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.             

 

  

   

don't sellputsthencalls to "get-rich-quick"

Investors may ask me, "How's your option selling strategy doing?"  Or, "Is it better to sellputsthencalls or better to simply buy-&-hold?"  I've observed option selling advocates boast that the strategy is an easy way to make a lot of money, especially since, as they proclaim, "75-80% of options expire worthless, & therefore, the option seller simply collects premiums 75-80% of the time.  No assignments to buy or sell the underlying, 75-80% of the time!  Almost like free money." 

I sell monthly options against ETFs in my IRA & after each 3rd Friday's expiration, I measure my month's performance & annualize the performance.  Over the most recent 9 months that cover option expiration Fridays 3/15/19 through 12/20/19, I sold options against 3 ETFs:

• SPY, the S&P 500 index.
• DIA, the Dow Jones Industrial Average.
• EEM, an emerging markets index.

I didn't use all 3 ETFs in each of the 9 months.  I used SPY in 5 of the months & DIA in the other 4; never together.  I only used EEM in each of the last 6 months.  When I used EEM, my allocation with it was only about 5%.

In my sellputsthencalls strategy during this period, along with selling puts & covered calls to open, I also repaired puts & calls.  I sold options 20 times.  12 of these 20 expired worthless = 60%.  Not 75-80%.  That low 60% ratio is typical for me because I often sell options that are only slightly out-of-the-money.  I do so to receive higher premiums.  Consequently, I receive more assignments. 

In reporting my option selling performance for 3 of those 9 months, I could easily boast that I'm "getting-rich-pretty quickly:"

• July, +16.7% annualized.
• October, +16.8% annualized.
• December, +16.1% annualized.

But in reporting my option selling performance in 1 of the months, I must admit that I'm "getting-poor-very quickly:"

• August, - 42.9% annualized.

To be fair & accurate, however, I compare these performances against appropriate indices:

• I own a small parcel of FXAIX, Fidelity's S&P 500 index fund, in my IRA.
• I keep track of the .DJI, the index for the Dow Jones Industrial Average.
• I own a small parcel of FPADX, Fidelity's emerging market index fund, in my IRA.

The comparisons (only made against the indices that I used in that month):

July

• option selling, +16.7% annualized.
• FXAIX, +11.3%.
• FPADX, +4.9%.

October

• option selling, +16.8% annualized.
• FXAIX, -7.0%.
• FPADX, +12.5%.

December

• option selling, +16.1% annualized.
• FXAIX, +36.3%.
• FPADX, +57.9%.

And August

• option selling, -42.9% annualized.
• .DJI, -60.9%.
• FPADX, -101.3%.

For the entire 9 month period, 3/15/19 through 12/20/19 (The annualized performance numbers for the 3 indices presume that I had held them for the entire 9 month period.  As noted above, I did not.)

• option selling, +13.7% annualized.
• FXAIX, +21.3%.
• .DJI, +13.4%.
• FPADX, +9.3%.

The above comparisons are not perfectly "apples-to-apples," but they provide a decent contrast.  A better "apples-to-apples" comparison is provided for my 6 month EEM investment, covering 6/21/19 through 12/20/19:

• option selling versus EEM, +20.4% annualized.
• FPADX, +13.2%. 

If you sellputsthencalls, don't expect to "get-rich-quick."  Expect your option selling performance to compare as follows to these buy-&-hold performances that use your underlying stock:

• Buy-&-hold through the roof?  Options do very well, but not as well.  This underperformance is painful for me, as in December, above.  The compromise of option selling.  But to avoid this compromise, I'd need to buy-&-hold; or buy call options.
• B&H up modestly, flat or down modestly?  Options generally outperform.
• B&H into the tank?  Options also lose, but not as much.  Don't under-appreciate "losing less."  If B&H produces a 20% into the tank loss from $10,000 to $8,000, it takes a 25% return to get back up to $10,000!  When you sellputsthencalls, you're hedging against market losses.