≡ Menu

The US stock market continues to provide all the right conditions for naked put option selling. Since starting to post about my naked put trades, I have closed 31 trades with a median annualized return after commissions of 13.3%

If you have an interest in generating income through option writing, here is a post at the EarlyRetirementNow site that I guarantee you will find interesting. The post provides an independent review of the blogger’s trading strategy of selling weekly SPY 5-delta put options on Monday, Wednesday and Friday. The weekly put options that are sold expire on the nearest expiry date. For example, put options sold on Monday expire on Wednesday. I hope you find the post valuable.

All the best in trading and in life.

{ 0 comments }

A New Site for Analyzing Option Trades

OptionStrat is a new free site for analyzing almost every imaginable option trade in near real-time. Fortunately, the site allows the user to enter an option trade to analyze and then share a link to same which I will do below.

Today, I sold two options: a PYPL Dec-18 155 put and a QQQ Nov-20 301 call. Prior to selling both options, I set them up on OptionStrat.

PYPL Dec-18 155 Short Put

If you click on the link above, you will be taken to OptionStrat and will see the following:

The PYPL put had a delta of -0.11 and OptionStrat shows the naked put trade as having a 91% probability of profit (POP).

QQQ Nov-20 301 Short Call

Clicking on the above link will reveal the following table on OptionStrat:

The QQQ call had a delta of 0.22 and OptionStrat shows a POP of 83%.

If you wish to see the traditional style option profit/loss graph, you can do so by clicking on a button the below the table.

The image below shows the current exhaustive list of option strategies which can be set up on OptionStrat:

Rather than me writing a review of what OptionStrat can do, I suggest that you head over to that site and try it out. FYI, I did email a question to the site administrator and received a response the same day so I would suggest that you not hesitate to click on the Contact link if need info.

All the best in trading and in life.

{ 0 comments }

December 2020 SPY and QQQ Covered Strangles

As discussed in an earlier post, I am selling options in a margin account as a means of generating additional income on my investment portfolio. Up to now, I have sold naked puts and today I entered my first covered strangles with SPY and QQQ as the underlying. I am certainly not swinging for home runs but rather small wins to compound over many years.

The tactical asset allocation models that I use currently have allocations to both SPY and QQQ so I chose those two ETF’s for my first covered strangles. My preference is monthly options as they have higher liquidity and entering the trades today gave me 60DTE (days to expiry).

The tables below provide info on the December SPY 307/375 strangle and the December QQQ 250/319 strangle.

Both strangles are very close to delta neutral.

The maximum profit from the sale of the call and put options is the total net credit which would only be realized if the options expire worthless on December 18 with the ETF prices between the Break Even + (call strike + credit) and the Break Even – (put strike – credit). Based on my experience selling naked puts, I expect that I will buy back the options before expiry as per my risk and profit management rules.

All the best in trading and in life.

{ 0 comments }

Over the past week, I closed my MSFT and UNH trades for solid profits and opened new short put trades in PYPL and BABA.

I stated in an earlier post that selling naked puts on liquid US stocks since May feels much too easy. The following two charts provide a partial insight into why selling puts has worked so well thus far in 2020 for me.

The broad US equity market has been in a strong uptrend for the past six months and volatility has remained elevated. For many years, I have understood the saying “Don’t confuse a bull market with brains.”. I suspect there is no shortage of option traders who would present a table of a small number of profitable closed trades as I have done and tout their unquestionable trading skills. You should be extraordinarily leary of self-promoters in the stock and option trading world. A quick search of YouTube videos for option trading strategies will quickly illustrate the proliferation of “traders” demonstrating how easy it is to generate annual returns of 80% or more selling naked put options. I truly hope you know that nobody can consistently make those returns.

All the best in trading and life.

{ 0 comments }

Covered Strangle with SPY

If you haven’t heard of a covered strangle, don’t be alarmed. It is a relatively simple stock and option combination that is rarely discussed in the financial media. Essentially, a covered strangle is a covered call plus a short put. Given that a covered call is a long stock/ETF position and a short call, a covered strangle therefore is a combination of a long stock/ETF position, a short put position and a short call position with both options having the same expiry date. The put and call would typically have the same expiry date and similar deltas when the trade is initiated.

The Options Industry Council has a concise explanation of a covered strangle here including possible profits, losses, influence of volatility and when to use a covered strangle.

Most of my investment portfolio is constructed based on tactical asset allocation (TAA) models using a basket of liquid US ETF’s. One of the strategies I am considering using to slightly improve the performance of my TAA investments is the use of a covered strangle with SPY.

The folks over at TastyTrade discuss the results of some covered strangle studies they have performed here. Aligning with their studies, my plan is to sell 45 to 60 DTE, 16 delta SPY calls and puts so long as my TAA strategy holds SPY.

The table below provides an idea of the revenue that would be generated for one covered strangle using SPY.

SPY Covered Strangle

The annual return is based on the assumption that both the call and the put options expire worthless. This is a scenario that I expect to rarely occur. I will close the option positions before expiry using a profit target, maximum loss and time stop rules.

As always, there are no free lunches especially when options are involved. For me, using a covered strangle adds risk to my TAA investment strategy. There is risk associated with the price of SPY falling below the put strike price. When that happens, I will typically buy back the put at a loss. The income that I received from selling a call at the same time as I originally sold the put will reduce the overall loss but there could still be a loss.

My intent is to open a covered strangle on 100 shares of SPY and post all the trade transactions for the next year here so you can follow along and gain an understanding of intricacies of managing a covered strangle.

{ 0 comments }