The US equity market continues to provide a favourable environment for those of us individual investors generating income for our personal portfolios through the selling of put options on liquid stocks. In the past week, I closed my MU trade and sold UNH and AAPL puts. Thus far, my average and median annualized trade returns (including commissions) are greater than 11% but the number of closed trades is still very small.
I spent some time recently considering option backtesting software. One of the software packages that I am looking at is OptionNet Explorer. Unfortunately, very little information is provided on the company’s website with regard to the software’s ability. It would be very helpful if they had some videos available for potential new customers. There is, however, a 30 day all-inclusive trial for 10GBP so that is an inexpensive way to try the software for anyone interested in backtesting various options strategies.
This past week I sold puts on MU, MSFT and UNH. Also, I closed the BABA trade for my highest annualized return so far this year.
If you perform a Google search on “selling put options for income” you will likely see on the first page of results a number of YouTube videos. Virtually all of them are terrible and the creators use a slight of hand to calculate phenomenal returns on their put trades. The issue is almost always the same in that the creators calculate the returns based on margin requirements. For example, if you sell a put on a $100 stock in a margin account and the margin requirement for the put (it varies by stock and strike price) is 20%, the YouTube video creator will likely calculate the return on the trade based on $20 rather than $100. Obviously, this has the effect of increasing the calculated return five-fold.
Below is a link to a Canadian trader’s site which has a very outdated design but the content is fine. One caveat – do not click the link at the bottom of the article to Troy’s Money Tree as the site now appears to be malicious. I have advised the site owner Teddi.
As Teddi notes in her post, selecting a stock to sell a put on is a paramount consideration. She looks for stocks in a sideways range which is a little different from what I do in that I consider stocks with positive momentum.
If you are considering selling stock put options as a means of generating income but are new to trading options, I strongly suggest you paper trade for six to twelve months first. After that, you could continue to paper trade but also commit a small amount of your portfolio to selling puts until you are confident in your put selection strategy as well as your ability to manage open trades.
No put options met my criteria this past week so no new positions were opened. The HLT puts that I sold on August 28 hit my buy target price and that trade was closed for a 77.8% gross profit over a 19-day holding period.
The table below shows my put option trades since May. The four open positions will likely be closed by the end of the week.
Given that the S&P 500 is up by more than 16% since the beginning of May, selling puts has been an easy way to generate extra income. It has felt too easy to me and I am curious to see how my put selection criteria and trading strategy perform in a more difficult environment which is sure to come.
Earlier this year, I began selling puts on US stocks as a means of increasing my portfolio value beyond that which I am achieving with tactical asset allocation using ETF’s. Over the course of the past number of months, I believe I have improved my ability to select puts that will, overall, provide profitable trades. As of this writing, I have five open positions and for all positions, I have a buy order that is good-until-cancelled to buy back the puts at a 75% profit. If the puts aren’t bought when 21 days-to-expiry remains, I will buy the puts at the market price to close out the trades.
This post just may be the start of me listing puts each week that have passed my filters.
The style of investing I use is most commonly known as Tactical Asset Allocation (TAA). The majority of investors who employ this style of investing with liquid ETF’s probably reallocate at the end of each month. Personally, I reallocate three times each month for a more robust investing methodology.
Very recently, as a means of producing additional investment income, I added a new component to my methodology which involves selling options on the more liquid ETF’s that I hold. I sell cash secured puts and covered calls. The rationale behind this component of my strategy is that the ETF’s I hold are most likely to rise in price in the very near term or, at the very least, not decline meaningfully. That being the case, properly selected puts with 30 to 50 days to expiry remaining should expire worthless more often than not.
Covered calls are a little different in that the ETF’s I hold should increase in price in the next 30 days or so and calls sold at a similar delta as the puts I sold are more likely to be exercised (i.e. the ETF units would be called away by the purchaser if the price of the ETF is above the strike price on expiry day).
At this point, I won’t get into how I select the puts and calls to sell other than to say I pick appropriate days to sell the options. In my opinion, not every day is a great day to sell either a put or a call.
The table below illustrates the small number of option trades that I have closed so far. Please note I do have open trades and some of them are in losing positions. If I closed out the losing positions at the time of writing this post I would have an overall positive result (i.e. my option selling would have produced positive income).
If you have some knowledge of option strategies you would recognize that selling a put and a call with the same expiration date is a short strangle. At a most basic level, that is what I am doing. A common short strangle approach used by options traders is to sell 30 delta puts and calls in equal numbers on the underlying stock or ETF and buy them back when a profit of 50% or 75% is achieved. Looking at the Gross Return column in the table above you will note that the lowest gross return so far was 75.6% so that gives you a very good indication of the profit return which will trigger me to close out the option.
In the future, I plan to provide updated tables for my closed option trades and time will tell if my selling puts and calls on the ETF’s I hold will prove to be a sustainable means of producing additional income within my investment portfolio.