As I sellputsthencalls I don't use greeks. The premium numbers tell me all I want to know. (This discussion features puts, but I also apply similar consideration to calls.)
On the last monthly option expiration Friday, 12/20/19, all of my options - SPY & EEM puts, both short - expired worthless (because both markets went through-the-roof). On Monday, 12/23/19, the first business day after the December month's expiration, my entire option selling portfolio was available as cash available to trade...$448,000. I disclose the amount of my Rollover IRA that I sellputsthencalls against because that disclosure adds to the feel of risk.
Normally, I'd sell as many cash secured puts as possible against SPY (S&P 500), to help me to buy SPY a bit lower (or DIA [Dow Jones Industrial Average]). I'd go out to the next monthly option expiration date, in this case 1/17/20. I'd generally choose a put that's only slightly out-of-the-money, so that I can get the highest premium. To evaluate risk, on December 23rd I looked at 3 strike prices, with SPY at $321.56:
- 14 puts $321.50 strike price $2.91 BID 13.2% premium yield $4,074 total premium
- 14 $321.00 $2.74 12.5% $3,836
- 14 $317.00 $1.80 8.3% $2,520
To calculate premium yield, I divide the BID by the strike price & annualize it. I know that if the market for SPY stays flat over the next month my return is the premium yield. Because I don't guess SPY's direction over the next month - I'm not good at doing that - I presume, & often hope that SPY does stay flat.
In the option month ending on 12/20/19, my actual sellputsthencalls return in my IRA was 16%. My option selling allocation that month was about 90% SPY & 10% EEM (emerging markets). 16% is very good, but a simple buy & hold strategy (with no option selling) using these 2 ETFs would have produced 36% & 58% annualized, respectively. In my sellputsthencalls strategy, I realize that I'll always underperform a through-the-roof performance by the underlying stocks. But this strategy's worth it, I think, because in the other 4 performances by the underlying - up-modestly, flat, down-modestly & into-the-tank - option selling generally wins.
Although December's underperformance is understandable, I thought that this January I'd chase December's lost opportunity by investing in energy. Plus, I've been a fan of the energy market since oil tanked in 2014. I've made a little money on the energy market at times, but currently, I'm in a position in my taxable account to lose a reasonable amount with the 1/17/20 expiration of long call options. Despite being an avowed sellputsthencalls trader, I have purchased some calls speculatively; & mostly unsuccessfully. So going into the January month, I was in the mood to catch up a bit. I considered Exxon Mobil with my $448,000; I could sell puts against XOM, trading at $70.12:
- 64 puts $70.00 strike price $1.05 BID 21.9% premium yield $6,720 total premium
The risk of selling puts?...getting put. It's a risk because the underlying stock can drop...the risk of stock ownership. Of course the risk of XOM ownership is much greater than the risk of SPY ownership, since SPY is a mutual fund. The feel of that risk?...SPY's total premium (from my just out-of-the-money put) for my IRA is $4,074, a 13.2% premium yield; XOM's total premium is $6,720, a 21.9% premium yield. I love $6,720, but I'm deathly afraid of $448,000 allocated to one company (XOM).
But how about XLE, the ETF that invests in 29 energy stocks (its largest position is XOM)? With XLE at $61.73:
- 73 puts $61.50 strike price $0.91 BID 21.6% premium yield $6,643 total premium
Feeling risk? To sell cash-secured puts against my entire $448,000 sellputsthencalls portfolio, I considered 3 choices, all barely out-of-the-money:
- SPY, producing $4,074 in total premium; 13.2% premium yield.
- XOM, producing $6,720; 21.9%.
- XLE, $6,643; 21.6%.
Looking at these choices, I could feel the risk of each. I'm frankly surprised that I could receive nearly the same total premium from the exchange traded fund XLE (a mutual fund) as from XOM. This enabled me to easily preclude selling puts against XOM; why accept the risk of an individual stock, XOM, when the much more diverse XLE gets me essentially the same premium?
Rather than applying my more conservative strategy of the past 2 years & trading against SPY, I chose to sell puts against XLE, whose price ticked down to $61.67 at trade time:
- 73 puts $61.50 strike price $0.93 BID (execution) 21.96% premium yield $6,738.56 total premium
In "selecting" risk during this January month, I chose to accept more, & I could actually feel the risk:
- XLE's total premium $6,643 versus SPY's $4,074.
- XLE's premium yield of 21.6% vs SPY's 13.2%.
- The risk of getting put a small S&P 500 sector rather than the broad S&P 500.
- The risk of chasing performance - December's lost opportunity; & even my taxable account's anticipated energy market losses (where I've owned XLE calls).
- Although I'm not good at market guessing, SPY is at all time highs. XLE is very low in comparison to its $100 price during 2014's oil peak. Investors are wondering about an S&P 500 decline. We all wish we could buy SPY at its March 9, 2009 lows. Perhaps XLE represents that chance? Perhaps I should select XLE's risk because there's less chance of it tanking than there is of SPY tanking? XLE, less risky?
As I sellputsthencalls to "select" risk, I'd be delighted to hear comments. In particular:
- Am I missing something as I ignore greeks?
- Am I "selecting" too much risk by generally selling barely out-of-the-money puts? I get assigned quite a bit; only about 60% of my sold options expire worthless.
- Is it appropriate to suggest that XLE exhibits less risk than SPY because SPY is at a market peak, & XLE is far below one?
- I like to sellputsthencalls because it's very quantitative. I can measure the risk & feel it, then "select" it.
- I often presume - & hope for - a flat market. Should I make more effort to pick direction?
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