May 3, 2021
Welcome back to a new installment of the options series! In the discussion following the previous post (Part 6), a reader suggested the following: In recent history, the index has never lost more than 50% over the span of one year. Then why not simply write (=short) a put option, about one year out with a strike 50+% below today’s index level? Make it extra-safe and use a strike 60% below today’s index!

So, let’s take a look at the following scenario where we short a put option on the S&P 500 index slightly more than a year out and with a strike about 60% below the current index level:
- Trading date: 4/30/2021
- Index level at inception: 4,181.17
- Expiration: 6/16/2022
- Strike: 1,700 (=59.2% below the index)
- Option premium: $11.50
- Multiplier: 100x (so, we receive $1,150 per short contract, minus about $1.50 in commission)
- Initial Margin: $4,400, maintenance margin: $4,000
In other words, as a percentage of the initial margin, we can generate about 26% return over about 13.5 months. Annualized that’s still slightly above 23%! Even if we put down $15,000 instead of the bare minimum initial margin, we’re still looking at about 6.8% annualized return. If that’s a truly bulletproof and 100% safe return that’s nothing to sneeze at. A 6.8% safe return certainly beats the 0.1% safe return in a money market, right? Does that mean we have solved that pesky Sequence Risk problem?
Here are a few reasons to be skeptical about this strategy…
Continue reading “Passive income through option writing: Part 7 – Careful when shorting long-dated options!”