Selling put options for income certainly doesn’t rank up there with all the excitement recently in short squeezes and cryptocurrencies but, then again, it shouldn’t. If you arrived at my site looking for excitement, you are going to be beyond disappointed!
Selling relatively short-dated naked put options on US stocks using the holdings in my investment account as collateral is a means of generating extra income and so far, so good as the table below shows.
On February 12, four of the naked put options I sold earlier expired worthless leaving me with two open trades.
A trade statistic that I consider is Median Return / Standard Deviation of Returns. This is an indicator of the quality of the trades and, as a trader, you want the value of this calculation to be high given that you want a high median return and a low standard deviation. As of right now, the standard deviation for my naked put trades is 31.7% giving me a value of 0.49 for this calculation. My goal is to improve that by both increasing the median return and lowering the standard deviation.
Since I last posted, I have closed seven naked put option trades and opened four new ones. Towards the end of this past week, I didn’t find any new trades that I felt comfortable with taking on. The market feels risky to me right now. That feeling is confirmed by my tactical asset allocation (market timing if you will) model that provided a caution signal a week ago for the first time since mid-May 2020.
At present, I have about one-half my normal open naked put option trades on. As I stated recently, the naked put option trades felt too easy. Time will tell but I suspect that it may soon be difficult to get the returns I did since I started posting my trades here last year.
My sign off picture this time is of a brook not far from my cabin.
This past week, I bought back two puts: MRVL for an annualized return of 39.4% and INTC for an annualized return of 59.5%. With those trades closed, I opened two new trades: a Feb 19 $44.00 MRVL naked put and a Feb 19 $140.00 QCOM naked put.
Currently, I have seven open naked put trades.
As I did last week, for something different I will end with a personal picture. The small building shown below was originally a one-room school in Bobby’s Cove, Newfoundland. It was purchased by a family from Cottrell’s Cove in 1930 and towed by horses across the sea ice in the winter to be used as a convenience store. With time, the family built a new store and used this building as a warehouse. Sometime in the 1980s the family no longer had a use for this building so it sat unused for decades. My late father purchased it and had it moved a short distance and a small wharf constructed in front of it. The wood siding was in need of replacement so this past summer I had the building restored. It used to be beige like the building to the right in the background. It took me several weeks to find the right colour and I am very pleased with the restoration.
For those of you who have subscribed to my site and receive my posts by email, I hope you enjoy seeing my part of the world. From reviewing the list of countries that my subscribers are from, most subscribers aren’t from Canada so I hope you these pictures are interesting for you. If you prefer that I not include them, please let me know.
With all the chatter on Twitter lately about jaw-dropping gains in the prices of Tesla and Bitcoin, writing a post about selling put options feels excruciatingly boring! It’s as though I am in a community of one.
Mind you, there is a small portion of my investment portfolio that is certainly exciting but my posts here are a means of me keeping myself honest about the value (or lack thereof) of generating income through collecting put premiums every month.
I know that I sound like a broken record (for those of you old enough to remember what happens when you have a deep scratch on a vinyl record) when I say that the US equity markets continue to provide excellent opportunities for selling put options on stocks.
Since I began posting my put option trades here on my humble blog last year, I have closed 45 trades and have a median annualized return after commissions of 13.3%. If you trade on one of the ultra-low commission online brokerages, your returns should be better than mine. I pay higher fees than I would if I switched to Interactive Brokers but I may get better fills.
For those of you who aren’t fully familiar with naked put options, I am using the holdings in one of my investment accounts as collateral for these trades. I am not tying up any capital by selling put options. I could have 100% of my account invested in ETF’s and still sell naked puts using the ETF’s as collateral. You could consider selling naked puts as a side hustle. Essentially I am selling insurance in that I am assuming risk and am being paid to do that.
I am going to sign off with a picture of me enjoying the view from our historic home in coastal Newfoundland.
I am posting this before the end of the week given that Christmas Day is on Friday.
Since starting to sell naked puts earlier this year, I have now closed 38 trades with a median annualized return of 14.7% after commissions. Both the S&P 500 and the Nasdaq 100 have positive momentum and the VIX is above 20 so conditions continue to be favourable for selling puts that pass my screen.