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Hi All - I just joined this forum seconds ago and wanted to thank you for your insightful posts and articles. I'm still trying to wrap my head around everything here. From what I understand, the strategy is to sell puts in S&P futures, but I'm also seeing people talk about options here, so I'm going to need some time to digest all of this.
My situation is that I'd like to begin semi-retirement in about four years and really, really want to preserve my principal. In January 2020, a couple of months before the crash started, I thought the market was too toppy, but wasn't happy with CD rates, so I bought multiples of 100 of high-dividend-yielding stocks (XOM, WFC, MO, PEP, IRM, EPD) and sold DITM calls with basically zero premium on these thinking that I'd either collect dividends on these or else they'd get called away. Then the market cratered, the premium increased and I collected dividends on a handful of these until they got called away. I also bought a bunch of NLY and NEAR and these got beaten up and I sold them at a loss. These eventually all got called away when the market started going up.
Since then, strategy (for the past eight months or so) has been to buy 100 shares of one or more 3x ETF (TQQQ, UPRO, TNA) on Fridays and then sell a weekly call at the same strike. My rough plan is to:
- collect the premium if these get called away (which they usually have)
- resell weeklies if they don't get called away and I can get at least $50 premium by reselling
- just wait if I can't get $50 of premium on a given week (or else sell a weekly two or three weeks out depending on my mood)
- if the value of the underlying drops by 50% or more, buy 200 shares more and use the new cost basis as my strike price for the weeklies; if I get assigned, only buy 100 shares the following week. This hasn't happened yet for any of the ETFs I've bought.
This is totally unbacktested and like the others in this thread, I'm kind of anxious about a major drop wiping out weeks' worth of gains. So far I have TNA (currently $94) at a cost basis of $108 that's been kind of hanging out and being unproductive for a few weeks now and also MJ (currently $21.34, cost basis $29) and YINN ($18.36, cost basis $31) that have been useless deadweight for weeks on end now. My UPRO and TQQQ keep getting called away and it's been frustrating to me to see that if I had been a call buyer instead of a call seller during this period, I would have made much more money.
The vast majority of my money is in cash in these accounts and I've been too afraid to buy bonds or do other things on margin. This is all in IRAs too, so I can't sell naked puts, etc. The past two weeks I've switched to selling cash-secured puts instead of buying the underlying plus selling the calls.
I also bought a QQQ 1/22 $250 LEAPS put in one account and a $300 1/22 SPY PUT in another. I did this sometime in June of last year and these have obviously been getting annihilated.
I have concerns about my above strategy for several reasons:
- I've been taught to favor trades with capped losses and unlimited upside. Selling (cash-secured) puts and (covered) calls caps my upside.
- As discussed in Karsten's option series, this is like picking up nickels from under a steamroller. I haven't gotten steamrollered yet but I can't imagine it being fun to see 30-50 weeks of gains vanish.
- Based on the safe 3% withdrawal rate with 100% stocks, it seems like I'm underiinvested. I'm in 70-80% cash across two accounts.
I need to see if switching to futures instead of 3x ETFs is worthwhile. I traded maybe once or twice over a decade ago and would need to figure out how to do this again.
Also, I keep telling myself that Warren Buffett is sitting on $140B of cash and not buying this market for the most part, as was the case in 2007.
Anyway, thanks for letting me ramble on and any insight or pointers would be greatly appreciated. I'm going to keep reading and digesting these blog posts.
I should clarify that I always try to sell weeklies at a strike which is the same as my cost basis for the underlying, which gives the underlying room to run if it's been beaten up. That's why my TNA, MJ and YINN have been useless for weeks now.
@membar I’m not familiar with all the symbols you’re selling on, nor am I an expert on stock picking or anything. But this caught my eye:
My situation is that I'd like to begin semi-retirement in about four years and really, really want to preserve my principal.
This statement doesn’t seem consistent with the strategy you’ve outlined of picking tons of individual stocks and sectors, including leveraged ETFs. You’re taking on a lot of sector/individual stock risk for your stated goals. Why?
I also suggest you take a look at ERN’s posts about selling puts and calls based on the cost basis and continuing to do so in a downturn. It can be YEARS before you recover as the downside is uncapped. In other words not a great strategy to preserve principal!
Hi @nobatmanjokes - thank you for your reply! I'm a newbie at this so any tips are appreciated. I wanted to reply to some of the comments you made:
This statement doesn’t seem consistent with the strategy you’ve outlined of picking tons of individual stocks and sectors, including leveraged ETFs. You’re taking on a lot of sector/individual stock risk for your stated goals. Why?
So I think with the "tons" of individual stocks you mentioned, you referred to the time I wrote DITM calls on XOM, WFC, PEP, etc. This was an ultra-conservative strategy that was unlikely to lose me principal. The calls were way DITM and the biggest risk I ran was the underlying being called away. They actually did go slightly OTM during the crash and WFC cratered after they slashed the dividend, but I ended up collecting dividend for several of these stocks.
As for selling puts in a downturn from ERN's, my understanding was that this works even during a downturn based on his pandemic results (albeit with gains that are inferior to this bull market - I think he mentioned 4%). In addition, I'm not using margin or leverage and not using my balance to buy bonds.
@membar my thesis was that generally single stock risk is uncompensated in markets as it can be easily diversified away. If the goal is to preserve the capital it doesn’t make sense to take that uncompensated risk. If the goal is more speculative the strategies you outline seem fine for that portion of a portfolio, but I would suggest defining them a bit on paper to keep yourself on a strategy more than just a few months at a time.
I personally see no value to collecting a dividend because I could just as easily sell the holding. Dividends and cost basis are useful in thinking about return, but are mental accounting in the decision to buy/sell/hold a stock or sell an option. Expected dividends are already factored into the option price so there is no free lunch there.
You can sell puts (or covered calls by put/call parity) in a downturn yes, but you mentioned continuing to sell at your cost basis (mental accounting). I can’t remember which article it is, but ERN highlighted what happens if you keep rolling the options that are in the money - you’re at high delta and taking on more than vol risk. That is a strategy that can take years to recover if you keep rolling or adding to the position and the underlying continues to fall. Especially with levered ETFs. If I misunderstood this part of the strategy then please ignore that part.
Either way, welcome to the forum looking forward to hearing about your future trades!
@nobatmanjokes Thanks for your detailed analysis!
RE: single-stock risk, I was talking about two different strategies: one was buying the underlying say XOM, and then selling a very, very DITM call (lowest strike I could find) at a time that volatility was very low (Jan. 2020). The time premium on this call was essentially zero so if the stock got called away, I would have neither gained or lost anything. Then the market cratered, the call premium got expensive, no one called the stock away and I continued to collect dividends (7% for XOM?) until the stock ultimately got called away. I figured this strategy was better than buying a CD and it panned out, though the risk was that I sold the call, sat around for three months, then got the stock called away without having earned anything. That's why I think this strategy is ultraconservative.
Another strategy is selling calls and puts in TQQQ, UPRO and TNA. These 3x ETFs track indexes, so I don't consider them single stocks.
I need to wrap my head around what you said about rolling ITM options. I haven't quite understood what you wrote and need to digest that.
Remember also that the 3x trades are against the backdrop of only allocating 15-25% of my account to these trades and keeping the rest in cash so I can potentially reduce my cost basis if the market craters. My reasoning is that even bear markets have bear market rallies and you can potentially capitalize on those by selling weeklies and averaging down, though I haven't backtested this.
@membar I started doing some covered calls but with the strike a little bit OTM. With limited success. I've been whipsawed a few times, i.e., the stock takes off I get called away and then buy the stock again and it drops again. For most of the names in my portfolio, I would have been better off to just buy-and-hold. I think the covered-call strategies on individual stocks are all mostly gimmicks. (even though the underlying stocks in that portfolio did indeed outperform the index)
So, you have to make up your mind about what you want to do. How much equity exposure and how much vol premium do you want? I have a lot of equity beta in my other accounts already, so I focus on the vol premium only in my option trading.
@earlyretirementnowcom Thanks for your reply! I hear you about your frustration. The covered call selling has been going fine with TQQQ, TNA and UPRO (except today, where things are cratering), but it's frustrating because like you said, I would have made out like a bandit buy just buying the call instead in most cases. The premium on these 3x ETFs is so juicy, though, and I remembered your comment about wanting to be the casino / picking up nickels from a steamroller, etc.
I need to really internalize your articles because it sounds like you're saying that if I want to retire in 4-5 years, I should go 100% long for 2.5 years and then dial things down, which freaks me out in this environment. I'm also not sure of which mix if equities vs. selling puts I should do.
@membar What is the point of owning the TQQQ/UPRO etfs vs doing the same strategy with futures yourself? You could save almost $100k in fees every decade for each million$ invested. Also the tax treatment on etf option premium is pretty rough compared to 1256 contracts
Also, I know you're collecting call premium as well but triple leverage seems much riskier for someone near retirement than simple buy and hold 1x IMO. What will you do if we have a repeat of 2000-2003?
@figuy1 Thanks for your reply. I traded futures over a decade ago with IB, but can't really remember what these are or how to trade them anymore. I'll look into these.
With the 3x ETFs, I'm only doing this with 15-25% of my account, with no leverage and the rest in cash. The idea is that each time these ETFs crater more than 50%, I can double or triple down (although this hasn't happened yet and I might change my mind). I am worried about a repeat of 2000, but if I'm worried about that, shouldn't I also not be long equities either?
Well 1 Put ITM and 1 expired worthless, and actually feel ok about losing a few weeks of premium. Think I'm going to sell one put at close MWF, but wait until next morning to sell my second until I'm safely in the two Put range (~290k).
Already sold Friday's Put at 3 delta and 350 points below market (Strike 3710) for $2.10. Probably too aggressive!
Really interested in tracking my psycholog along this road.
@navypack None of my puts were ITM, though my highest was 4055 so that was close. The premiums are rich enough that for Friday's puts my strikes were much lower: between 3565 and 3745.
I had my first experience w/ my SPX puts expiring ITM today. I was short 3 of the 4085 puts. I hedged w/ short SPY Mon and Tues. Today, I got more aggressive w/ short /ES futures. I was able to mitigate about half the damage so I'm only out about 3k.
Hedging is tricky business. I made a few mistakes w/ poor timing. Getting whipsawed is no fun and could potentially make your losses worse than if you just accepted the probabilities.
The silver lining is the VIX really popped and I sold Fri puts about 400 pts OTM for 1.20
I was unlucky on timing Monday so that was a 20 point loss which would have been clear if I’d sold at end of day. Oh well, just 6 weeks or so not a huge loss and certainly well within the 50% loss budget for 2021. Set new strikes at 3640 today for 1.5