TRADE IDEA: APA JAN 17TH 20 MONIED CC or JAN 17TH 20 SHORT PUTWith broad market and exchange-traded funds being temporarily unproductive from a premium-selling standpoint, I've been scouring the earth for high rank/high implied underlyings. APA (100/74) is one of them with earnings in the rear view.
Pictured here is a monied covered call with the short call at the 20 strike in the January cycle.
Markets are showing wide here (16.05/17.70/19.34), most of which is due to after hours pricing of the stock, which ended the regular session at 23.22, with the short call at 4.17 at the mid, implying a possible fill of 19.05 with .95 max for the monied covered call (5% ROC); the same strike short put pays .91 at the mid with a cost basis of 19.09 if assigned, so it's six of one, half dozen of the other in a cash secured environment, but greater buying power efficiency on margin by going short put over the covered call.
Go less monied with the call -- at the 22.5 strike, and you're looking at potential 20.65 fill and 1.85 max (9% ROC); the 22.5 short put pays 1.76 with a cost basis of 20.74 if assigned.
Shortput
OPENING (IRA): XLP JAN 17TH 52 SHORT PUT... for a .40 credit.
Notes: Another "not a penny more" short put with a resulting cost basis of 51.60/share if assigned. As with my XLU and HYG not a penny mores (See Posts Below), will look to roll "as is" for a credit on at least a quarterly basis until assigned or that's no longer productive. Current yield of 2.99%; $178 annualized on a one lot ... .
This trade kind of rounds out what was on the remainder of my IRA shopping list which has focused on dividend yielders like IYR, HYG, XLU, and XLP. I'm already in IYR covered calls and in HYG and XLU short put plays.
OPENING: TSLA JAN 17TH 110 SHORT PUT... for a 1.17 ($117) credit.
And back into my bet that TSLA doesn't lose 50% of its value in the next 115 days on this 18 handle sell-off ... .
OPENING: TSLA NOV 15TH 100 SHORT PUT... for a 1.05 credit.
Notes: A bet that TSLA does not lose more than half its value in the next 4 months ... .
EDUCATION: EMULATING YIELD VIA SHORT PUTOver time, my basic approach to my IRA has been to acquire shares at substantial discounts over time and to take advantage of "the three legs": (1) short call premium; (2) dividends; and (3) growth, with the eventual goal to be able to solely or predominantly rely on dividends post-retirement, since "growth" can periodically be elusive and short call premium collection on covered calls can vary widely, depending on movement of the underlying, implied volatility, and one's degree of "aggression."*
Typically, this has involved selling puts as an "acquire lower" strategy, followed by share assignment, and then covering. However, as we all know, getting into stock at a particular price results in a less than agile setup. After all -- and regardless of whether you buy stocks outright or are assigned them -- once you're in stock, you're in at the price you bought or were assigned, and there's no amount of magic wand waving that will change the price at which you acquired, even if you shed tears and get buyer's remorse later.
In comparison, staying in options as long as possible affords you greater flexibility as to potential acquisition price since you can roll for credit and therefore cost basis reduction before your getting full on into the shares. Relatedly, you can essentially "manipulate" the potential share price at which you're assigned by rolling the short puts down and out if you become unhappy with the strike at which you sold originally.
All that having been said, what if I want to emulate dividend yield in the shares while I wait to get assigned at a discount? Well, there's a way to do that -- with short puts.
Pictured here is an EEM June 19th '20 36 short put, paying .97 at the mid, with delta/theta metrics of 18/.36. 328 days out in time, it's the expiry nearest 365 days 'til expiry, and the delta'd strike (~18) that will pay something approximating the annualized dividend of $90.** In other words, this isn't the actual trade you'd put on to emulate dividend yield (although absolutely nothing prevents you from doing that), but rather a guide to tell you what delta and/or theta you'd need to sell in shorter duration to emulate the amount of annualized dividend.
In this particular case, selling the September 20th 40 short put*** would potentially fit that bill. Paying a .30 credit, it has delta/theta metrics of 17.29/.69 with a theta burn nearly twice that of the longer-dated 36, with the downside being that the strike is obviously much closer to current price than the 18 delta sold out in time. However, the theta metric makes it conceivable that you could collect what amounts to the annual premium of .90 in three to four expiry cycles as compared to 12, assuming that the underlying goes sideways, up, or even down to a certain degree during your credit collection/divvy generation emulation process.
Post fill, look to roll at extrinsic approaching worthless from the ~18 delta to an ~18 delta strike in an expiry that will pay a credit, aiming to collect at least .25 with any given roll. If you're not able to get at least .25 on a roll to a similarly delta'd strike without going out an absurd amount of time, consider rolling down and out more incrementally.
Naturally, this begs the question of whether and under what circumstances it's worth being in stock versus short puts since you can emulate not only dividends, but also growth with short puts ... . But I'll leave that discussion for another day.
* -- By "aggression," I mean what delta you're willing to sell as cover (i.e., 20 versus 30 versus 40 versus at-the-monied or even monied).
** -- The annual yield in EEM isn't great -- 2.08%, so I'm primarily using it as an example due to its excellent liquidity and market tightness in the off hours.
*** -- Naturally, this is best done on weakness or in a higher implied volatility environment. EEM's at 7/16 here, so you're consequently not getting a ton of juice out of the 18 delta.
"THE KID": OPENING (IRA) IWM SEPT 20TH 125 SHORT PUT... for a 1.10/contract credit.
Metrics:
Max Loss/Buying Power Effect: Full notional
Max Profit: $110/contract
Break Even on Setup: 123.90 (18.4% discount over where the underlying is currently trading if assigned)
Delta: 10.93 (Current)
Theta: 1.36 (Current)
Notes: While I'm sitting on my hands a bit here, I figured I post one of my kid's "Not A Penny More" IRA trades (See HYG Post Below). She doesn't do a ton, doesn't want to look at stuff a lot (maybe once a month), and is totally unwilling to buy into the ridiculousness of acquiring shares at near all-time-highs. This particular trade was put on some time last week, and she'll look to roll out for a credit once a month post-opex for cost basis reduction until that's no longer productive or until she gets assigned, at which time she'll proceed to sell calls against her shares.
OPENING (IRA): SPY MARCH '20 215 SHORT PUT... for a 2.57/contract credit (cost basis of 212.43/share).
Notes: Here, I'm looking to acquire additional SPY shares, but only at a potential 25% discount from current price. Otherwise, I want to get paid to wait and/or reduce cost basis in the meantime. Because expiries are skip month (March, June, September, December, etc.), will look to roll out for additional cost basis reduction every other month, so this is likely to be a slow trade ... .
OPENING: X MAY 17TH 19 SHORT PUT... for a .49/contract credit.
Metrics:
Max Profit: $49
Buying Power Effect: ~$202/contract
Break Even/Cost Basis If Assigned: $18.51/share
Delta: 15.96
Theta: .74
Notes: Here, I'm just looking to deploy some buying power in one of the few underlyings with fairly decent implied volatility (42.4%) at a high probability of profit strike (the 16). I'm fine with taking on shares, but only want to do that at a discount over current price -- the 18.51/share cost basis represents a 20.4% discount over where it's currently trading. Will look to roll out as is at 50% max as long as that remains productive.
THE WEEK AHEAD: NIO EARNINGS; XOP, EWZ PREMIUM SELLINGMy screeners aren't showing me a ton of things for either earnings-related volatility contraction plays and/or just Plain Jane premium selling, so I'm largely looking just to work what I have on, do any adjustments that are necessary, and wait for a higher volatility environment (VIX is at sub-15 here) to deploy capital back into premium selling.
The Chinese "Tesla killer" NIO (82/136) announces in two days and with a background implied clocking in at 136, who can resist putting something on. Pictured here is a fairly delta neutral 11 Short Straddle in the April expiry that is paying a whopping 4.18 at the mid (1.04 at 25% max) with break evens that encompass most of the underlying's whole data set -- 6.82 to 15.18. Even skewed to the call side, the net delta is -2.59 with a theta metric of 4.08.
Obvious alternative plays:
April 18th 7/11/11/15 iron fly: 3.10 at the mid, max loss of .90 versus max profit of 3.10 (.78 at 25% max), delta -.97, theta 1.43. I would note the rarity of the substantially better than risk one to make one metrics of this setup.
April 18th 7 short put, .72 at the mid with a downside break even of 6.28.
On the exchange-traded fund front, the vast majority of underlyings are at the very low end of their 52-week ranges, with the highest implied underlyings in XOP (16/30) and EWZ (10/30), which again militates in favor of not putting on a ton of nondirectional premium selling stuff here.
I did look at ASHR, which did stick out at 75/34, but the options chains in April, May, and July have wanky strikes (i.e., the April 28th 27.71 (WTF?) short straddle), and I don't like having to roll from "wanky" to an even Steven strike if I have to. If I'm going to play China, it's going to be in the more liquid FXI (16/21), which doesn't suffer from similar oddities that make trading it potentially harder than it has to be.
TRADE IDEA (IRA): HYG SEPT 20TH 82 SHORT PUTMetrics:
Max Profit: $173/contract
Buying Power Effect (Cash Secured): $8026
Break Even: 80.26/share
Delta: 31.71
Theta: .67
Notes/Comments: Up to this point, I haven't posted many of my IRA trade ideas, primarily because they are way longer-dated setups than people are generally interested in, and I've also been an infrequent buyer of the underlyings that make up my portfolio -- a fairly mundane mix primarily made up of SPY, EFA, TLT, and IYR covered calls where setup management consists of looking at the short calls from time to time and rolling them out for duration, credit, and further cost basis reduction. It isn't very exciting, and I may not have to do much for weeks, if not months, in certain cases.
Naturally, this trade is not going to be attractive to everyone; you are, after all, going to be tying up $8k of buying power for a very long time with a return on capital of about 2.16% if you do nothing and the short put expires worthless. For me personally, I have idle cash sitting in the IRA earning virtually nothing, and I don't anticipate adding to my core positions in short order given my cost basis, where these underlyings are in the grand arc of time, and my proximity to retirement. Moreover, one of my basic IRA rules is not to undertake single name risk, so my basic options are (a) do nothing; or (b) stick something out there and get paid to wait for the price at which I want to acquire.
Here, I'm interested in acquiring HYG with its attractive 5.46% yield, but at a price discounted substantially over where it's currently trading; otherwise, I simply don't want the shares. I can either wait until price gets there or sell puts that will result in a cost basis at or below what I'd like to get in at if I'm assigned. Here, I'm opting for the latter ... .
Post fill, I'll periodically look to roll for duration and credit to reduce cost basis further.
OPENING: PBR NOV 16TH 12 SHORT PUT... for a 1.07 per contract.
Metrics:
Probability of Profit: 64%
Max Profit: $107/contract
Max Loss/Buying Power Effect: 10.94/~2.00 on margin
Break Even/Cost Basis in Shares if Assigned: 10.94/share (a 12.13% discount over current spot).
Theta: 1.28
Delta: 39.24
Notes: "Wheeling" this small high implied vol underlying, with the basic cycle being short put, run to expiry, cover if assigned, exit profitably, lather, rinse, repeat ... .
OPENING: TUR SEPT 21ST 19 SHORT PUT ... .... for a 1.05/contract credit. High rank/implied (100/78).
Metrics:
Probability of Profit: 73%
Max Profit: 1.05 ($105)/contract
Max Loss/Buying Power Effect: Undefined/$194/contract
Break Even: 17.95
Delta: 27.47
Theta: 2.17
Notes: Taking advantage of the Turkish meltdown to sell some puts.
X - (Short Premium) Selling naked puts for premium $$$Selling premium into large selloff using naked puts. Sold the 30 strike put for .96, 33 delta, 50 DTE. This stock is 30% off from its high and pretty beat up. Hoping for a price pop from major support.
GLD - Selling put options from key support levelsIn this video I discuss key support levels where selling short options for both premium as well as direction(if price bounces higher off of key support) can provide a highly probably and profitable trade setup. There is far more to options that I can fit in a 10 minute video but if you are unfamiliar with them I encourage you to research options. They can add variety to your trading portfolio, increase profitability, and reduce draw downs.
TRADING IDEA: TWO BULLISH ASSUMPTION PLAYS IN DISHDISH announces earnings on Tuesday before market open and is a state of high volatility (>50%). While you can naturally go with the plain Jane volatility contraction play around earnings (short strangle), there might be an opportunity here to catch it at significant lows while simultaneously taking advantage of risk premium present here which will lower your cost basis out of the gate.
The "Wheel of Fortune" Short Put
Sell the June 15th 32.5 Put (Neutral to Bullish Assumption)
Metrics:
Probability of Profit: 64%
Max Profit: 1.60/contract
Buying Power Effect: 30.90 (cash secured); 6.18 (on margin)
Break Even: 30.90
Notes: Look to either take profit at 50% max or run the contract all the way to expiry. If assigned, immediately proceed to cover at or above your cost basis (i.e., sell calls with strikes above 30.90). Proceed to work it as you would any other covered call. To bring in buying power effect somewhat, you can buy the throwaway 25 long for .15, which reduces the buying power effect to 6.05 in a cash secured environment (and reduces the credit received to 1.45 and changes your break even to 31.05); there isn't much advantage to doing that if on margin.
The natural alternative is to roll the broken short put out "as is" for duration and additional credit before taking assignment. Assuming you can get a decent credit to do that, this is usually to your advantage somewhat, since taking on stock is more buying power intensive than naked short putting on margin or uber wide long put vertical in a cash secured environment. In the latter case, you'll have to re-up on buying a throwaway long before rolling out the short to keep the buying power effect in check.
Synthetic Covered Call (Neutral to Bullish Assumption, But More Bullish than the Wheel of Fortune)
Sell the June 15th 35 put
Probability of Profit: 56%
Max Profit: 2.95/contract
Max Loss/Buying Power Effect: 32.05 (cash secured); 6.41 (on margin).
Break Even: 32.05
Notes: Look to take profit at 50% max or do the same thing as you would with the Wheel of Fortune trade, albeit with a less favorable break even. Consequently, it's a slightly more bullish play since you need price to stay above your break even (32.05). Buying the 25 strike throwaway long brings in the buying power effect to 7.07 in a cash secured environment.
* * *
I also looked at doing a Poor Man's Covered Call, but it doesn't look like that would be a more capital efficient setup (at least when I priced it out during off hours) than naked short putting on margin or going uber wide short put vert to bring in buying power effect in cash secured. Preliminarily, a 90/30 June/Sept Poor Man's, which would involve buying the Sept 20 long and selling the June 15th 37.5 short, would cost 13.40 to put on.
OPENING: GE MARCH 16TH 16 SHORT PUT... for a 1.66/contract credit.
Metrics:
Probability of Profit: 49%
Max Profit: 1.66 ($166/contract)
Max Loss: 14.34 (which equals the cost basis in any stock I'm assigned)
Break Even: 14.34
Notes: Put on at the 70 delta strike, this is a synthetic covered call with a buying power effect that is far smaller (~20% of the max loss or $246/contract) as compared to a straight up covered call where you'd buy 100 shares at 14.58 for $1458 and then sell, for example, the March 23rd 30 delta short call at 15.5 for a piddly .35, resulting in a cost of 14.23 ($1423) to put on, so one of the pluses to this strategy is lower buying power effect.
Granted, having the shares themselves entitles you to the divvies (the yield is currently 3.32%), and you won't get those with a naked short.
However, some frown on covered calls as being "capped out" in terms of profit. While that can be partly addressed through rolling the short calls for strike improvement/cost basis reduction, the synthetic is more flexible, since the short put can be rolled up as price moves toward it and over it if that's what you want to do with the play (which is basically continually reduce cost basis in potential assigned shares "up front", after which you'd then proceed to cover via short call).
Here, however, I'm looking to take profit at 50% max or .83 ($83)/contract, so I don't necessarily need price to break the short put completely ... .
