Author Topic: Passive income with Option investing  (Read 430 times)

helloyou

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Passive income with Option investing
« on: July 02, 2021, 06:32:34 PM »
Hello,

I discovered option trading recently and was even more interested when I learn that Warren Buffett himself does that (https://www.re-thinkwealth.com/warren-buffett-invest-options/).

He does long dated put in order to buy stock he loves at lower price! Isn't that great? But stock and be paid for owning it!

Here's what I did:
-  Sold 1 Tesla put at $690 expiring in Jan 2023 with a premium of $198.89.
- That means I guarantee to buy 100 Tesla shares in 19 months at $492 ($690-$198 = 30% discount of the current price).
- I received $19800 in my account doing this strategy, which is about 30% discount from the stock price ($69k), and equivalent to 1.5% interest / month. (30%/19month = 1.5%/month)

That sounds amazing, the big risk is of course if Tesla drop more than 30%. But apart from that, it looks like a great way to make money. Bonus is that I receive the cash from Day 1 and I can do anything I want from it.

Isn't that great? I feel like it's earning too much for doing nothing, I'm going to get about $800/month just owning this option!

Do you do that as well?
« Last Edit: July 02, 2021, 06:39:45 PM by helloyou »

Financial.Velociraptor

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Re: Passive income with Option investing
« Reply #1 on: July 03, 2021, 09:47:22 AM »
I've done something similar for years. 

Understand that you do not own the put.  You hold a liability.  Yes, you get paid for that. 

You could be making more by using puts with an expiry 6-8 weeks out.  Time value decays fastest around that point.  That is, if you sell puts 6-8 weeks out and roll them at each expiry, there is more total premium in a year than selling one put with an expiry a year out. 

It is not free money.  TSLA could crash and you could be left holding the bag.  Do you understand that TSLA has not had a single quarter where the fundamental underlying business of making and selling cars turned a profit?  All profits have come from financial shenanigans and selling their environmental credits.  The competition is all going 100% renewable within the next couple decades and that source of profit is going away.  The rooftop solar business is a boondoggle.  They have invested heavily in the previous generation's battery technology.  They have a tiny sliver of the scale of the legacy automakers.  There are many risks here.

mboley

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Re: Passive income with Option investing
« Reply #2 on: July 03, 2021, 10:02:47 AM »
Another name for options trading is gambling isnt it?

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Financial.Velociraptor

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Re: Passive income with Option investing
« Reply #3 on: July 03, 2021, 10:05:32 AM »
Another name for options trading is gambling isnt it?

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@mboley

derivatives are intended to be used to reduce risk.  Many people abuse them for leverage instead though. 

helloyou

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Re: Passive income with Option investing
« Reply #4 on: July 03, 2021, 11:04:14 AM »
@Financial.Velociraptor I was considering shorter timespan to earn more but at the same time I want the lowest risk possible.

It seems to me that shorter put are more risky due to Tesla inherent volatility.

Today Tesla is trading today at $680. Let say I sell a short put expiring in 6 weeks time (Sept17'21 680 put) giving me $6.5k premium.

However, let say Tesla drop to $500 by September 17th, so I have to rollover and take on $18k losses (680-500). If the next rolling period Tesla goes back to let say $680, I would have realised $18k loss and the higher premium collected won't make up for the losses.

Have I missed something? It looks like the main risk with a very volatile stock

Financial.Velociraptor

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Re: Passive income with Option investing
« Reply #5 on: July 03, 2021, 03:18:39 PM »
@Financial.Velociraptor I was considering shorter timespan to earn more but at the same time I want the lowest risk possible.

It seems to me that shorter put are more risky due to Tesla inherent volatility.

Today Tesla is trading today at $680. Let say I sell a short put expiring in 6 weeks time (Sept17'21 680 put) giving me $6.5k premium.

However, let say Tesla drop to $500 by September 17th, so I have to rollover and take on $18k losses (680-500). If the next rolling period Tesla goes back to let say $680, I would have realised $18k loss and the higher premium collected won't make up for the losses.

Have I missed something? It looks like the main risk with a very volatile stock

You have it right-ish.  When you sell either a put or a call, you do not own an asset.  You have taken on a liability.  If the underlying moves against you, you can get assigned at a disadvantage.  It matters not so much that the time is short or long as American style options can be assigned by the holder at any time before expiry.  You could hold the long dated put, have the price tank and get assigned. 

High premium is a double edged sword.  Implied volatility pushes up option premium. Thus, the best paying short options have the highest estimated likelihood by the market of being assigned.  Because the option has real value for the holder, they are usually bid up past their true expected value.  That is, someone is paying a little extra to gain insurance or leveraged upside.  A lot of ink has been spilled about whether options pricing is truly "efficient".  I think they are "mostly" efficient but some profit for the seller is, on average, on the table.

helloyou

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Re: Passive income with Option investing
« Reply #6 on: July 03, 2021, 04:00:29 PM »
@Financial.Velociraptor does that mean you agree with me?

If Tesla drop 20% with a short put I'm quite sure I'll get assigned and get a realised loss. Then is there a way to save it? I mean it looks like I'd have realised the loss of $14k then I can roll it over I won't get back the money if the price go back up with another put right?

I've seen the wheel strategy in order to sell a covered call after being assigned, but I still may not make up for the losses
« Last Edit: July 03, 2021, 04:03:06 PM by helloyou »

Financial.Velociraptor

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Re: Passive income with Option investing
« Reply #7 on: July 03, 2021, 05:33:58 PM »
@Financial.Velociraptor does that mean you agree with me?

If Tesla drop 20% with a short put I'm quite sure I'll get assigned and get a realised loss. Then is there a way to save it? I mean it looks like I'd have realised the loss of $14k then I can roll it over I won't get back the money if the price go back up with another put right?

I've seen the wheel strategy in order to sell a covered call after being assigned, but I still may not make up for the losses

Yes, I agree.  You take the same risk if the put is longer dated. 

Saving it?  There is a thing called "stock repair" but it is only useful if you are fairly certain the underlying is not going to fall even further.  You buy an out of the money call and sell two further out of the money calls.  Basically a ratio spread.  If the stock goes up to the upper strike, you make twice the difference in the spread between strikes.  For a stock that is down 50%, a 1/3 recovery can put you back at break even.  I've used this when a stock had fallen below liquidation value.  Very limited downside left and reversion to mean highly likely.  Usually, I just take my lumps when something tanks though.

Just want to be clear that selling options is not "free money".  You take a risk every time you do it.  Hopefully, you are cash secured and not doing this on margin.  Used right, selling options generates recurring income, and lowers risk at the expense of part of your otherwise total return (in theory).  That is, to get current income, you sacrifice some upside potential. 

helloyou

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Re: Passive income with Option investing
« Reply #8 on: July 03, 2021, 06:11:41 PM »
Thanks. Makes me more confident I'm using the right strategy with the long put and not needing additional leverage in order to break even if the stock tank.