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.             

 

  

   

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

Covered call premiums to complement the dividend.

Did you ever hear an investor saying, "although my stock is getting beat up, at least I'm being paid its dividend as I hold it, waiting for it to recover?" I'm applying that rationale to my recent IRA investment in SPY, the ETF that holds the stocks of the S&P 500.  Via a put assignment on 10/19/18, I paid $288.05 a share (strike price minus the sold put's premium).  SPY closed today at $263.69.  When I sold the put, I knew that SPY was high, but I try not to guess its direction.  I just want to own it, because I need equity allocation.  And I'm not going to sell it at this low price.  At least I'm being paid its dividend as I hold it, waiting for it to recover.  Its dividend's current yield is around 1.9%, which amounts to about $5 a year, or 42 cents a month (it pays quarterly).  To be honest, the dividend is hardly great consolation versus my nearly $25 loss.  But, applying my consistent option selling strategy, I've also sold covered calls against my SPY since 10/19/18.  On 10/22/18, with SPY already down to $275.26, I sold the 11/16/18, $280.50 call & received a $2.33 premium.  As the October debacle continued, with SPY trading at $264.97 today, I applied a covered call roll strategy to my SPY position.  I like calling it a repair strategy, & more appropriately so.  I was able to buy back the 11/16/18, $280.50 call (which I sold on 10/22/18 for $2.33) for a $0.51 premium & I immediately sold the 11/16/18, $273.50 call for a $1.93 premium.  I earned a $1.42 premium credit with my SPY repair strategy.  In covered call premiums, I've garnered $3.75, which is 1.3% of my $288.05 net cost for SPY.  If I don't earn any more covered call premiums on my SPY through 11/16/18, my annualized premium yield is over 15% (1.3% X 12 months).  That's a nice complement to the SPY dividend's 1.9% current yield!  (Suppose SPY exceeds $273.50 in advance of the 11/16/18 close; any ideas?)