where to "put" cash? - 2nd edition - to help pay bills!

See my 6/2/20 post, where to "put" cash?  It was an idea that offered an alternative for investors who are unhappy with money market returns.  But I put the idea to work this month in my own account.  It's a cash account that's used for checkwriting, bill pay, ATM withdrawals, pension & Social Security deposits.  It holds about $120K in cash that's in a money market fund that pays a 7-day yield of 0.01%.  

On 8/6/21, I sold 23 cash secured puts against XLE, the energy ETF.  XLE was trading at $49.69.  I sold the $43 puts that expired on 8/20/21.  I received a $0.07 premium that netted $152.12.  On 8/20/21, XLE closed at $45.89 & my puts expired worthless - i.e., I was not assigned to buy XLE shares at $43.  All I earned was $152.12, representing an annualized yield of over 3%.  Because this account holds "sacred" cash (especially in my wife's eyes), I would have been really displeased if XLE closed below $43 & I'd have been assigned to buy XLE at $43 (my risk).

Today, I did similarly.  XLE traded at $47.69.  I sold 22 cash secured puts against it - the $40 puts that expire on 9/17/21.  I received a $0.13 premium that netted $270.93 for the 25 day commitment, again representing an annualized yield of over 3%.  I have a $7.69 cushion until a $40 put assignment - a 16% cushion.  

What's interesting is that prior to the trade, I observed my monthly bill pay debit of $1,548.83 for my credit card against this cash account.  After my cash secured put trade, that debit was reduced to $1,277.90 - by exactly $270.93, today's put premium.  

Selling puts (& calls) can be helpful - with a controlled amount of risk - to help pay for routine expenses like bill payments.  This strategy can also be applied to finance Required Minimum Distributions.          

defense versus a 10% correction

On another forum, an investor asked for an idea to protect against a 10% decline.  My reply:

"I'm not defending myself against a 10% pullback, in large part, because I don't guess the market.  But if I wanted to defend against a 10% pullback, I might sell a cash secured put against SPY, the ETF that holds the S&P 500.  An example:

SPY is trading at $444.45; close to an all-time high.  A 10% drop would take it to $400.  To be defensive, I'd sell an SPY put with a $400 strike price that expires on 12/17/21.  The buyer of that put would pay me $7.10 (per share).  This put buyer is often a speculator that's making a guess that SPY will fall toward or below $400 between now & 12/17/21. That $7.10 would be paid to my account tomorrow & it's non-forfeitable.  It's mine.  I could spend it on investments, gasoline, groceries.

But the $7.10 isn't free to me; there's a catch...an obligation for me:  if SPY drops below $400 between now & 12/17/21, I'm obliged to buy SPY at exactly $400.  Even if it drops to $390, or to $300 or to $0 (the risk of this idea).  When I'm forced to buy it at $400, my cost basis is $400 minus $7.10 = $392.90.  

I do not have to own SPY shares to make this trade.  But I must hold $400 cash (per share) in my account to secure the $400 buy obligation. 

If SPY stays above $400 until 12/17/21, the put option expires, & my obligation to buy SPY at $400 ceases.  All I have earned is the $7.10.  What's my return if SPY doesn't drop to < $400?...$7.10 divided by the $400 on reserve = 1.8% for about 4 months, which annualizes to over 5%.

If SPY drops to < $400, I'll be obliged (forced) to buy SPY at $400, a 10% discount from today's price.  (Actually, at $392.90!)  

A pure defensive move against a 10% drop would be to stay in cash.  And then, after SPY drops to $400, buying it at the 10% discounted price.  Selling these cash secured puts pays you $7.10 while you wait for the 10% correction."    

Sell puts, then calls...to eliminate guesswork?

In my primer, Selling Options...Simply Called and Simply Put, I insist that my strategy eliminates the need for guesswork.  All I need to do is select an expiration - I use monthly options; & a strike price that's attractive to me - a strike price at which I don't mind a put or call assignment.  I.e., I'm amenable to being put-assigned to buy or call-assigned to sell at my strike price.  Of course, the premium that I receive for selling the put or call must be attractive compensation for my obligation to buy or sell the underlying.  I have no need to guess the future direction of the underlying's price (I even admit that I'm not good at doing so).

To measure my performance, since I only use monthly options against ETFs, I evaluate the month between option expiration Fridays.  I measure my option selling strategy versus a buy & hold strategy for the ETF.  I recognize 5 market outcomes:  

1. through the roof.
2. up modestly.
3. flat.
4. down modestly.
5. into the tank.

If the market for my ETF goes through the roof, my option selling strategy will do very well, but not as well as buy & hold.  If the market goes into the tank, I'll also lose, but not as much.  But if the ETF's market is flat, or up or down modestly, option selling is often a real winner. 

No need to guess?  I sell the put or call & often hope for 3 outcomes:  up or down modestly, or flat.  But if the underlying goes through-the-roof, even though I do very well, I am often disappointed to leave money on the table - to not get it all!  And if the underlying tanks, even though I lose less, I'm often disappointed about the loss! That's when, at times, I apply a repair strategy (a roll strategy).  It's my  sometimes-mistaken effort to out-guess the market. 

On 12/23/19, I began using XLE - the energy ETF - exclusively in my sell puts, then calls strategy.  Starting with $467K.  In almost all of the 19 months through 7/16/21, my option selling strategy's performance compared as expected versus a buy & hold performance vis-a-vis the 5 market outcomes above.  But my overall 19 month option selling strategy dismally under-performed buy & hold.  During this 19 month period, XLE dropped 13%, from $61.67 to $53.65 (including the $4.97 in divs).  My option selling strategy lost 18%, down to $382K!  I would have expected a single digit loss.

Although I had some successful repair strategies, I made 2 critical errors using them.  In March, 2020, I repaired my strike price from $32 to $26, when XLE was around $23.  I guessed that XLE would stay (COVID-) weak, but it moved to nearly $34.  In March, 2021, I repaired from $47 to $55, when XLE was around $53.  I guessed that XLE would remain strong, but it dropped to around $49.  

The March, 2020 error cost me $41K & the March, 2021 error cost $21K!  Without these mistakes, my 7/16/21 value would have been $444K, down only 5% & in line with my expectation.