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Thread: Ideas or tips to make money selling puts/calls?

  1. Default Ideas or tips to make money selling puts/calls?

    Sorry if this has been covered before. I am new to this forum so I have not looked at any old posts, but want to find out some tips that would be specific to my situation.

    I am not a new investor, and have acumulated quite lot of stocks over the years. Maybe I haven't made mint on my picks but through luck (probably) I have made some good bets.

    Some of my best buys have come when I was forced to execute a put. As is when the market was crashing I was forced to buy CAT at $30/share and forced to buy DIS at $30/share (etc..).

    I am not afraid of being forced to buy a company I like, but I prefer to sell puts that I don't think will execute (or if they do execute will be at a price I like) for example, I sold a put on AAPL $310 (made me $2K for no risk as it turned out there was never even a hint of it going that low, but if it did execute I was OK).

    So, with that as an example, are there any tips for what type of future puts to sell?

    Also, I didn't tend to sell calls on my stocks as I was buy and hold. But I have gotten too fat on AAPL and CAT and I wouldn't mind selling some. IOW I will sell a future call on AAPL (I have sold two contracts one at $650 and one at $700 and got $2K for each) and I figured I would sell them at those prices any way. I know, I will lose on the upside, but I have 400+ so I don't mind if one or two execute and I can sell short puts if the price falls and get some money along the way.

    I also have quite a lot of Altri (MO) which could sell calls on.

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    I am in a taxable account and I will owe capital gains, but I figure the cap gains tax cuts may expire this year and it wouldn't be the end of the world if some of my upside calls are executed, but I am not trying to sell the sahers at all costs either. I am a buy and hold guy so I am not afraid of holding my gainers forever.

    Any questions or advice?

    As I say, I prefer to SELL puts and SELL calls. I don't like paying for any options and can take my downside risks being long.

  3. #3


    I've been a fan of implementing a short put strategy when constructing a new portfolio or legging in to a new position. For example, if my target allocation says I should buy 500 shares of P&G I might buy the first 200 at the market on day 1. I might then sell puts for another 200 shares going 60 to 90 days out. I collect the option premium while I wait and if the option is exercised because PG fell in price and the shares are put to me I've dollar-cost averaged lower as well as lowered my effective cost per share by the amount of the put premium received. I'd then likely do this for another 100 shares until I accumulated 500 shares in total.

    That's one way to implement options if you're looking to build out a position. If you're a holder of a position and simply want more income you may look at selling covered calls on a range bound stock. Unless you're looking to wind down a position because maybe it has grown too large and has begun to dominate your portfolio I would not look to do this on a stock that is trending higher such as AAPL since your shares may get called away. This strategy has worked best for me on range bound stocks.

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    Again, I use P&G as a real-life example I've applied in my portfolio. PG has been on a very slow grind over the last few years. The chart below shows that it has displayed a regular pattern of bouncing from oversold levels as measured by the RSI(14) and turning back when the RSI(14) reaches overbought levels. If you can find a stock that displays regular peaks and troughs such as this I've found it is advantageous to sell calls at least 5% out of the money with expiration somewhere in the 60 day range.

    A good example of the rationale here is to look at the price performance of PG from the March 15 2011 trough of less than $58/share to the May 17
    2011 peak of roughly $65.50/share. Over these two months PG appreciated nearly 13% for an annualized pace of over 108%. I don't think many would say that is sustainable therefore the idea is a call 5% out of the money after a period of short term extreme buying pressure has little probability of being exercised allowing you to collect the income and still hold on to your stock.

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    I'll look at that, I have 3x of PG as well.

    But mainly I want to sell some AAPL and CAT maybe MO if it sells I'm not sad but I don't mind if it doesn't sell.

    So far I have sold future calls on AAPL at +$100 range, but have not sold anything close to the money.

    I was curious if option is a suckers play, what I mean is say I get $2K here, $2K there, $1K here $1K there and then one trade I miss out on $6K meaning it's a wash. In the past, I got cold feet when I had sold puts that I didn't want to execute and I bought them back and they ate up some of my good money with one bad play at the wrong time. Overall I'm good bit ahead with my options, but not WAY ahead since a few bad bad plays can turn really bad.

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    If you're speculating with options the short answer is "yes" they are a suckers play. All one has to consider to realize this is how options are priced. The Black-Scholes-Merton model is the most popular options pricing model in use. The average retail trader does not have access to an options pricing tool to let him know if he is getting ripped off or not.

    If you want to play around with options I'd encourage you to become familiar with Black-Scholes and to consider the 'implied volatility' of the option relative to where historic IV has been for the underlying security. This is sort of what I do in my covered call strategy - I more or less look for cases where the IV is at a significant high, two standard deviations above the mean for example, and then sell short-term calls 5% or more out of the money.

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