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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.


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.


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.


Put Option Trades for the Week Ending October 09, 2020

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.

All the best in your trading.


Put Options for the Week Ending October 02, 2020

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.

All the best.