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.             

 

  

   

covered call, in the money, ex-dividend?

I often sell monthly covered calls against DIA, the ETF that holds the 30 Dow stocks.  DIA pays a monthly dividend.  Its current yield is around 2%.  The ex-dividend date is always option expiration Friday, which is tomorrow, September 20, 2019.  My current DIA September 20, 2019, covered call has a strike price of $267.  Today, DIA's at $271.42, & my call's $4.42 in the money.  With dividend paying equities like DIA, in the money calls are often assigned against the call seller on the day prior to ex-dividend date, which is today, September 19.  If this happens, I'll be assigned to sell my DIA today, at $267, & because ex-dividend is not until tomorrow, I'll lose my monthly dividend.  As part of my monthly routine when my covered call is in the money, today (one day before ex-dividend date) I considered a one month repair strategy to avoid the premature assignment of my covered call & loss of my dividend:  buying back the September $267 call at the $4.60 ASK & selling the October 18, 2019, $269 call at the $4.90 BID, pocketing the 30 cent credit.  In my evaluation of this repair strategy, I calculate my potential annualized return.  I don't know which way DIA will move over the next 29 days, so I presume that DIA stays at $271.42 for this calculation.  If DIA stays flat, I'll be assigned to sell at $269 on October 18.  $2 strike price appreciation + $0.30 premium credit = $2.30 return.  $2.30/$267 = 0.86% which annualizes to 10.8%.  Add DIA's CY of 2% = 12.8% potential for the repair strategy.  My new October $269 call would still be in the money with today's repair, and premature call assignments generally do occur on the day before ex-dividend which is today, but it's reasonable to dismiss this concern until the next ex-div date which is October 18.  (It is unlikely to see my new October $269 call assigned today because then I'd receive the extra $2.30 repair return almost instantly!)  In comparison to the repair strategy, I considered allowing my September $267 call to be assigned today, obliging me to sell my DIA at $267.  If so, tomorrow I'd sell a DIA, October 18, 2019, cash secured put.  At today's pricing, I'd sell the $271 put, at a $3.60 BID.  $3.60/$271 (the cash secured put's reserve requirement) = 1.33% which annualizes to 16.7%.  Today, because I presume a flat market - I must do so since I don't know it's direction - I chose the put strategy at 16.7% over the covered call repair strategy at 12.8%.

Repair strategy for a covered call that's way in the money.

Click onto the very good BCI blog for a video/review of a $75 (strike price) covered call with the underlying stock over $100 at the expiration date!  Blue Collar Investor - FIVE's repair (roll) strategy