Author Topic: Selling Put Options for Income  (Read 9090 times)

mr.marc.stache

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Selling Put Options for Income
« on: September 21, 2014, 05:00:37 PM »
Has anyone tried selling put options for extra income? Most options expire worthless. So by selling the option, one collects the premium and produces extra income on top of the dividend the stock pays. If the stock is put to you, then you buy more of the stock at the strike price. There are some risks of loss to this strategy. However, the steady income is supposed to counter the risk. And selling puts with some risk management is supposed to be less risky that other option methods.

I have read a few articles on the strategy. However, does anyone have any experience with this strategy to produce extra "active" income on top of the passive dividend income from stocks, index etfs, or bond funds?

waltworks

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Re: Selling Put Options for Income
« Reply #1 on: September 21, 2014, 08:02:53 PM »
Refer to the zillion+ efficient market vs. trade/option/put/lever threads already here.

-W

GizmoTX

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Re: Selling Put Options for Income
« Reply #2 on: September 21, 2014, 08:05:33 PM »
It's very risky to do this "naked", i.e. without owning the stock you option trade on.
We've been successful trading calls but it is not for the uneducated & inexperienced.

Dodge

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Re: Selling Put Options for Income
« Reply #3 on: September 21, 2014, 08:09:00 PM »
Has anyone tried selling put options for extra income? Most options expire worthless. So by selling the option, one collects the premium and produces extra income on top of the dividend the stock pays. If the stock is put to you, then you buy more of the stock at the strike price. There are some risks of loss to this strategy. However, the steady income is supposed to counter the risk. And selling puts with some risk management is supposed to be less risky that other option methods.

I have read a few articles on the strategy. However, does anyone have any experience with this strategy to produce extra "active" income on top of the passive dividend income from stocks, index etfs, or bond funds?

The expected return is still negative.  While you may win 100 times before losing, that one loss will bring you down more than the 100 wins brought you up.
If you think you know something, find someone who disagrees and listen to them.

Dr. A

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Re: Selling Put Options for Income
« Reply #4 on: September 21, 2014, 08:11:46 PM »
With a put option, you can be covered merely by holding enough cash in the account to cover the purchase at the strike, you don't have to actually be short the stock. (A "cash secured" put). But I agree whole heartedly about never going naked... In the stock market that is...

KBecks2

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Re: Selling Put Options for Income
« Reply #5 on: September 21, 2014, 08:28:54 PM »
I have been writing puts with a portion of our money since around February of this year.  I find it fun and interesting, and I am making money with it.

You should always be ready to buy the stock if it is put to you.  You have to make sure you have the cash available to cover the purchase if the price is too low.

I have bought to close a few things (some that would have turned out OK.)  Overall it has been fun and I have made a little extra money. After this weekend's expiration, I made just over $500 on about $10,000 of stock exposure.  That is about a 5% return, and it was made in less than 6 months.  I will now write more puts against that $10,000 for a future expiration.  So far for the year, I made $2,300.  That includes $700 I lost when I wanted bo undo a covered call.

dollarfor40cents.com is a fun web site for research.  I usually choose low strikes and I want the biggest discount if I'm taking shares.

I think your portfolio should be a certain size before you mess around with this.  I'm writing on $10 - $25k of cash per month (if I find ones I want to participate in -- in October I have no expirations), and I consider myself to be a small options market participant.  I try to be conservative, unless I want the shares.

I would not recommend options as an investment for most people, but if you are interested, I do like using them, carefully, and with an eye on the look-through exposure at all times.

I subscribe to Motley Fool options for education and advice.    Good luck!
« Last Edit: September 21, 2014, 08:36:43 PM by KBecks2 »

KBecks2

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Re: Selling Put Options for Income
« Reply #6 on: September 21, 2014, 08:38:02 PM »


The expected return is still negative.  While you may win 100 times before losing, that one loss will bring you down more than the 100 wins brought you up.

That's not true.

waltworks

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Re: Selling Put Options for Income
« Reply #7 on: September 21, 2014, 09:27:25 PM »
The expected return *as compared to passive strategies with low fees* is negative, I think Dodge meant.

That's true for basically any stock strategy. If you are super good, super lucky, or super connected to inside info, you can beat the market, but if you're posting here to get investing advice, odds are very high you will do worse than you would in an index fund.

-W

Dodge

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Re: Selling Put Options for Income
« Reply #8 on: September 21, 2014, 10:21:45 PM »
The expected return *as compared to passive strategies with low fees* is negative, I think Dodge meant.

That's true for basically any stock strategy. If you are super good, super lucky, or super connected to inside info, you can beat the market, but if you're posting here to get investing advice, odds are very high you will do worse than you would in an index fund.

-W

Yes, that's usually what I mean, but when talking about options the literal translation is true.  Let's look at a simplistic example, and say the market thinks there's a 90% chance of SPX closing above 2000 this month.  I will assume we're talking about a credit spread, as selling naked can be suicide.  If you sell the appropriate option spread, you have a 90% chance of having a profitable trade.  If you take the opposite side (the buying side), you have a 10% chance of having a profitable trade.

If you decide to sell the credit spread for $100 (90% chance of success), you will gain $100 if the trade is a winner, and lose $900 if the trade is a loser (10% chance of happening).

If you take the opposite side, a debit spread (10% chance of success), you will gain $900 if the trade is a winner, and lose $100 if the trade is a loser (90% chance of happening).

Just looking at that, the expected return is 0.  When considering transaction costs, it becomes negative.  When considering behavioral factors, it goes down even further, but let's ignore that for now.  The point is that the market expects a return for such a strategy to be break-even.  In order for you to believe it's not break-even, you would also have to believe that you are smarter than the market....which brings us to the whole "efficient market vs the world" topic you mentioned earlier.
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waltworks

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Re: Selling Put Options for Income
« Reply #9 on: September 21, 2014, 10:31:02 PM »
Ah, got it. It's literally a zero sum game, then, whereas the overall market is not in as much as it generally gains value overall.

-W

Dodge

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Selling Put Options for Income
« Reply #10 on: September 21, 2014, 11:09:48 PM »
Ah, got it. It's literally a zero sum game, then, whereas the overall market is not in as much as it generally gains value overall.

-W

Yes.  And for someone in the accumulation phase is even worse, because your money is growing due to deposits, and people like to keep scaling their trades up. In the simplistic example above, let's say you deposit $1000 a month, win every month (+10%), then lose on the 10th month (-90%).

Month 1: gain 100
2: gain 210
3: gain 331
4: gain 464
5: gain 610
6: gain 771
7: gain 948
8: gain 1143
9: gain 1357

So far we have gained 5,937, and have 14,937 in the account. Now here comes the loss.

10: lose 13,443

Final account total: $1493

Of course this is an exaggerated example, but the concept is the same. When you get to the loss, it will be much bigger than the previous gains, even with an expected return of 0, if you keep growing the account through deposits and increase your trading volume to match.
« Last Edit: September 21, 2014, 11:23:51 PM by Dodge »
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rayt168

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Re: Selling Put Options for Income
« Reply #11 on: September 22, 2014, 08:06:53 AM »
Are you selling puts outside your retirement accounts?  I was wondering about the tax implications by picking this route.  Do you know how difficult it is to report the income on your tax return?  Thanks.

hodedofome

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Re: Selling Put Options for Income
« Reply #12 on: September 22, 2014, 08:14:04 AM »
Agree with Dodge in that selling options in the general sense usually leads to blowing up your account. Everything's fine and dandy in a normal market, you look like a genius, then a black swan hits and suddenly you've lost it all. Just look at LTCM.

However, I don't think that's what the OP is referring to here. Selling put options could work if it's in a stock that you already want to buy, however not at it's current price. Say you want to buy it but only if it's 10 or 20% lower. So you sell put options at that strike price and if it trades lower, then great you've bought the stock you wanted at the price you wanted. If it doesn't trade that low, then you receive the income and probably do it all over again.

This only makes sense if you already have the cash on hand, but don't want to buy at current prices. If you don't have the cash, then I wouldn't do it.

Now whether you'd make more money by just buying the stock at the current price, or selling the put, in the long run...I don't know. I haven't researched it that intently since I don't do it currently.

ragnathor

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Re: Selling Put Options for Income
« Reply #13 on: September 22, 2014, 11:35:51 AM »
What do you guys think of the following ETF?

HVPW

The website is http://www.hvpwfund.com/

It takes a basket of 20 volatile stocks and sells puts every 2 months. This mitigates a lot of the risk of being too concentrated. They index it is based on supposedly beat the average market by 2% over a decade.

Curious to hear other opinions.

TreeTired

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Re: Selling Put Options for Income
« Reply #14 on: September 22, 2014, 11:56:22 AM »
What do you guys think of the following ETF?

HVPW

The website is http://www.hvpwfund.com/

It takes a basket of 20 volatile stocks and sells puts every 2 months. This mitigates a lot of the risk of being too concentrated. They index it is based on supposedly beat the average market by 2% over a decade.

Curious to hear other opinions.

I just bought some.    When I first heard about this ETF I was skeptical, because it seemed like a typical bull market product as in,   look at all the easy money we can make by selling puts!!!!  and the strategy happens to work because the market has been going up for the past 5 years.   But after reading their disclosures and checking out the website it seems like a reasonable execution of a put-writing strategy,  and worthwhile for me to buy the ETF because they can execute the strategy more efficiently than I can.  In addition to the 20 stocks, which is way more than I can handle,  they pay much lower commissions than I would.  I do sell options -  both puts and calls -  but the commissions are pretty high compared to straight equities, and very high compared to the dollars invested.

Selling puts is not necessarily even a leveraged strategy if you are selling "cash secured" puts.  You can end up owning a bunch of garbage but you can't "blow your account" the same way you can lose your entire investment if you were selling naked calls.  Selling puts is - economically -  the same as selling covered calls.  From experience, the downside of this strategy (selling calls on your positions) if you don't actively manage it is that you get called out of all the high performing stocks and you get to keep all the dogs, so eventually your portfolio consists of a bunch of garbage stocks. 
« Last Edit: September 22, 2014, 12:02:15 PM by NC_MJ »
Accidentally retired in 2007.

clifp

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Re: Selling Put Options for Income
« Reply #15 on: September 22, 2014, 02:13:28 PM »
Ah, got it. It's literally a zero sum game, then, whereas the overall market is not in as much as it generally gains value overall.

-W

Actually that isn't true selling put options has positive expected value.  The zero sum game is only with respect to gaining Alpha either the option buyer or seller is a loser.
Mathematically, selling a cash secured put is the same as as holding a stock and writing a covered call. It is a less risky than simply holding the stock.

Imagine two ~100K portfolio Stock Sam has 500 shares of SPY at ~$200/share.  Option Oliver has $100K in cash and is short 5 SPY 200 put contracts expiring Dec 20, (3 month contract).  Using 9/19 prices Oliver would have collected $460 premium x5= $2300 (less $5 commission) . If by Dec 20 the SPY had dropped 10% to 180 both Sam and Oliver would have lost on paper $10K, but Sam would have only received $470 in dividends vs Oliver $2300 in premium.  If the market remain flat Olivers comes out ahead fact he can probably make about the same dollars writing another 3 month option Dec 23 or about $9,200 (9% annually). Of course there is no free lunch and if the market goes up 15% Sam gets the whole $15,000 while Oliver is capped at $2,300.

It makes more sense for somebody who is retired to do this than somebody who is the accumulation phase, cause you don't want to miss those 15% moves.  For a retiree reducing the volatility of a portfolio is important and option writing is one way of doing this. IMO in today interest rate environment probably superior to reducing your equity exposure.

However, the big picture is important. Writing a put is basically selling insurance, and while selling insurance can be very profitable business.  The best times to sell insurance is right after a big hurricane like Katrina hits and everyone is most fearful. Not today when there have been several years of below average Hurricane activity in the Gulf coast. The same thing is true selling portfolio insurance, right now the VIX (the so called fear index) is near record lows moving between 10 and 15.  Memories of the 2008/09 bear market are starting to fade and people aren't willing to pay a lot for insurance, cause the market has been going up for 5 years. Personally I generally avoid writing options when the VIX is below 20..

hodedofome

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Re: Selling Put Options for Income
« Reply #16 on: September 22, 2014, 02:22:15 PM »
However, the big picture is important. Writing a put is basically selling insurance, and while selling insurance can be very profitable business.  The best times to sell insurance is right after a big hurricane like Katrina hits and everyone is most fearful. Not today when there have been several years of below average Hurricane activity in the Gulf coast. The same thing is true selling portfolio insurance, right now the VIX (the so called fear index) is near record lows moving between 10 and 15.  Memories of the 2008/09 bear market are starting to fade and people aren't willing to pay a lot for insurance, cause the market has been going up for 5 years. Personally I generally avoid writing options when the VIX is below 20..

Agree with this 1000%. The time to begin a strategy is after it's been sucking, not after it's been doing great for 5 years.

hodedofome

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Re: Selling Put Options for Income
« Reply #17 on: September 22, 2014, 02:26:50 PM »
From experience, the downside of this strategy (selling calls on your positions) if you don't actively manage it is that you get called out of all the high performing stocks and you get to keep all the dogs, so eventually your portfolio consists of a bunch of garbage stocks.

Agree with this and the good implementations I've seen of put selling are in stocks where you have expectations of good future growth, but for whatever reason it's having a rough month/quarter/year. Something like Coca-Cola or Johnson & Johnson where future growth is likely to happen but it's about 20% overvalued compared to where you want to buy it. So instead of waiting in cash for the drop (that may never happen), you sell puts for a little extra income while you wait.

Dodge

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Re: Selling Put Options for Income
« Reply #18 on: September 22, 2014, 02:38:32 PM »
While your story and numbers are accurate, I don't see how that means it isn't a zero sum game. The person who buys the option loses just as much as the person who sells the option gains, and vice versa.
If you think you know something, find someone who disagrees and listen to them.

clifp

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Re: Selling Put Options for Income
« Reply #19 on: September 22, 2014, 03:12:37 PM »
While your story and numbers are accurate, I don't see how that means it isn't a zero sum game. The person who buys the option loses just as much as the person who sells the option gains, and vice versa.
In the short term that is true of all transactions at any time, stock, real estate, even buying  or selling meat at the grocery store.  It could have gone on sale tomorrow, or for the store owner who puts the meat on sale a person desperate for steaks for a bbq could have walked in and happily bought the the whole lot at full price. What is different between buying and selling stocks and buying and selling options?

GizmoTX

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Re: Selling Put Options for Income
« Reply #20 on: October 23, 2014, 02:04:37 PM »
Options expire. Stocks are forever unless the company goes out of business.

livetogive

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Re: Selling Put Options for Income
« Reply #21 on: October 23, 2014, 03:28:40 PM »
this is an interesting concept from an academic perspective.  Derivatives are technically zero sum games but that's before fees.  How far out of the money are you selling these?

My grad school derivatives prof walked us through a proof of how in isolation, it's almost always best to buy calls / sell puts at the money.  I really wish I remember the proof! stupid beer.

God or Mammon?

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Re: Selling Put Options for Income
« Reply #22 on: October 24, 2014, 12:40:31 AM »
Ah, got it. It's literally a zero sum game, then, whereas the overall market is not in as much as it generally gains value overall.

-W

Yes.  And for someone in the accumulation phase is even worse, because your money is growing due to deposits, and people like to keep scaling their trades up. In the simplistic example above, let's say you deposit $1000 a month, win every month (+10%), then lose on the 10th month (-90%).

Month 1: gain 100
2: gain 210
3: gain 331
4: gain 464
5: gain 610
6: gain 771
7: gain 948
8: gain 1143
9: gain 1357

So far we have gained 5,937, and have 14,937 in the account. Now here comes the loss.

10: lose 13,443

Final account total: $1493

Of course this is an exaggerated example, but the concept is the same. When you get to the loss, it will be much bigger than the previous gains, even with an expected return of 0, if you keep growing the account through deposits and increase your trading volume to match.

Completely wrong - very disappointed to see so much misinformation in this forum

Selling put options is the only option strategy that has been proven, in theory and practice, to make money over time

See page 3

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDiChde01kgoPir6Xn32FRFbqeb82kbHoxtMpI96GczOwPDqS9rgY%2bznFNeamgbB7fkSq1LToskTZxZLYB6rvfZF88f5%2b0vYLLuDTwYjoYT%2fg%3d%3d

The main reasons it works:
1) the stock mkt drifts upward over time
2) time value decays
3) there is a skew to the puts making them more expensive than calls for a given % out of the money - this phenomenon is due to the fact ppl typically buy puts for portfolio insurance and sell covered calls on their stock portfolio

Also, if you are using an unlevered or lowly leveraged strategy, you can always roll the puts out in time and down in strike if they become in the money upon expiry, as a put option with a longer maturity will always be worth more than one with a shorter maturity given same strike price

God or Mammon?

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Re: Selling Put Options for Income
« Reply #23 on: October 24, 2014, 12:56:12 AM »
Ah, got it. It's literally a zero sum game, then, whereas the overall market is not in as much as it generally gains value overall.

-W

Yes.  And for someone in the accumulation phase is even worse, because your money is growing due to deposits, and people like to keep scaling their trades up. In the simplistic example above, let's say you deposit $1000 a month, win every month (+10%), then lose on the 10th month (-90%).

Month 1: gain 100
2: gain 210
3: gain 331
4: gain 464
5: gain 610
6: gain 771
7: gain 948
8: gain 1143
9: gain 1357

So far we have gained 5,937, and have 14,937 in the account. Now here comes the loss.

10: lose 13,443

Final account total: $1493

Of course this is an exaggerated example, but the concept is the same. When you get to the loss, it will be much bigger than the previous gains, even with an expected return of 0, if you keep growing the account through deposits and increase your trading volume to match.

Completely wrong - very disappointed to see so much misinformation in this forum

Selling put options is the only option strategy that has been proven, in theory and practice, to make money over time

See page 3

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDiChde01kgoPir6Xn32FRFbqeb82kbHoxtMpI96GczOwPDqS9rgY%2bznFNeamgbB7fkSq1LToskTZxZLYB6rvfZF88f5%2b0vYLLuDTwYjoYT%2fg%3d%3d

The main reasons it works:
1) the stock mkt drifts upward over time
2) time value decays
3) there is a skew to the puts making them more expensive than calls for a given % out of the money - this phenomenon is due to the fact ppl typically buy puts for portfolio insurance and sell covered calls on their stock portfolio

Also, if you are using an unlevered or lowly leveraged strategy, you can always roll the puts out in time and down in strike if they become in the money upon expiry, as a put option with a longer maturity will always be worth more than one with a shorter maturity given same strike price

Also (now we are really getting technical) the forward price of the stock, which is used to calculate the value of the option, is lower than the current stock price for almost any dividend paying stock, since interest rates are close to 0.  So the all options (puts and calls) are pricing in a return that is negative by the amount of the dividend (dividend minus risk free rate to be exact).

KBecks2

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Re: Selling Put Options for Income
« Reply #24 on: October 24, 2014, 06:30:49 AM »
The service I use,  Motley Fool Options   (www.fool.com)  is open for enrollment for a few days, and there is a refund process if you don't like it.   888-665-3665.    Call them and ask.  Enrollment is usually 1x a year and ask them for the info.   Their investing team is very good.  My membership pays for itself with trades.  I recommend them without reservation.

Options is not something I would try by myself, so I picked this team of advisors for education and idea-generation and specific trade recommendations. 

In the past year I have learned to write cash-secured puts,  buy LEAP calls, write an ongoing covered call and now something called a diagonal.  I am avoiding the jade lizard because it sounds too exotic for my taste.  ;) 

Also, dollarfor40cents.com is a great tool.

Have fun!
« Last Edit: October 24, 2014, 06:36:13 AM by KBecks2 »

YoungInvestor

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Re: Selling Put Options for Income
« Reply #25 on: October 24, 2014, 12:07:56 PM »
It's very risky to do this "naked", i.e. without owning the stock you option trade on.
We've been successful trading calls but it is not for the uneducated & inexperienced.

To clarify this post, you need to be short on the stock to cover your put. Being long on a stock covers the call.

Naked puts are fairly dangerous, making money for years and years and losing everything during a market downturn is not unheard of.

Brokerages don't necessarily allow everyone to sell options naked anyway.

EDIT:

To clarify this post: It is very possible to have an the expected profit when selling puts. In fact, the current ask price for these puts probably factors in a pretty decent expected profit margin. Just make sure that you are actually able to calculate these things before you get into that game.

Selling puts is just like selling insurance. Just don't do it without solid knowledge.
« Last Edit: October 24, 2014, 12:14:34 PM by YoungInvestor »