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.             

 

  

   

when the goin' gets tough

A good option selling friend of mine once said to me, "An option seller's mettle is really tested when he gets beat up!" 

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 also 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.

On 12/23/19, with XLE - the energy ETF - "struggling" at $59.88, I dedicated my entire option selling strategy to XLE by selling the January $59.71 puts for a $0.93 premium.  On option expiration Friday, 1/17/20, I was assigned to buy XLE at $59.71 because XLE closed at $59.12.  I killed it during that January month.  But I've been crunched since.  Down about $175K in my IRA.  My mettle is tested.  

After January's assignment to buy XLE, I sold covered calls versus my XLE shares.  As I applied my sell puts, then calls strategy since then, I've gotten put & called, & I've also repaired my sold puts & calls.  I've generated a ton of option selling premium; my goal is to generate a premium yield that's greater than 10% annualized.  With the volatility index high, that's easy to do.  In fact, I've recently used some of my rich premiums to buy protective calls - my hedge against a rising XLE market.  XLE's quick & strong recovery since March 23 has made it tough for me to beat buy & hold.  

My monthly performance is as you'd expect versus the above market outcomes, yet frustrating:
ending...       option selling         buy & hold

1/17/20          +0.65%                    -1.23%

2/21/20           -7.4%                      - 8.4%          

3/20/20           -45.5%                    -52.2%

4/17/20           +10.7%                   +33.5%

5/8/20*            +13.3%                   +14.2%

*The May monthly options expire on 5/15/20, but my 13.3% presumes they expired on 5/8/20.  My sold XLE puts are out of the money, therefore this presumption is quite fair for this evaluation.   

I sometimes wonder if it's worth it to sell puts, then calls.  Perhaps I should simply use Fidelity Contrafund.  I retired from Fidelity Investments in 2017, & during my 10 years there, I used only Fidelity Contrafund in my 401K.  But I then realize that I'm not good at picking market direction.  That's why I sell puts, then calls, & hope for the 3 middle market outcomes above.  Since 1957, when the S&P index began using 500 companies, it's up about 8% a year.  Quite middle of the road.          

selling options...better than buy & hold?

It's easy to cherry-pick performance & make any strategy look good.  But with option selling, performance comparisons are very objective.  In chapter 25 of my primer Selling Options...Simply Called and Simply Put (noted on this page), I review 5 outcomes for an option's underlying stock & compare them to selling options versus the underlying stock.  The 5 outcomes are through-the-roof, up modestly, flat, down modestly & into-the-tank. 

In response to my one year old post of 10/21/18, "Flexibility, creativity...," another Dave asked me on 10/24/19 how my option selling versus TLT (the I*Shares ETF that holds long term Treasurys) worked when TLT shot up dramatically in the first half of 2019.  I had piqued his interest in my year old post of 10/21/18, when I reviewed a 24 day period in which I could have done nothing (similar to buy & hold) with my existing, sold, TLT covered call; & compared doing nothing versus the TLT covered call repair that I actually made.  During this 24 day period, the 10 year US Treasury yield rose from 3.10% to 3.20% & TLT dropped nearly $3 a share.  Had I done nothing, my strategy would have gone into-the-tank, losing 2.21% over the 24 days, or 33.54% annualized.  But by repairing my covered call & generating a premium credit, my option selling strategy still got beat up, but not as much - it dropped 1.59% over 24 days, or 24.14% annualized.  The covered call repair that I made provided a modest hedge against rising interest rates & falling bond prices.

To answer "another Dave's" query, I could only review the 3 month period ending on 3/15/19.  During this 3 month period, the 10 year US treasury yield dropped from 2.79% to 2.59% & TLT appreciated.  I compared TLT option selling versus FNBGX, the Fidelity index fund that's a good proxy for TLT because both invest in long term US Treasurys.  During this 3 month period, FNBGX went up modestly, 1.34% or 5.36% annualized.  Selling options against TLT fared better, up 2.73% or 10.93% annualized. 

By the way, the 10 year US Treasury yields only 1.80% today; TLT has gone through-the-roof since 3/15/19.  It's reasonable to say that if I had been selling TLT options since 3/15/19, my strategy would have done well, but hardly as well as buying & holding TLT. 

Option selling, in general, should beat 4 of the 5 outcomes above, losing only to through-the-roof.  But it doesn't prevent an investor from losing money!