'd be using $15k as collateral via margin and they'd give you $245. If it went wrong I could easily roll down and out to 4/17 $140 for break even or maybe being debited $50-$100. In that instance it goes way wrong, I still come out with $145 in cash and I own 100 shares of Apple at $140/share when they are currently trading at $170/share.


I know that a lot of people with $300-$400k in one brokerage account wouldn't bother trying to squeeze an extra $700/month, but being a mustachian I see it as a type of additional interest free dividend and if I look at it from an income perspective and what it would cover, it pays for most of my kids daycare or all of our family groceries and eating out for a month. It's equivalent to about 15% of our monthly expenses covered.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.

@mizzourah2006
This works, "when it works".  There is no free lunch.  If you are writing options, whether cash secured puts or covered calls, you are 1) generating immediate income 2) reducing your risk 3) giving up upside price appreciation.  If you are in the camp you want to generate "enough" income while lowering your risk at the cost of consistently underperforming buying the index, this a great strategy.  I used it for years.  It is also a good way to paid (a pittance) for placing "stink bids" in the market (this seems to be your preference).

I buy more in the money spreads these days.  I like to play momentum with half my bets bullish and half bearish (market neutral).  Bullish has been more profitable and a higher percentage winner for some time but it won't always be that way.  I do still occasionally do a buy/write on high yielding etfs, REITS, BDCS, MLPS and such.  That is a very low risk way to capture most of the upside of most markets, while reducing risk.

[Rob_bob]

I have a margin account and sell cash secured puts.  My brokerage will not let me use the margin to cover the Put, I have to keep the cash in the account.  I would have to apply for an upgrade to my options trading privilege's in order to use margin.

You might want to see what level of options trading you have or qualify for.

[Niceday]

If the stocks take off, it'll be even more expensive for you to acquire the shares. There is no get rich quick formula. Options introduce more variables to an already difficult game. I'd just buy the stocks even when you can afford few number of shares, then keep watching the fundamentals of the companies, and keep the stocks for a long time(multiple years) as long as the companies continue to do well, keep buying more of these stocks when you have more cash, and I'm sure you'll be rewarded.

[MustacheAndaHalf]

... I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own ... So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

NVDA has dropped 25% in the past 30 days, so someone using this approach might have written a put option at $270 and now get assigned at $228.  That would have lost 500% - 1000% of the original premium.  Someone buys shares at $228 and sells them for $270 to whoever uses this approach.

I think Jan 2022 has been a good introduction to the year - volatility and losses.  And this is before the rate hikes expected by the Fed later this year - this is just the introduction.  I would avoid selling put options until the Fed has finished, and it's a less risky environment.  But that could mean 2023 or later.

[mizzourah2006]

I have a margin account and sell cash secured puts.  My brokerage will not let me use the margin to cover the Put, I have to keep the cash in the account.  I would have to apply for an upgrade to my options trading privilege's in order to use margin.

You might want to see what level of options trading you have or qualify for.

I have options level 3. I can do it. I know because I am. I have puts out for tens of thousands more than I have in cash in the account.

If the stocks take off, it'll be even more expensive for you to acquire the shares. There is no get rich quick formula. Options introduce more variables to an already difficult game. I'd just buy the stocks even when you can afford few number of shares, then keep watching the fundamentals of the companies, and keep the stocks for a long time(multiple years) as long as the companies continue to do well, keep buying more of these stocks when you have more cash, and I'm sure you'll be rewarded.

Of course but if the stocks take off I wouldn't have been able to join in the party anyway because I didn't have the capital to do so. The entire point of this strategy is borrowing from my future self interest free and getting paid a "mustachian" salary of $800/month to do so. 

... I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own ... So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

NVDA has dropped 25% in the past 30 days, so someone using this approach might have written a put option at $270 and now get assigned at $228.  That would have lost 500% - 1000% of the original premium.  Someone buys shares at $228 and sells them for $270 to whoever uses this approach.

I think Jan 2022 has been a good introduction to the year - volatility and losses.  And this is before the rate hikes expected by the Fed later this year - this is just the introduction.  I would avoid selling put options until the Fed has finished, and it's a less risky environment.  But that could mean 2023 or later.

I've ridden NVDA from ~$70/share to $330/share back to $230/share all in the past 2 years. I'm not a person who would write close to the money strikes on positions that moved quickly. I also happen to be a deep learning engineer who actually uses the tech.

But, if someone were an idiot like your describing they would have been paid handsomely. I lost 100 shares at $240 on a CC and I wrote a CSP at $240 to get them back. I got paid $6.02/share to do so when they were trading at $290+. So if I were stupid enough to write a $270 put the implied volatility would have given a premium in the $2-$3k range. 

[clifp]

Has anybody considered writing cash secured puts on margin?

...

Just wondering if anybody has ever thought about doing this before. Seems like a pretty conservative way to borrow from your future self for free and collect an additional $8-$10k/yr in income while waiting for shares you want to own anyway to come to you.

I came to a similar conclusion many years ago and have been using periodically for about dozen years.  Like all bullish strategies it work great in bull market, not so great in a bear market.
It can be dangerous at the start of a bear market. Is what we've seen this year the start of a long bear market or just correction? My crystal ball is hazy.

One suggestion, I've found it is most profitable with the VIX is over 20. (just a gut number on my part). The general idea is you want to sell hurricane insurance (or portfolio insurance in our case)  right after a hurricane, not after 6 months of perfect weather. I will say the recent correction has me looking a selling TSLA puts, and if we see another 10-20% drop in the S&P maybe some FAANG stocks

I remember one particular trade I made near the end of 2008.  Your example, Apple was trading in the low $3 range. (there is has been a 28-1 split so it was actually around $90). I found I could sell a Jan 2010, put with strike price right around $2. and get a $.60/share. Apple at the time had about .$50 share in cash. So if the put was exercised I'd be buying all of Apple's for about $1 share. A price I would happily pay. I wrote a few other LEAPs, on other big name companies for smaller positions.  Fortunately, for me the bear market end in March of 2009, and by Jan 2010 all the put expired worthless.  In truth, if the bear market had gone on for a year, I very well could have faced some margin calls.

The other problem with the strategy is while you are busy looking for quarters on the ground, you miss the $100 bills in the trees. If I had just come with $9,000 to buy 100 shares of Apple, I'd have 2,800 shares today worth $470K. I had done a decent analysis, I knew Apple was a bargain, but I was too focused on the option premium.

[specialkayme]

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

Not exactly.

For one, no one knows what the chance of any event occurring is. If I sold a 10% OTM put on SPX expiring in a week, what are the odds it will expire ITM? You can look at historical price movements, but it's no guarantee for how the market will move in the future. The buyer and the seller of the put place their own estimate of how likely the event is to occur before expiration, and value it accordingly. The buyer might think there is a 3% chance of it occurring, while the seller might think there's a 0.5% chance of it occurring. A good deal for both.

For two, some people buy options knowing it isn't going to occur. Hedge against a market crash for one. For the same reason you buy car insurance or homeowner's insurance, and likely think you're overpaying for insurance. You don't think you'll get in an accident, and you know the insurance company is making money off you, but you buy it anyway. Spreads are another reason. If I want to sell an 8% OTM put, but I only want to risk a set number of dollars, I can buy a 9% OTM put to turn it into a spread. I believe the 9% OTM put will expire worthless (just like I believe the 8% OTM put will expire worthless), but I buy it anyway. Someone else is selling me that put. Both of us expect it to expire worthless.

For three, OTM puts are historically over valued. Natenburg for one. Mandelbrot for two. The evidence points in the same direction. Humans typically underestimate the odds of a very large downward movement, overestimate the odds of a moderate downward movement, and underestimate the odds of a small downward movement. Meaning way OTM puts are typically undervalued (but you might have to wait 50 years to see the event occur), OTM puts are typically overvalued, and slightly OTM puts are typically undervalued.

[mizzourah2006]

Maybe I'm not doing a good enough job of explaining my thought process here. I keep seeing the "picking up pennies in front of a steamroller analogy". 99% of my money is invested in the stock market for long term growth. What I'm proposing is more of a leveraged play on my "emergency fund" and future earnings. So, I typically keep $15-$20k in cash just in case. It sits in my savings account in case one of us would lose our jobs. It's roughly 3-4 months of expenses. But, historically when the stock market corrects I take all or most of it and buy shares of VTI or something similar and just replenish my cash over the next 3-4 months.

I see this as basically using that + ~2-3 months of future earnings to basically sell someone insurance for writing a future limit order on stocks I want to own. People on here are discussing the best banks for high interest savings accounts. What I'm describing is kind of equivalent to an interest bearing account that pays ~35-40% per year (assuming getting paid ~$8k/yr in premiums on $20k in cash) and if it goes wrong I get to buy shares of companies I want to own anyway at a ~15-25% discount to where I could have bought a fraction of them with my emergency fund months earlier.

But yes, I totally get that being long term bullish on the market and holding cash to secure puts hoping shares fall to you is not a rational strategy. What I'm describing is a way to leverage cash I hold for other reasons and future income that I haven't realized yet for what would be considered a solid side gig income for most mustachians. I also want to stress the only reason I'm considering it is because the margin as collateral creates the equivalent of an interest free loan. I wouldn't consider it if I had to pay~5% interest to access the margin dollars.

Maybe I am an idiot though because it seems no one thinks it's a strategy worth considering.

[Financial.Velociraptor]

Maybe I'm not doing a good enough job of explaining my thought process here. I keep seeing the "picking up pennies in front of a steamroller analogy". 99% of my money is invested in the stock market for long term growth. What I'm proposing is more of a leveraged play on my "emergency fund" and future earnings. So, I typically keep $15-$20k in cash just in case. It sits in my savings account in case one of us would lose our jobs. It's roughly 3-4 months of expenses. But, historically when the stock market corrects I take all or most of it and buy shares of VTI or something similar and just replenish my cash over the next 3-4 months.

I see this as basically using that + ~2-3 months of future earnings to basically sell someone insurance for writing a future limit order on stocks I want to own. People on here are discussing the best banks for high interest savings accounts. What I'm describing is kind of equivalent to an interest bearing account that pays ~35-40% per year (assuming getting paid ~$8k/yr in premiums on $20k in cash) and if it goes wrong I get to buy shares of companies I want to own anyway at a ~15-25% discount to where I could have bought a fraction of them with my emergency fund months earlier.

But yes, I totally get that being long term bullish on the market and holding cash to secure puts hoping shares fall to you is not a rational strategy. What I'm describing is a way to leverage cash I hold for other reasons and future income that I haven't realized yet for what would be considered a solid side gig income for most mustachians. I also want to stress the only reason I'm considering it is because the margin as collateral creates the equivalent of an interest free loan. I wouldn't consider it if I had to pay~5% interest to access the margin dollars.

Maybe I am an idiot though because it seems no one thinks it's a strategy worth considering.

You will not realistically make 35% a year selling puts, without using an enormous amount of margin, and then  you will get murdered in a major correction.  7-11% (depending on Beta of the underlying) is a better estimate in a bull market.  Expect to take losses in a bear market (but less than buy/hold) as you keep your premium. 

It's similar to the dividends fallacy.  Lots of people think dividends are "free money" and it is better to live off distributions than to sell shares.  Mathematically, options will usually lead you to lag the market but with lower risk.  Unless you use margin, which amplifies both gains and losses.  There have been a couple CBOE studies that seem to indicate writing covered calls 2% out of the money on an index might lead to 50-70 basis points in outperformance, in the right market environments.  I have doubts about the repeatability of those studies. 

Over a long period of time, it is almost certain you will trail the market by trading options.  If that is attractive to you so long as you smooth returns and lower risk (it is for me), then by all means - use cash secured (short) puts.  Pro tip, time value decay accelerates around week 7 and tapers off again in the last week.  You want to write puts that have an expiry 6-8 weeks out, not the weeklies.   

[mizzourah2006]

Maybe I'm not doing a good enough job of explaining my thought process here. I keep seeing the "picking up pennies in front of a steamroller analogy". 99% of my money is invested in the stock market for long term growth. What I'm proposing is more of a leveraged play on my "emergency fund" and future earnings. So, I typically keep $15-$20k in cash just in case. It sits in my savings account in case one of us would lose our jobs. It's roughly 3-4 months of expenses. But, historically when the stock market corrects I take all or most of it and buy shares of VTI or something similar and just replenish my cash over the next 3-4 months.

I see this as basically using that + ~2-3 months of future earnings to basically sell someone insurance for writing a future limit order on stocks I want to own. People on here are discussing the best banks for high interest savings accounts. What I'm describing is kind of equivalent to an interest bearing account that pays ~35-40% per year (assuming getting paid ~$8k/yr in premiums on $20k in cash) and if it goes wrong I get to buy shares of companies I want to own anyway at a ~15-25% discount to where I could have bought a fraction of them with my emergency fund months earlier.

But yes, I totally get that being long term bullish on the market and holding cash to secure puts hoping shares fall to you is not a rational strategy. What I'm describing is a way to leverage cash I hold for other reasons and future income that I haven't realized yet for what would be considered a solid side gig income for most mustachians. I also want to stress the only reason I'm considering it is because the margin as collateral creates the equivalent of an interest free loan. I wouldn't consider it if I had to pay~5% interest to access the margin dollars.

Maybe I am an idiot though because it seems no one thinks it's a strategy worth considering.

You will not realistically make 35% a year selling puts, without using an enormous amount of margin, and then  you will get murdered in a major correction.  7-11% (depending on Beta of the underlying) is a better estimate in a bull market.  Expect to take losses in a bear market (but less than buy/hold) as you keep your premium. 

It's similar to the dividends fallacy.  Lots of people think dividends are "free money" and it is better to live off distributions than to sell shares.  Mathematically, options will usually lead you to lag the market but with lower risk.  Unless you use margin, which amplifies both gains and losses.  There have been a couple CBOE studies that seem to indicate writing covered calls 2% out of the money on an index might lead to 50-70 basis points in outperformance, in the right market environments.  I have doubts about the repeatability of those studies. 

Over a long period of time, it is almost certain you will trail the market by trading options.  If that is attractive to you so long as you smooth returns and lower risk (it is for me), then by all means - use cash secured (short) puts.  Pro tip, time value decay accelerates around week 7 and tapers off again in the last week.  You want to write puts that have an expiry 6-8 weeks out, not the weeklies.   

My estimate is that you can get ~$8k/yr writing deep OTM puts with 30-45 DTE on ~$60-70k of collateral. $20k of that collateral is my emergency fund thus my math is $8k/$20k = 40%. Of course trading options trails the market over the long term. AGAIN...my strategy involves trailing the market with my emergency fund and future earnings. What's your current return on your emergency fund and your future earnings? I can tell you mine. My emergency fund savings account pays me less than 1%. My future earnings have negative returns as inflation continues to eat away at them. Thus a current strategy of doing nothing in my book is actually a negative real return whereas this strategy just "trails the market".

I want to repeat because no one seems to get this, I'm not suggesting holding cash and writing puts. I'm suggesting leveraging my emergency fund + future earnings to write deep OTM puts and receive ~$8k/yr in income that I can turn around and invest in the market.

[clifp]

Maybe I'm not doing a good enough job of explaining my thought process here. I keep seeing the "picking up pennies in front of a steamroller analogy". 99% of my money is invested in the stock market for long term growth. What I'm proposing is more of a leveraged play on my "emergency fund" and future earnings. So, I typically keep $15-$20k in cash just in case. It sits in my savings account in case one of us would lose our jobs. It's roughly 3-4 months of expenses. But, historically when the stock market corrects I take all or most of it and buy shares of VTI or something similar and just replenish my cash over the next 3-4 months.

I see this as basically using that + ~2-3 months of future earnings to basically sell someone insurance for writing a future limit order on stocks I want to own. People on here are discussing the best banks for high interest savings accounts. What I'm describing is kind of equivalent to an interest bearing account that pays ~35-40% per year (assuming getting paid ~$8k/yr in premiums on $20k in cash) and if it goes wrong I get to buy shares of companies I want to own anyway at a ~15-25% discount to where I could have bought a fraction of them with my emergency fund months earlier.

But yes, I totally get that being long term bullish on the market and holding cash to secure puts hoping shares fall to you is not a rational strategy. What I'm describing is a way to leverage cash I hold for other reasons and future income that I haven't realized yet for what would be considered a solid side gig income for most mustachians. I also want to stress the only reason I'm considering it is because the margin as collateral creates the equivalent of an interest free loan. I wouldn't consider it if I had to pay~5% interest to access the margin dollars.

Maybe I am an idiot though because it seems no one thinks it's a strategy worth considering.

You will not realistically make 35% a year selling puts, without using an enormous amount of margin, and then  you will get murdered in a major correction.  7-11% (depending on Beta of the underlying) is a better estimate in a bull market.  Expect to take losses in a bear market (but less than buy/hold) as you keep your premium. 

It's similar to the dividends fallacy.  Lots of people think dividends are "free money" and it is better to live off distributions than to sell shares.  Mathematically, options will usually lead you to lag the market but with lower risk.  Unless you use margin, which amplifies both gains and losses.  There have been a couple CBOE studies that seem to indicate writing covered calls 2% out of the money on an index might lead to 50-70 basis points in outperformance, in the right market environments.  I have doubts about the repeatability of those studies. 

Over a long period of time, it is almost certain you will trail the market by trading options.  If that is attractive to you so long as you smooth returns and lower risk (it is for me), then by all means - use cash secured (short) puts.  Pro tip, time value decay accelerates around week 7 and tapers off again in the last week.  You want to write puts that have an expiry 6-8 weeks out, not the weeklies.   

My estimate is that you can get ~$8k/yr writing deep OTM puts with 30-45 DTE on ~$60-70k of collateral. $20k of that collateral is my emergency fund thus my math is $8k/$20k = 40%. Of course trading options trails the market over the long term. AGAIN...my strategy involves trailing the market with my emergency fund and future earnings. What's your current return on your emergency fund and your future earnings? I can tell you mine. My emergency fund savings account pays me less than 1%. My future earnings have negative returns as inflation continues to eat away at them. Thus a current strategy of doing nothing in my book is actually a negative real return whereas this strategy just "trails the market".

I want to repeat because no one seems to get this, I'm not suggesting holding cash and writing puts. I'm suggesting leveraging my emergency fund + future earnings to write deep OTM puts and receive ~$8k/yr in income that I can turn around and invest in the market.

I totally get what you are doing, since I've been doing it periodically for I guess 15 years.  You are talking about doing consistently using shorter options, where I decided that out of the money puts, only became significantly overvalued during times of high volatility and I generally wrote longer 3-15 month options.  My rationale was the same as yours, doing so was the equivalent of an interest-free margin loan.

During a bull or even flat market, I believe you can make an extra X$, and accelerate your path to FIRE.  Don't kid your self you are exposed to additional risks.   I was retired so I didn't have future earnings to bail me out.  Here is the thing, you know what also happens a lot during bear markets? People lose their jobs. So during a bear market, you will experience the same losses for your buy and hold portfolio, plus additional losses as your out-of-the-money puts go in the money, add to that no job.

You are a smart guy, I'm sure you understand that emergency fund and leverage don't generally belong in the same sentence. But personally, I think emergency funds are overrated, money is fungible.

My comments about Apple, maybe are not applicable.  I know I was too focused on the juicy premium from writing puts, that I missed the big picture.  Yes, the Apple put was a screaming bargain at $2 in the future, put Apple stock was a still screaming bargain at $3.  I don't believe there are screaming bargains in the market right now, but maybe after 50% correction, there will be.

FWIW, I approve of the strategy.

[taco_sushi]

I'm using options to hedge my portfolio and also generate income to buy more stock. I agree with some of the comments above, it depends on what your goal is with this % of your portfolio. CSPs are way of entering into owning the shares at the strike price, and can be useful in a sideways market to generate income. It can also be a way of generating income in a bullish market. It's not useful in a bearish market, since it's a bullish strategy.

If you're solving for income, you can read below or search for the "wheel strategy".
Also check out Reddit subgroup /Thetagang

https://options-guru.com/premium-selling-and-the-triple-income-wheel-strategy/
https://medium.datadriveninvestor.com/the-wheel-strategy-99e16b9540b2

I would stay away from Margin unless you are confident in your options strategies and know how to manage risks from both bullish and bearish markets. If you have cash to support CSP, that's great. But CSPs are a capital intensive way to generate income or lower your entry into strike price. Long term, buy and hold is better for the majority of your portfolio.

Side interesting note "Warren Buffet does this, he sells European style mutli-year put options on SPY. Then uses the premium/income he receives now to buy undervalued stocks"

[mizzourah2006]

I totally get what you are doing, since I've been doing it periodically for I guess 15 years.  You are talking about doing consistently using shorter options, where I decided that out of the money puts, only became significantly overvalued during times of high volatility and I generally wrote longer 3-15 month options.  My rationale was the same as yours, doing so was the equivalent of an interest-free margin loan.

During a bull or even flat market, I believe you can make an extra X$, and accelerate your path to FIRE.  Don't kid your self you are exposed to additional risks.   I was retired so I didn't have future earnings to bail me out.  Here is the thing, you know what also happens a lot during bear markets? People lose their jobs. So during a bear market, you will experience the same losses for your buy and hold portfolio, plus additional losses as your out-of-the-money puts go in the money, add to that no job.

You are a smart guy, I'm sure you understand that emergency fund and leverage don't generally belong in the same sentence. But personally, I think emergency funds are overrated, money is fungible.

My comments about Apple, maybe are not applicable.  I know I was too focused on the juicy premium from writing puts, that I missed the big picture.  Yes, the Apple put was a screaming bargain at $2 in the future, put Apple stock was a still screaming bargain at $3.  I don't believe there are screaming bargains in the market right now, but maybe after 50% correction, there will be.

FWIW, I approve of the strategy.

Ok, yeah you get it. So, I'm not completely crazy, lol. I felt like either I was crazy or I wasn't doing a good enough job of explaining myself. This is a tiny portion of my portfolio. I have about 1.3 million in total investments, but I have an emergency fund (I agree with you about EFs not being totally valuable, which is why when the market corrects I tend to use it and replenish it, but it makes the SO feel more comfortable) and we have a solid income, so I have a lot of potential future capital that I won't have access to for several months at a time and obviously that is a perpetual problem. I totally agree with you that the downside in all of this is everything going to shit and me losing my income and the market crashing, but with 30-45 DTE the probability of all of that happening so suddenly is something I could live with.

Curious why you were writing longer put options? I guess it matters less with margin money, but I hate the idea of tying up capital for ~15 months. Was it because of the implied volatility? What type of premiums were you getting for writing 15 month out puts? Most of the stuff that I've read suggests 30-45 DTE is typically the best timeframe for options.

I would stay away from Margin unless you are confident in your options strategies and know how to manage risks from both bullish and bearish markets. If you have cash to support CSP, that's great. But CSPs are a capital intensive way to generate income or lower your entry into strike price. Long term, buy and hold is better for the majority of your portfolio.

I agree with the bolded, which is why I want to use margin. Again as I mentioned this is a strategy I'm considering for a tiny, tiny portion of my investment strategy and it's a way to get a return on cash I have set aside as an emergency fund and my future 2-3 months of income that I haven't received yet. Honestly, unless the stocks go to complete crap I can always close the options position because at the day of expiration all intrinsic value of the option is gone and the price of the option is the strike price - the underlying position's price. So, let's say I have $60k out in options on AAPL at $150 (so 4 options). Everything goes to crap and the underlying drops to $130. If I decided to just completely take the loss and I didn't have the $60k in cash to take assignment I'd be out $8k in cash to just close the position. So, to really actually need to use any of the margin there would have to be a crash of epic proportions. I could support that trade in just my EF all the way down to $100/share. So in this instance we'd need to see AAPL get wiped out to the tune of over 42% in ~45 days for me to really be in a vulnerable position.

[ChpBstrd]

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

Not exactly.

For one, no one knows what the chance of any event occurring is. If I sold a 10% OTM put on SPX expiring in a week, what are the odds it will expire ITM? You can look at historical price movements, but it's no guarantee for how the market will move in the future. The buyer and the seller of the put place their own estimate of how likely the event is to occur before expiration, and value it accordingly. The buyer might think there is a 3% chance of it occurring, while the seller might think there's a 0.5% chance of it occurring. A good deal for both.

For two, some people buy options knowing it isn't going to occur. Hedge against a market crash for one. For the same reason you buy car insurance or homeowner's insurance, and likely think you're overpaying for insurance. You don't think you'll get in an accident, and you know the insurance company is making money off you, but you buy it anyway. Spreads are another reason. If I want to sell an 8% OTM put, but I only want to risk a set number of dollars, I can buy a 9% OTM put to turn it into a spread. I believe the 9% OTM put will expire worthless (just like I believe the 8% OTM put will expire worthless), but I buy it anyway. Someone else is selling me that put. Both of us expect it to expire worthless.

For three, OTM puts are historically over valued. Natenburg for one. Mandelbrot for two. The evidence points in the same direction. Humans typically underestimate the odds of a very large downward movement, overestimate the odds of a moderate downward movement, and underestimate the odds of a small downward movement. Meaning way OTM puts are typically undervalued (but you might have to wait 50 years to see the event occur), OTM puts are typically overvalued, and slightly OTM puts are typically undervalued.

Not exactly.

The expected value of an option's payoff is exactly expressed in its price. Higher odds of positive gain or odds of larger positive gains = higher price. The odds are not something that "no one knows" as much as they are calculated by computers using options pricing models that account for the variance/standard deviation of the particular asset's past returns, among other variables.

When one realizes that option prices are set by thousands of competing supercomputers running essentially the same formula that has been validated with decades of experience, then the next step is to realize that there are no bargains in the zero-sum options market. One can tweak their returns function to hedge a certain risk by trading off another form of risk, but there's no way to earn a consistent paycheck in excess of the risk-free rate forever. Luck as a factor disappears after enough transactions, and these computers stay in business through billions of transactions by getting their expected value calculations right. Our ape brains running on emotion-laden narrative thought processes are vastly outgunned.

When we trade options, there is a very low chance we are trading against another human who "thinks" the odds are different than we "think", and lower still that our trade will execute at a price significantly different than what a computer would calculate, and no computers happen to notice our bid/ask price being wrong so they can take advantage of us or our counterparty. Retail traders running meat-brains are a very tiny sliver of overall volume, and represent exactly zero percent of market makers.

I'm familiar with volatility skew/smirk/smile but even these have logical explanations related to the arbitrage opportunities enabled by options at different strike prices - also things best calculated by computers. A lot of enthusiastic YouTubers will wave away all this complexity and claim that there's free money laying around if one will just follow their strategy (cue picture of a lambo for emotional priming), but then again they're scratching out a living off of clicks, not running hedge funds. Beware this whole line of thinking. 

[mizzourah2006]

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

Not exactly.

For one, no one knows what the chance of any event occurring is. If I sold a 10% OTM put on SPX expiring in a week, what are the odds it will expire ITM? You can look at historical price movements, but it's no guarantee for how the market will move in the future. The buyer and the seller of the put place their own estimate of how likely the event is to occur before expiration, and value it accordingly. The buyer might think there is a 3% chance of it occurring, while the seller might think there's a 0.5% chance of it occurring. A good deal for both.

For two, some people buy options knowing it isn't going to occur. Hedge against a market crash for one. For the same reason you buy car insurance or homeowner's insurance, and likely think you're overpaying for insurance. You don't think you'll get in an accident, and you know the insurance company is making money off you, but you buy it anyway. Spreads are another reason. If I want to sell an 8% OTM put, but I only want to risk a set number of dollars, I can buy a 9% OTM put to turn it into a spread. I believe the 9% OTM put will expire worthless (just like I believe the 8% OTM put will expire worthless), but I buy it anyway. Someone else is selling me that put. Both of us expect it to expire worthless.

For three, OTM puts are historically over valued. Natenburg for one. Mandelbrot for two. The evidence points in the same direction. Humans typically underestimate the odds of a very large downward movement, overestimate the odds of a moderate downward movement, and underestimate the odds of a small downward movement. Meaning way OTM puts are typically undervalued (but you might have to wait 50 years to see the event occur), OTM puts are typically overvalued, and slightly OTM puts are typically undervalued.

Not exactly.

The expected value of an option's payoff is exactly expressed in its price. Higher odds of positive gain or odds of larger positive gains = higher price. The odds are not something that "no one knows" as much as they are calculated by computers using options pricing models that account for the variance/standard deviation of the particular asset's past returns, among other variables.

When one realizes that option prices are set by thousands of competing supercomputers running essentially the same formula that has been validated with decades of experience, then the next step is to realize that there are no bargains in the zero-sum options market. One can tweak their returns function to hedge a certain risk by trading off another form of risk, but there's no way to earn a consistent paycheck in excess of the risk-free rate forever. Luck as a factor disappears after enough transactions, and these computers stay in business through billions of transactions by getting their expected value calculations right. Our ape brains running on emotion-laden narrative thought processes are vastly outgunned.

When we trade options, there is a very low chance we are trading against another human who "thinks" the odds are different than we "think", and lower still that our trade will execute at a price significantly different than what a computer would calculate, and no computers happen to notice our bid/ask price being wrong so they can take advantage of us or our counterparty. Retail traders running meat-brains are a very tiny sliver of overall volume, and represent exactly zero percent of market makers.

I'm familiar with volatility skew/smirk/smile but even these have logical explanations related to the arbitrage opportunities enabled by options at different strike prices - also things best calculated by computers. A lot of enthusiastic YouTubers will wave away all this complexity and claim that there's free money laying around if one will just follow their strategy (cue picture of a lambo for emotional priming), but then again they're scratching out a living off of clicks, not running hedge funds. Beware this whole line of thinking.

But I guess I see a slight difference between what you're describing and what I'm describing. In a pure options market the options are the trade. I'm not trying to outtrade the supercomputers, I'm just willing to take some of the future risk of a downturn because in the future I'll have the money, but I don't have it today.

I'm simply agreeing to get paid a slight income for companies I can't buy today, but would be willing to buy if the price dropped more. It's a leveraged play on my future earnings and the cash I keep in my savings account. I see it as perhaps upping your 401k from 10% to 30% for a few weeks if the market tanks 20%. I'm not necessarily trying to never get assigned the options in this instance. I'd be fine buying AAPL at $140/share on 3/18. Could it drop to $130 and then I overpaid? Sure it could, but if it drops to $140 and I buy 100 shares and then it drops to $130 did I screw up if my goal is to own AAPL shares for the long term anyway?

[ChpBstrd]

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

Not exactly.

For one, no one knows what the chance of any event occurring is. If I sold a 10% OTM put on SPX expiring in a week, what are the odds it will expire ITM? You can look at historical price movements, but it's no guarantee for how the market will move in the future. The buyer and the seller of the put place their own estimate of how likely the event is to occur before expiration, and value it accordingly. The buyer might think there is a 3% chance of it occurring, while the seller might think there's a 0.5% chance of it occurring. A good deal for both.

For two, some people buy options knowing it isn't going to occur. Hedge against a market crash for one. For the same reason you buy car insurance or homeowner's insurance, and likely think you're overpaying for insurance. You don't think you'll get in an accident, and you know the insurance company is making money off you, but you buy it anyway. Spreads are another reason. If I want to sell an 8% OTM put, but I only want to risk a set number of dollars, I can buy a 9% OTM put to turn it into a spread. I believe the 9% OTM put will expire worthless (just like I believe the 8% OTM put will expire worthless), but I buy it anyway. Someone else is selling me that put. Both of us expect it to expire worthless.

For three, OTM puts are historically over valued. Natenburg for one. Mandelbrot for two. The evidence points in the same direction. Humans typically underestimate the odds of a very large downward movement, overestimate the odds of a moderate downward movement, and underestimate the odds of a small downward movement. Meaning way OTM puts are typically undervalued (but you might have to wait 50 years to see the event occur), OTM puts are typically overvalued, and slightly OTM puts are typically undervalued.

Not exactly.

The expected value of an option's payoff is exactly expressed in its price. Higher odds of positive gain or odds of larger positive gains = higher price. The odds are not something that "no one knows" as much as they are calculated by computers using options pricing models that account for the variance/standard deviation of the particular asset's past returns, among other variables.

When one realizes that option prices are set by thousands of competing supercomputers running essentially the same formula that has been validated with decades of experience, then the next step is to realize that there are no bargains in the zero-sum options market. One can tweak their returns function to hedge a certain risk by trading off another form of risk, but there's no way to earn a consistent paycheck in excess of the risk-free rate forever. Luck as a factor disappears after enough transactions, and these computers stay in business through billions of transactions by getting their expected value calculations right. Our ape brains running on emotion-laden narrative thought processes are vastly outgunned.

When we trade options, there is a very low chance we are trading against another human who "thinks" the odds are different than we "think", and lower still that our trade will execute at a price significantly different than what a computer would calculate, and no computers happen to notice our bid/ask price being wrong so they can take advantage of us or our counterparty. Retail traders running meat-brains are a very tiny sliver of overall volume, and represent exactly zero percent of market makers.

I'm familiar with volatility skew/smirk/smile but even these have logical explanations related to the arbitrage opportunities enabled by options at different strike prices - also things best calculated by computers. A lot of enthusiastic YouTubers will wave away all this complexity and claim that there's free money laying around if one will just follow their strategy (cue picture of a lambo for emotional priming), but then again they're scratching out a living off of clicks, not running hedge funds. Beware this whole line of thinking.

But I guess I see a slight difference between what you're describing and what I'm describing. In a pure options market the options are the trade. I'm not trying to outtrade the supercomputers, I'm just willing to take some of the future risk of a downturn because in the future I'll have the money, but I don't have it today.

I'm simply agreeing to get paid a slight income for companies I can't buy today, but would be willing to buy if the price dropped more. It's a leveraged play on my future earnings and the cash I keep in my savings account. I see it as perhaps upping your 401k from 10% to 30% for a few weeks if the market tanks 20%. I'm not necessarily trying to never get assigned the options in this instance. I'd be fine buying AAPL at $140/share on 3/18. Could it drop to $130 and then I overpaid? Sure it could, but if it drops to $140 and I buy 100 shares and then it drops to $130 did I screw up if my goal is to own AAPL shares for the long term anyway?

The reasoning makes sense, but the strategy has some risks. On any given date, there is a decent risk that a stock's price will be lower at a future date. There's also a risk the price will never be this low again in one's lifetime.

If one were to place a good-till-cancelled limit order at a price 20% below today's price, they would be glad they did this instead of buying the stock if a few months later the stock fell 20% below today's price. On the other hand, they might feel regret if they sit there in cash for years waiting for a big drop that never happens as the stock rises 20% and keeps going. If the odds of either outcome are 50%, neither the buy-now or wait-for-a-drop strategy is superior.

Selling puts is like getting paid a small amount to place a limit order to buy stock. However, the regret cuts both ways. A put seller accepts most of the risk involved with owning a stock, but their entire upside consists of the small premium received. If the price falls, the put seller loses money and regrets selling the put. If the stock rises, the put seller would usually have been better off owning the stock, and they think to themselves "why did I agree to take on all the downside risk of this stock if I couldn't get much of the upside? Had I owned the stock, I would have taken the same risk but at least enjoyed the upside."

[mizzourah2006]

The reasoning makes sense, but the strategy has some risks. On any given date, there is a decent risk that a stock's price will be lower at a future date. There's also a risk the price will never be this low again in one's lifetime.

If one were to place a good-till-cancelled limit order at a price 20% below today's price, they would be glad they did this instead of buying the stock if a few months later the stock fell 20% below today's price. On the other hand, they might feel regret if they sit there in cash for years waiting for a big drop that never happens as the stock rises 20% and keeps going. If the odds of either outcome are 50%, neither the buy-now or wait-for-a-drop strategy is superior.

Selling puts is like getting paid a small amount to place a limit order to buy stock. However, the regret cuts both ways. A put seller accepts most of the risk involved with owning a stock, but their entire upside consists of the small premium received. If the price falls, the put seller loses money and regrets selling the put. If the stock rises, the put seller would usually have been better off owning the stock, and they think to themselves "why did I agree to take on all the downside risk of this stock if I couldn't get much of the upside? Had I owned the stock, I would have taken the same risk but at least enjoyed the upside."

We are in 100% agreement here, but I do appreciate you talking through this as it validates some of my initial assumptions. If I had the capital to just buy right now or place a near ITM limit order in most instances I'd be better off doing so. But, the problem is I don't currently have the capital to do this. I see my future cash flow from employment as kind of an ever-turning wheel. At the point with which I receive a paycheck it can go to work for me in the market. But at any given point that I receive my current pay I still have months of future pay I can't receive until later. All things being equal every time I receive a paycheck the probability that I will receive the next 6 (3 months of pay) is roughly equal (assuming all of my underlying assumptions about job security and company solvency remain true). Thus, I see it as writing a future limit order and getting paid to do so with money I couldn't write the limit order for today. My company won't lend me $40k interest free, but my broker will. As my cash comes in and if these positions are solid (i.e. probability of the put being ITM remains unlikely) I'd simply put that cash to work for me and the future paychecks would become the new collateral. The only cash I'll ever have on hand is the Emergency Fund that my spouse likes to have for her to sleep well at night. All other is margin cash borrowed from the broker interest free as a collateral loan.

[specialkayme]

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

Not exactly.

For one, no one knows what the chance of any event occurring is. If I sold a 10% OTM put on SPX expiring in a week, what are the odds it will expire ITM? You can look at historical price movements, but it's no guarantee for how the market will move in the future. The buyer and the seller of the put place their own estimate of how likely the event is to occur before expiration, and value it accordingly. The buyer might think there is a 3% chance of it occurring, while the seller might think there's a 0.5% chance of it occurring. A good deal for both.

For two, some people buy options knowing it isn't going to occur. Hedge against a market crash for one. For the same reason you buy car insurance or homeowner's insurance, and likely think you're overpaying for insurance. You don't think you'll get in an accident, and you know the insurance company is making money off you, but you buy it anyway. Spreads are another reason. If I want to sell an 8% OTM put, but I only want to risk a set number of dollars, I can buy a 9% OTM put to turn it into a spread. I believe the 9% OTM put will expire worthless (just like I believe the 8% OTM put will expire worthless), but I buy it anyway. Someone else is selling me that put. Both of us expect it to expire worthless.

For three, OTM puts are historically over valued. Natenburg for one. Mandelbrot for two. The evidence points in the same direction. Humans typically underestimate the odds of a very large downward movement, overestimate the odds of a moderate downward movement, and underestimate the odds of a small downward movement. Meaning way OTM puts are typically undervalued (but you might have to wait 50 years to see the event occur), OTM puts are typically overvalued, and slightly OTM puts are typically undervalued.

Not exactly.

The expected value of an option's payoff is exactly expressed in its price. Higher odds of positive gain or odds of larger positive gains = higher price. The odds are not something that "no one knows" as much as they are calculated by computers using options pricing models that account for the variance/standard deviation of the particular asset's past returns, among other variables.

When one realizes that option prices are set by thousands of competing supercomputers running essentially the same formula that has been validated with decades of experience, then the next step is to realize that there are no bargains in the zero-sum options market. One can tweak their returns function to hedge a certain risk by trading off another form of risk, but there's no way to earn a consistent paycheck in excess of the risk-free rate forever. Luck as a factor disappears after enough transactions, and these computers stay in business through billions of transactions by getting their expected value calculations right. Our ape brains running on emotion-laden narrative thought processes are vastly outgunned.

When we trade options, there is a very low chance we are trading against another human who "thinks" the odds are different than we "think", and lower still that our trade will execute at a price significantly different than what a computer would calculate, and no computers happen to notice our bid/ask price being wrong so they can take advantage of us or our counterparty. Retail traders running meat-brains are a very tiny sliver of overall volume, and represent exactly zero percent of market makers.

I'm familiar with volatility skew/smirk/smile but even these have logical explanations related to the arbitrage opportunities enabled by options at different strike prices - also things best calculated by computers. A lot of enthusiastic YouTubers will wave away all this complexity and claim that there's free money laying around if one will just follow their strategy (cue picture of a lambo for emotional priming), but then again they're scratching out a living off of clicks, not running hedge funds. Beware this whole line of thinking.

Agree to disagree my friend. Your belief is founded on the theory that markets are fully efficient, and any inconsistency is quickly absorbed by AI. My belief is markets are not fully efficient, and inconsistencies exist in the pricing of options. You won't convince me otherwise, and I won't convince you either.

As a "meat-brain" who's done the research to find the inconsistencies in the market, backtested to verify the research isn't theoretical, paper traded to confirm the backtests weren't form fitting, and live traded the tested strategies for 18+ months (and found numerous communities of people who have done just the same as I have), I recognize that I could be a statistical anomaly. But I'm ok with that, as anomaly money spends the same as regular money.

[MustacheAndaHalf]

... I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own ... So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

NVDA has dropped 25% in the past 30 days, so someone using this approach might have written a put option at $270 and now get assigned at $228.  That would have lost 500% - 1000% of the original premium.  Someone buys shares at $228 and sells them for $270 to whoever uses this approach.

I think Jan 2022 has been a good introduction to the year - volatility and losses.  And this is before the rate hikes expected by the Fed later this year - this is just the introduction.  I would avoid selling put options until the Fed has finished, and it's a less risky environment.  But that could mean 2023 or later.

I've ridden NVDA from ~$70/share to $330/share back to $230/share all in the past 2 years. I'm not a person who would write close to the money strikes on positions that moved quickly. I also happen to be a deep learning engineer who actually uses the tech.

But, if someone were an idiot like your describing they would have been paid handsomely. I lost 100 shares at $240 on a CC and I wrote a CSP at $240 to get them back. I got paid $6.02/share to do so when they were trading at $290+. So if I were stupid enough to write a $270 put the implied volatility would have given a premium in the $2-$3k range.

I took NVDA's price from a month prior ($300) and applied the 10% you mentioned in the sentence I quoted, giving $270.  You listed several volatile stocks, so maybe you meant 20% below.

Right now NVDA is more volatile than Dec, yet the $220 strike (10% from current $245 price) expiring a month from now traded for $689/contract.  Where did you get $3000/contract?

[mizzourah2006]

... I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own ... So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

NVDA has dropped 25% in the past 30 days, so someone using this approach might have written a put option at $270 and now get assigned at $228.  That would have lost 500% - 1000% of the original premium.  Someone buys shares at $228 and sells them for $270 to whoever uses this approach.

I think Jan 2022 has been a good introduction to the year - volatility and losses.  And this is before the rate hikes expected by the Fed later this year - this is just the introduction.  I would avoid selling put options until the Fed has finished, and it's a less risky environment.  But that could mean 2023 or later.

I've ridden NVDA from ~$70/share to $330/share back to $230/share all in the past 2 years. I'm not a person who would write close to the money strikes on positions that moved quickly. I also happen to be a deep learning engineer who actually uses the tech.

But, if someone were an idiot like your describing they would have been paid handsomely. I lost 100 shares at $240 on a CC and I wrote a CSP at $240 to get them back. I got paid $6.02/share to do so when they were trading at $290+. So if I were stupid enough to write a $270 put the implied volatility would have given a premium in the $2-$3k range.

I took NVDA's price from a month prior ($300) and applied the 10% you mentioned in the sentence I quoted, giving $270.  You listed several volatile stocks, so maybe you meant 20% below.

Right now NVDA is more volatile than Dec, yet the $220 strike (10% from current $245 price) expiring a month from now traded for $689/contract.  Where did you get $3000/contract?

I can only assume that because I got $6.02 for writing a 2/18 $240 in mid December if I had instead written a $270 I would have gotten much more than that. When NVDA shot up from about $198 to $330 in roughly a month it was much more volatile than it is right now. In that case I wrote the put at the time about ~20% below to get the $602. I did mention NVDA as a company I like. I didn't say I'd be writing puts after a company runs over 60% in roughly a month though. In the particular instance of NVDA I knew it would be very likely to come back down into the mid 200s and it slowly did even before the NASDAQ selloff. I also wouldn't write a put on AAPL right now. I'd wait for it to settle down a bit, my guess is it slowly drifts back to the mid to low $160s. That's when I'd write the put.

[goodmoneygoodlife]

A quick example would be with AAPL: I can write a 3/18 $150 put for $245. So, the stock would need to fall about 13% from here in the next 50 days for it to be ITM. So, in this instance you'd be using $15k as collateral via margin and they'd give you $245. If it went wrong I could easily roll down and out to 4/17 $140 for break even or maybe being debited $50-$100. In that instance it goes way wrong, I still come out with $145 in cash and I own 100 shares of Apple at $140/share when they are currently trading at $170/share.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.

I guess this makes sense as a strategy. AAPL hasn't really ever tanked deeply in its recent history. But there's a first time for everything (look at Meta as an example of a FAANG that's plummeted in historical fashion; though Meta has a lot of fundamental issues whereas I don't feel that AAPL does).

Was curious how you came up with the worst-case of being debited $100 though?

Also, why not write deeper OTM puts or do puts much bigger than 50 days DTE? Why 3/18?

[mizzourah2006]

I guess this makes sense as a strategy. AAPL hasn't really ever tanked deeply in its recent history. But there's a first time for everything (look at Meta as an example of a FAANG that's plummeted in historical fashion; though Meta has a lot of fundamental issues whereas I don't feel that AAPL does).

Meta is an example of a stock that took a 30% clip, my best guess is I would have had an open put at about $270-$280/share in that instance and would have rolled down and out. So I'd probably be sitting with a 3/18 $260 put. I honestly think the entire meta thing was a weird over reaction. Either that or the markets aren't nearly as efficient as we thought. We knew in April of 2021 Apple was implementing a user opt-in for app tracking. FB had literally mentioned in all of their previous earnings calls that it would impact revenue. The funny thing is despite all of that they still beat analyst expectations on revenue. I didn't have a put on FB, but I wouldn't be terribly upset if I did. It's likely not a hyper growth story for the next couple of years, but it's a cash cow and now the forward P/E is closer to 13-15x. It's actually like Apple was from 2015-2020 at this point. I would have just kept rolling down and out a few months. My guess is I could have gotten it down to about $240/share by May at no cost. If the NASDAQ is back up to where it was 2 weeks ago by then I expect ~$240/share to be a reasonable price for it. I'd just turn around and write $250-$270/share covered calls on those shares at that point.

Was curious how you came up with the worst-case of being debited $100 though?

In my experience rolling down and out a month usually costs no more than $1/share. In fact if I look at my 3/18 AAPL $150 right now and I wanted to roll down and out to 4/14 $140 I'd get a $20 credit. I'd need to go down $115 to take a $98 debit.

Also, why not write deeper OTM puts or do puts much bigger than 50 days DTE? Why 3/18?

Most of the research I've read suggests the most theta decay starts to occur 30-45 DTE, so it's the sweet spot for theta decay and gamma risk.

But it's entirely possible to write them deeper and further OTM too. The way I see it is the rolling down and out accomplishes the same thing if the trade moved against you. If you are using cash to do this there is also the time value of money. Tying up $15k for 90 days might not be a good use of capital. But when it's margin it really wouldn't matter. So it's a reasonable strategy.

Just my 2 cents though.