Get started

Shortput

The Weeks/Months Ahead: DCA Using Short Puts/Short Put VerticalsNow that I'm retired (whee!) and in the process of rolling my employment-based retirement account into my IRA, I need to think about deploying that buying power somewhere. Traditionally, I've sold primarily short puts in broad market as a way to emulate dollar cost averaging (DCA) into the broad market versus just buying shares and, if assigned stock, proceeded to sell call against at or above my cost basis. I'm pretty much going to continue doing that here, along with getting into some high implied volatility exchange-traded funds (e.g., ARKK, See Post Below). SPY, after all, isn't paying all that richly here, with the September 17th 400 short put paying around 4.00 or 1.01% (5.42% annualized) in premium as a function of notional risk, which isn't exactly going to rock anyone's world. In comparison, the ARKK September 17th 102 short put is paying around 1.99 or 1.99% (10.68% annualized) in premium as a function of notional risk. Naturally, that September 17th 400 short put is around the 17 delta, so I could conceivably sell closer to at-the-money to force a bigger credit, but my basic philosophy is one of consistency: Sell the 16 delta. It pays what it pays. Sometimes it will pay more. Sometimes less. We're just in a "less" phase at the moment. Additionally, I'm at a stage where I'm less concerned about ROC %-age and more concerned about "Is this making enough in pure dollar and cents terms?" If 5.42% annualized does the trick, well, then, I'm totally fine with that, even if it isn't the kind of returns people want to see out of their retirement portfolios. Granted, SPY now qualifies as a "large instrument," so short putting it isn't going to be an option or desirable for the vast majority of individuals, particularly when the ROC %-age isn't all that sexy. Enter the short put vertical, which is easier on the eyes from a buying power perspective and has better ROC %-age metrics. Slap a long September 17th 395 long put on that 400 shortie, and -- voila -- you get a defined risk setup costing 4.53 ($453) to put on with an ROC of 10.4% at max (55.8% annualized). Too weenie? Go SPX 50-wide, with the September 17th 3950/4000 paying 4.50 at the mid on a buying power effect of 45.50 (9.89% ROC at max). Up to this point, I've been doing a mix of both, reserving the 50-wides for <45 days' duration (See Post Below for one of my standard 50-wide SPX spreads) and the short puts for longer. In the very small account I've been posting trades for (See Post Below, QQQ August 13th 327.5/332.5 Short Put Vertical), well, I'm pretty much relegated to spreads, since there's little buying power available to do much else. From a trade management standpoint, I've been doing the following: (a) Rolling the broad market short puts at 50% max and, if assigned, taking on shares and selling call against at the strike at which my short put was. For underlyings that are less liquid, I lean toward taking them off on approaching worthless, even though this generally ties up buying power for longer. On occasion, I've been rolling the short puts up intraexpiry, (See Post Below, rolling the December 240 to the December 297); on others, out in time. (See Post Below, rolling the August 20th 381 to the September 30th 378), with where I roll primarily having to do with what the 16 delta strike is paying. If it's paying <1% intraexpiry, I've generally been rolling out. (b) Taking profit on the short put verticals at 50% max, loss at 2 x credit received. One of the reasons I just take loss on these is that rolling a spread -- particularly one that is in the money -- can be pesky if your aim is to receive a credit on roll. If it's in the red, you're going to realize a loss on roll anyway, so you're generally better off just taking it and then reentering with a higher probability setup. Naturally, there are some potentially subjective elements to that decision-making process (e.g., what is the probability of profit at that juncture in time, how much time is left in the setup, how do the strikes set up relative to support/resistance, etc.), but I like to stay mechanical and taking loss at a given metric makes for a "clean" decisional process. (c) On approach of lengthy vacations, my tendency has been to flatten out of the spreads, since they're not nearly as "set and forget" as the short puts. Since I have to be fine with getting assigned shares on any given put contract, I can walk away for lengthy periods of time, after which one of two things happen: (1) the contract expires worthless; or (2) I'm assigned shares. Naturally, if I'm away and get assigned and don't cover immediately, I'm potentially out of some short call premium, but it's not the end of the world. You do not want to walk away from a spread that could end up in the money and convergent on max loss, particularly if you're not prepared for the buying power effect of being assigned shares on the short option leg of the spread. There isn't assignment risk with SPX options (they're cash settled, after all), but still, waiting to take something off that is convergent on max loss is no bueno. As usual, we'll see how things go. 2020 was fantastic for anything "bullish assumption," with 2021 being more of the same through the first half of the year. Naturally, I don't need broad market to continue ripping higher to make money with these basic strategies; sideways will also do.
AMEX:SPYLong
by NaughtyPines
5
Rolling (IRA): SPY September 17th 358 Short Put to October 15th... 373 for a 2.06 credit. Comments: Doing mechanical rolling at 50% max in a longer-dated strategy in SPY. With the September 17th 358 currently valued at 1.69, rolling out to the October monthly to the strike paying at least 1% of the strike price in credit. Here, that's the 373, currently paying 3.75. Total credits collected to date: 9.01 + 2.06 = 11.07 versus a current short put value for the October 373 of 3.75, so I've locked in 11.07 - 3.75 = 7.32 ($732). Looked at another way, my cost basis in any shares assigned from the 373 contract will have a cost basis of 373 minus total credits received of 11.07 or 361.93. As with all my other short puts, I'm fine with being assigned shares, selling call against should that occur.
AMEX:SPY
by NaughtyPines
Rolling (IRA): SPY August 20th 381 to September 30th 378... for a 2.04 credit. Comments: Mechanically rolling at 50% max. Here, I'm rolling out to the quarterly expiry strike that pays at least 1% of the strike price in credit (the September monthly is getting kind of crowded), which happens to be a lower strike. Credits collected so far: 16.31 (See Post Below) + 2.04 = 18.35 relative to a current price for the September 30th 378 of 3.77, so I've realized gains of 18.35 - 3.77 = 14.58 ($1458).
AMEX:SPY
by NaughtyPines