Beating Index Investing with Options Trading

[cyanide12345678]

Since we were discussing stocks, I think we should have a discussion on options trading.

I've recently gotten into options, while the rumor is that options are dangerous and extremely risky, but the more I've read on this topic, the more it seems that options are one of the best ways to increase return while minimizing risk if used properly.

Here is an example of the kind of trading that I'm doing with some assumptions.

Assumptions:
1) I buy market price stocks on a weekly basis anyway based on a boring 3 fund portfolio for long term investments.I'm a boglehead in that regard.
2) I have a margin account that allows for significant buying power, but unless a trade goes through, margin is NOT used and interest is not charged.
3) If any of my put orders go through, I'll actually be pretty happy given the ridiculous discount compared to today.

Lets take an example - IWM ( Russell 2000 - Small cap ETF ) - Today's price 147 roughly.

You can sell a IWM put with a strike price of $50 for Dec 2022 for roughly around $130. In other words, you are saying that if the price of IWM was below $50, you will buy 100 IWM stocks for $50 each (even if the price was less than 50, you would buy it for $50). For this contract to be in place, someone is paying me$1.3 per share, or $130 per contract.

Three possible outcomes:

1) Price goes above 147 of todays price by Dec 2022- You gain $130, contract expires, you miss out on the upside of IWM because you never owned it.
2) Price stays between 50 - 147 by Dec 2022 - You gain $130, contract expires, you don't don't get any of the loss of owning IWM compared to a market order at todays price.
3) Price is below $50 on the 3rd friday of Dec 2022 - Lets say $45 (70% drop from todays price); Then You purchase $4500 worth of stock for $5000 based on the contract (100 stocks at 50/share regardless of price). You also keep the $130. So $370 unrealized loss, but what sort of buy and hold investor wouldn't want to buy IWM for $50 compared to today's price of 147. If stocks declined 66%, I'd be buying pretty aggressively anyway.

In all likelihood, the price of IWM will be above $50 at Dec 2022. If it goes below that point before Dec 2022 and then rebounds before that, it usually doesn't matter (long discussion of intrinsic and extrinsic/time value which I don't want to get into). It has to be below $50 on the exact date that the option contract expires for the PUT to go through and for you to buy 100 shares for $5000 for each contract.

Now, with those 3 outcomes in mind, here's how my trading is on steroids:

1) Weekly 2.5k of automatic buy orders of VTSAX and VTIAX in a 60/40 US vs International allocation - Monthly 10K investment. This is what every buy and hold investor normally does. Nothing fancy here. These investments negate risk of number 1 above, since you are invested in the market and participate in the upside over long term.
2) 10K of monthly investment, after buying 10K of VTSAX and VTIAX, gives an extra 10K of buying power on margin.
3) Each of the above PUT trade uses $1000 of margin buying power (not going into the math of how it requires just $1000 of buying power for the above, but that's what it does on my margin account). Now I can theoretically sell 10 of those PUTS, make $1300 on my 10k investment today (13% return today and 5.2% return annual return over 2.5 years which is duration of the PUT), while participating in the upside of tomorrow through VTSAX and VTIAX.

And honestly in all likelihood, I make this extra 5.2% annual return without ever seeing a > 66% drop in IWM and without ever any trade going through and never using any margin and never being charged interest for margin. Even in 2008-9 IWM only dropped 60% from it's peak. So lets be real, it's pretty damn unlikely that the price will be less than 50 on Dec 16th 2022.

The return can be increased significantly if you want to use 30% drop, 40% drop, 50% drop as strike price instead. I just truly felt that a strike price at 66% drop is ridiculously unlikely. so I picked that.

Worst case scenario, I buy a crap tonne of IWM at a 66% drop from todays price at margin (eh...my margin is at 2% interest anyway, so I'm okay with that too). And then I move funds around to eliminate the margin, or cash flow using my income to eliminate margin.

Thoughts? Ofcourse this can be done with VTI, SPY etc, I was just using IWM as an example. Sorry if this is complex Any other options strategy that anyone else is employing?

Full disclosure: I sold 5 PUT contracts today at the strike price of 50 for a premium of $658 that was paid to me today using the exact same strategy as above. The only downside is that I will be on the hook of buying 25K worth of IWM IF price dropped below $50 (dream price to buy for me anyway). Sold some SPY Puts with 55% discount strike prices as well and staggered the dates of the contracts to decrease risk.

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[wamcp]

Since we were discussing stocks, I think we should have a discussion on options trading.

I've recently gotten into options, while the rumor is that options are dangerous and extremely risky, but the more I've read on this topic, the more it seems that options are one of the best ways to increase return while minimizing risk if used properly.

Here is an example of the kind of trading that I'm doing with some assumptions.

Assumptions:
1) I buy market price stocks on a weekly basis anyway based on a boring 3 fund portfolio for long term investments.I'm a boglehead in that regard.
2) I have a margin account that allows for significant buying power, but unless a trade goes through, margin is NOT used and interest is not charged.
3) If any of my put orders go through, I'll actually be pretty happy given the ridiculous discount compared to today.

Lets take an example - IWM ( Russell 2000 - Small cap ETF ) - Today's price 147 roughly.

You can sell a IWM put with a strike price of $50 for Dec 2022 for roughly around $130. In other words, you are saying that if the price of IWM was below $50, you will buy 100 IWM stocks for $50 each (even if the price was less than 50, you would buy it for $50). For this contract to be in place, someone is paying me$1.3 per share, or $130 per contract.

Three possible outcomes:

1) Price goes above 147 of todays price by Dec 2022- You gain $130, contract expires, you miss out on the upside of IWM because you never owned it.
2) Price stays between 50 - 147 by Dec 2022 - You gain $130, contract expires, you don't don't get any of the loss of owning IWM compared to a market order at todays price.
3) Price is below $50 on the 3rd friday of Dec 2022 - Lets say $45 (70% drop from todays price); Then You purchase $4500 worth of stock for $5000 based on the contract (100 stocks at 50/share regardless of price). You also keep the $130. So $370 unrealized loss, but what sort of buy and hold investor wouldn't want to buy IWM for $50 compared to today's price of 147. If stocks declined 66%, I'd be buying pretty aggressively anyway.

In all likelihood, the price of IWM will be above $50 at Dec 2022. If it goes below that point before Dec 2022 and then rebounds before that, it usually doesn't matter (long discussion of intrinsic and extrinsic/time value which I don't want to get into). It has to be below $50 on the exact date that the option contract expires for the PUT to go through and for you to buy 100 shares for $5000 for each contract.

Now, with those 3 outcomes in mind, here's how my trading is on steroids:

1) Weekly 2.5k of automatic buy orders of VTSAX and VTIAX in a 60/40 US vs International allocation - Monthly 10K investment. This is what every buy and hold investor normally does. Nothing fancy here. These investments negate risk of number 1 above, since you are invested in the market and participate in the upside over long term.
2) 10K of monthly investment, after buying 10K of VTSAX and VTIAX, gives an extra 10K of buying power on margin.
3) Each of the above PUT trade uses $1000 of margin buying power (not going into the math of how it requires just $1000 of buying power for the above, but that's what it does on my margin account). Now I can theoretically sell 10 of those PUTS, make $1300 on my 10k investment today (13% return today and 5.2% return annual return over 2.5 years which is duration of the PUT), while participating in the upside of tomorrow through VTSAX and VTIAX.

And honestly in all likelihood, I make this extra 5.2% annual return without ever seeing a > 66% drop in IWM and without ever any trade going through and never using any margin and never being charged interest for margin. Even in 2008-9 IWM only dropped 60% from it's peak. So lets be real, it's pretty damn unlikely that the price will be less than 50 on Dec 16th 2022.

The return can be increased significantly if you want to use 30% drop, 40% drop, 50% drop as strike price instead. I just truly felt that a strike price at 66% drop is ridiculously unlikely. so I picked that.

Worst case scenario, I buy a crap tonne of IWM at a 66% drop from todays price at margin (eh...my margin is at 2% interest anyway, so I'm okay with that too). And then I move funds around to eliminate the margin, or cash flow using my income to eliminate margin.

Thoughts? Ofcourse this can be done with VTI, SPY etc, I was just using IWM as an example. Sorry if this is complex Any other options strategy that anyone else is employing?

Full disclosure: I sold 5 PUT contracts today at the strike price of 50 for a premium of $658 that was paid to me today using the exact same strategy as above. The only downside is that I will be on the hook of buying 25K worth of IWM IF price dropped below $50 (dream price to buy for me anyway). Sold some SPY Puts with 55% discount strike prices as well and staggered the dates of the contracts to decrease risk.

Don’t mistake option premium pricing of today as the normal moving forward. It is not, volatility is currently much higher than average despite VIX having collapsed from 80 print a couple months ago to 27 today. Long run average is 20. I expect the forward vix averages to be more depressed though, towards 12 like prepandemic, thanks to the Fed. Until inflation rises or rates are hiked, I don’t see a high volatility market regime to last years, at least for the near future.

that means option selling strategies may appear attractive today (it was, I made 100k from index put selling since April) but likely not worth it moving forward.

 

[cyanide12345678]

Don’t mistake option premium pricing of today as the normal moving forward. It is not, volatility is currently much higher than average despite VIX having collapsed from 80 print a couple months ago to 27 today. Long run average is 20. I expect the forward vix averages to be more depressed though, towards 12 like prepandemic, thanks to the Fed. Until inflation rises or rates are hiked, I don’t see a high volatility market regime to last years, at least for the near future.

that means option selling strategies may appear attractive today (it was, I made 100k from index put selling since April) but likely not worth it moving forward.

I only started a couple of weeks ago, honestly didn't know a thing about option trading before that. After obsessively watching charts and youtube videos, I feel comfortable with the basics of cash covered puts, naked puts, and covered calls. And so far have been impressed.

I only made $5k since starting a week or two ago selling puts. Pretty weak compared to your 100k I could have made a lot more, but the strike prices I've picked are so damn conservative that they will likely never happen.

 

[wamcp]

I only started a couple of weeks ago, honestly didn't know a thing about option trading before that. After obsessively watching charts and youtube videos, I feel comfortable with the basics of cash covered puts, naked puts, and covered calls. And so far have been impressed.

I only made $5k since starting a week or two ago selling puts. Pretty weak compared to your 100k I could have made a lot more, but the strike prices I've picked are so damn conservative that they will likely never happen.

selling way out the money puts on margin can be a fantastic tool to boost your yield during abnormally high volatility periods. Just beware of the tail risk that comes with it and manage accordingly and don’t overleverage.

 

[erdoc00]

Novice options trading, hmm...

I'm just posting so I can remind myself to revisit this thread in a few months

 

[cyanide12345678]

Novice options trading, hmm...

I'm just posting so I can remind myself to revisit this thread in a few months

Haha i just learned the basics 2 weeks ago i mean I'm still fairly risk averse until i really master something. Open to learning fancier trades. Any words of wisdom?

 

[erdoc00]

Haha i just learned the basics 2 weeks ago i mean I'm still fairly risk averse until i really master something. Open to learning fancier trades. Any words of wisdom?

Probably shouldnt mess with options unless you know what you're doing and have extensive experience with it. Many banks wont even give you the ability to trade options unless you're experienced since there is not only the risk to lose your initial investment but to possibly go orders of magnitude deeper into debt.

Go spend some time on r/wallstreetbets to see the real world examples of this. Lots of Robinhood options traders to learn from.

 

[cyanide12345678]

Probably shouldnt mess with options unless you know what you're doing and have extensive experience with it. Many banks wont even give you the ability to trade options unless you're experienced since there is not only the risk to lose your initial investment but to possibly go orders of magnitude deeper into debt.

Go spend some time on r/wallstreetbets to see the real world examples of this. Lots of Robinhood options traders to learn from.

But if my trades are essentially based on 50-60 percent declines, then realistically it shouldn't be a big deal.

Also, I'm spacing the contract months, and limiting the leverage amount. In case there was a 50-70 percent decline in the markets, then I still have the ability to cash flow those trades with my income. Plus, I'm doing it with things I wouldn't mind owning like VTI, SPY, IWM, VXUS. That's it.

 

[cyanide12345678]

Probably shouldnt mess with options unless you know what you're doing and have extensive experience with it. Many banks wont even give you the ability to trade options unless you're experienced since there is not only the risk to lose your initial investment but to possibly go orders of magnitude deeper into debt.

Go spend some time on r/wallstreetbets to see the real world examples of this. Lots of Robinhood options traders to learn from.

wow i just looked at the reddit. Some people are losing 100s of thousands of dollars! But man...they are betting on individual stocks. That's just gambling I feel.

 

[bravotwozero]

Yeah, I'm just going to stick with an index fund, and re-allocate 10% of my portfolio to physical gold...

 

[Apollyon]

selling way out the money puts on margin can be a fantastic tool to boost your yield during abnormally high volatility periods. Just beware of the tail risk that comes with it and manage accordingly and don’t overleverage.

I understand each word individually, but, in total, I'm lost!!

 

[d2305]

Short and options trading is too hard.

 

[cyanide12345678]

I understand each word individually, but, in total, I'm lost!!

I think what they meant was that what I'm doing is a good way to increase yield, since I'm basically selling puts wayyyy out of the money at 50-66 percent decline from today's pricing. It is extremely unlikely these puts will materialize, and the return they are offering is decent especially in all likelihood they will expire worthless (and I'll keep the premium).

But i basically have to be careful in making sure that i don't sell a lot of puts for the same date - eg dec 16 2022 and over leverage. For eg i could buy 50k of a 3 fund portfolio, gain 50k of additional buying power from margin, then sell 50 puts like above. Id make $130 x 50 = $6500 today on the 50k. But if a black swan event happens just prior to dec 16 2022 and markets are down 70 percent, then i have to buy 5000 shares of iwm at $50 each. So then i have to have $250k of cash otherwise I'm paying for margin or worse getting a margin call. Plus if December puts get assigned, and i have puts for next January, feb etc and market stays really low, then they can get assigned and that's even more pressure to produce cash.

 

[gutonc]

I think what they meant was that what I'm doing is a good way to increase yield, since I'm basically selling puts wayyyy out of the money at 50-66 percent decline from today's pricing. It is extremely unlikely these puts will materialize, and the return they are offering is decent especially in all likelihood they will expire worthless (and I'll keep the premium).

But i basically have to be careful in making sure that i don't sell a lot of puts for the same date - eg dec 16 2022 and over leverage. For eg i could buy 50k of a 3 fund portfolio, gain 50k of additional buying power from margin, then sell 50 puts like above. Id make $130 x 50 = $6500 today on the 50k. But if a black swan event happens just prior to dec 16 2022 and markets are down 70 percent, then i have to buy 5000 shares of iwm at $50 each. So then i have to have $250k of cash otherwise I'm paying for margin or worse getting a margin call. Plus if December puts get assigned, and i have puts for next January, feb etc and market stays really low, then they can get assigned and that's even more pressure to produce cash.

I don't think that helped...at all.

 

[cyanide12345678]

Short and options trading is too hard.

That's what i thought. But after a lot of YouTube , it doesn't feel that way.

YouTube the videos from theta gang and it will all make sense.

Though my baseline financial knowledge was always slightly higher than the average physician, and I've traded stocks for a long time. So i wasnt hesitant to jump in.

I swear sometimes my old Co residents use me as their financial advisor

Though to summarize and see if this makes sense - when i sell a put, someone is paying me $$$ (the premium) for the guarantee of buying 100 shares of stock X at the strike price on a particular date. You pick the strike price and the date. This put only executes if the price of stock x is less than strike price at the date you picked. If it's above that price, you keep the premium, nothing happens. If it's below the strike price, you buy stock x at the strike price and keep the premium.

So let's say stock x is for $100. You would be happy to buy it for $80. One thing you can do is a limit order for 80. Even better would be a put option. You can place a put with a strike price of 80 that expires in 3 months (or whatever time period). If the price drops below, you buy at your desired price while getting paid a premium. If the price never goes below 80, you keep making money on the premium.

Similarly what I'm doing is picking strike prices that are just ridiculously unlikely to happen and trying to just make money from the premium.

 

[DeadCactus]

I'm not convinced that beating the index is anything more than successful gambling with skill falsely attributed to what is really luck. Even more so when a full accounting of all the costs is taken in. This is an idea promoted by people much more educated on the topic than I am. I don't post this to antagonize the original poster: many people would disagree with me and provide well reasoned arguments. I post it so trainees don't feel like they need to get bogged down in advanced investment strategies to be good stewards of their financial future.

 

[Philly145]

It is extremely unlikely these puts will materialize

Famous last words!

As a former wall st options trader, this thread makes me smile

 

[wamcp]

I'm not convinced that beating the index is anything more than successful gambling with skill falsely attributed to what is really luck. Even more so when a full accounting of all the costs is taken in. This is an idea promoted by people much more educated on the topic than I am. I don't post this to antagonize the original poster: many people would disagree with me and provide well reasoned arguments. I post it so trainees don't feel like they need to get bogged down in advanced investment strategies to be good stewards of their financial future.

i will agree to disagree. My active trading and investing in the markets has accelerated my path to financial independence by literally decades already

 

[DoctwoB]

Not an options trader but have considered dabbling once the nest egg is big enough and was going to use the strategy outlined above. Buy margin covered puts on index funds I have no problems holding long term. Keep the trades small enough I can shift some assets or cash flow the exercised options if they occur. Only downside I see is that I buy more of index X at price Y when I could have Bought in at a lower price. That assumes however that I would have been able to time correctly. More likely I would have bought on the way down when price was > Y and then again on the way back up. Of course if the fund goes to 0 I could lose more, but if I had put just that money into the market without options I would have lost that regardless.

Of course by limiting my downside I’m also limiting my upside. Put options on safish index funds aren’t going to give great returns. This isn’t a way to get crazy returns but to boost returns by a modest amount.

 

[thegenius]

1) Price goes above 147 of todays price by Dec 2022- You gain $130, contract expires, you miss out on the upside of IWM because you never owned it.
2) Price stays between 50 - 147 by Dec 2022 - You gain $130, contract expires, you don't don't get any of the loss of owning IWM compared to a market order at todays price.
3) Price is below $50 on the 3rd friday of Dec 2022 - Lets say $45 (70% drop from todays price); Then You purchase $4500 worth of stock for $5000 based on the contract (100 stocks at 50/share regardless of price). You also keep the $130. So $370 unrealized loss, but what sort of buy and hold investor wouldn't want to buy IWM for $50 compared to today's price of 147. If stocks declined 66%, I'd be buying pretty aggressively anyway.

Hey man. I ain’t gonna criticize you. I don’t really know much about this stuff and it isn’t for me. I do think what you are doing is low risk, perhaps very low risk.

What I get concerned about is a few things 1) selling contracts about 1.5 to 2 years out: to me it seems extremely difficult to predict anything like that so far out, no matter how improbable; and 2) the notion that you would be a buyer at $50 anyway of it got that low. That is a huge drop. As I think you write it’s 66% in a fund or ETF that basically tracks the general market. Just imagine what our world would be like in 2 years if the stock market was 66% lower? The Dow Jones would be around 12K. I bet Apple and Microsoft and GE and Boeing and everything else would be tanking. The world economy would be in a free fall. We would have billions of more people impoverished, many millions dead, I mean I can’t even fathom what it would be like to be living in a time when the stock market is that low. And would it be going lower? Would it be going up? Very very very scary.

Again I agree that the chance of your puts ever materializing is basically zero.

So you are agreeing to sell 100 shares of a stock you don’t own to someone at $50 / share? So technically you have to buy it and then sell it immediately?

It’s kind of interesting....makes me wonder why someone would want to buy what you are selling.

 

[thegenius]

What are the YouTube videos you are watching?

 

[Apollyon]

Hey man. I ain’t gonna criticize you. I don’t really know much about this stuff and it isn’t for me. I do think what you are doing is low risk, perhaps very low risk.

What I get concerned about is a few things 1) selling contracts about 1.5 to 2 years out: to me it seems extremely difficult to predict anything like that so far out, no matter how improbable; and 2) the notion that you would be a buyer at $50 anyway of it got that low. That is a huge drop. As I think you write it’s 66% in a fund or ETF that basically tracks the general market. Just imagine what our world would be like in 2 years if the stock market was 66% lower? The Dow Jones would be around 12K. I bet Apple and Microsoft and GE and Boeing and everything else would be tanking. The world economy would be in a free fall. We would have billions of more people impoverished, many millions dead, I mean I can’t even fathom what it would be like to be living in a time when the stock market is that low. And would it be going lower? Would it be going up? Very very very scary.

Again I agree that the chance of your puts ever materializing is basically zero.

So you are agreeing to sell 100 shares of a stock you don’t own to someone at $50 / share? So technically you have to buy it and then sell it immediately?

It’s kind of interesting....makes me wonder why someone would want to buy what you are selling.

Voodoo economics, man! Not just a George H.W. Bush term from 1980, man! (Look it up, if you don't know - actually, it was "trickle down" to which he referred.)

 

[Groove]

What brokerage/trading platform are you guys using?

 

[d2305]

I use Fidelity, but they're all pretty much the same.

 

[cyanide12345678]

Famous last words!

As a former wall st options trader, this thread makes me smile

Right, but even if they did, so what? Between my wife and I, we should hopefully break 500k in income this year. Which hopefully goes up to 600k when she graduates from residency in a year. At baseline we are investing 200K+ on an annual basis, if absolutely needed, we can cash flow most purchases with our income since I'm not over leveraging. Worst case scenario is I buy something at a discount? Also, I have a M1finance account that I can borrow against at 2% margin that I can always use for liquidity for short periods of time.


So I'm not denying that it's possible for 60+ percent drops. They happen. They just don't happen that often. Hence, I will stick with the statement, it's extremely unlikely that these puts will materialize. But obviously, it's not impossible.

 

[cyanide12345678]

What brokerage/trading platform are you guys using?

Etrade for my Solo 401k (target fund), boring 2 fund portfolio in taxable account (VTI and VXUS) and my option trading.
M1finance taxable account for boring 3 fund portfolio ( SCHB, VEU, VTEB) = 96% of m1account + 4% Gambling money in MJ (Marijuana ETF). Added when MJ was around $12 and was basically slaughtered from it's highs.
Vanguard for Backdoor roths (target fund)
I used Axos invest as well as a free automated robo advisor platform. They started charging 0.25%. Just pulled all money out from there because of the new fee.

 

[Mad Jack]

Reddit - Dive into anything

www.reddit.com

 

[cyanide12345678]

I'm not convinced that beating the index is anything more than successful gambling with skill falsely attributed to what is really luck. Even more so when a full accounting of all the costs is taken in. This is an idea promoted by people much more educated on the topic than I am. I don't post this to antagonize the original poster: many people would disagree with me and provide well reasoned arguments. I post it so trainees don't feel like they need to get bogged down in advanced investment strategies to be good stewards of their financial future.

I also disagree.

And trust me, I've read all the boglehead books. I had truly fully embraced the 3 fund portfolio. Had read all the literature how 3 fund portfolio beats all the active investors over long periods of time.

Yes, I completely believed that too.

But it mathematically is more or less impossible to NOT beat the index with what I'm doing.


I'm literally BUYING THE INDEX; Fully involved in index investing. Since most stock gives 50% margin in a basic margin account. I'm using that buying power, WITHOUT THE COST OF MARGIN (there's no cost since the buying power isn't used unless I buy something. The buying power is essentially collateral in case the PUT trades execute - aka if VTI, SPY, IWM decide to drop 50+ percent in my case based on what I'm doing). I collect premium (INCREASED RETURN). And if the PUT executes - Then I BUY THE INDEX (and that too really low).

So in short -
If put doesn't execute, I keep my regular index investing going (2.5K weekly) + Lots of premium for all the expired puts (higher return overall)
if put executes, I buy even more index (Big 20-50K trades of index buying at 50+ declines from put contracts) + some small amounts of premium.

Each time, the premium pushes my return over the normal buy and hold index investor.

It's honestly just math and not luck.

 

[cyanide12345678]

Hey man. I ain’t gonna criticize you. I don’t really know much about this stuff and it isn’t for me. I do think what you are doing is low risk, perhaps very low risk.

What I get concerned about is a few things 1) selling contracts about 1.5 to 2 years out: to me it seems extremely difficult to predict anything like that so far out, no matter how improbable; and 2) the notion that you would be a buyer at $50 anyway of it got that low. That is a huge drop. As I think you write it’s 66% in a fund or ETF that basically tracks the general market. Just imagine what our world would be like in 2 years if the stock market was 66% lower? The Dow Jones would be around 12K. I bet Apple and Microsoft and GE and Boeing and everything else would be tanking. The world economy would be in a free fall. We would have billions of more people impoverished, many millions dead, I mean I can’t even fathom what it would be like to be living in a time when the stock market is that low. And would it be going lower? Would it be going up? Very very very scary.

Again I agree that the chance of your puts ever materializing is basically zero.

So you are agreeing to sell 100 shares of a stock you don’t own to someone at $50 / share? So technically you have to buy it and then sell it immediately?

It’s kind of interesting....makes me wonder why someone would want to buy what you are selling.

Yeah, it's really low risk. I could make the strike prices less than 50% declines and get significantly larger premiums. But I want to play it as safe as possible.

1) You can sell contracts even 1 day in advance. The shorter the time duration, the less time premium there is. By selling a 2 year put, I'm basically only selling time. And time will always decay. The short 1 day put premiums are very minimal. I could get higher premium if I did do a weekly option. But to me a long trade is less hassle.

2) I'm not predicting the future. All I know is regardless of the condition of the market, I will be aggressively buying stocks. So if there is a 66% decline, what better time to buy? If the markets drop 70%. All my market orders will have a significantly higher decline than any PUT. The downside is capped. For example - A market order for VTI is around 164 today. I'm buying WEEKLY VTI. I have a few VTI puts at $100. Lets say VTI dropped to 80 dollars. My weekly VTI trades at market price will be roughly 50 % down, while my purchases through the Puts excecuting will be roughly only 20% down. So the PUT actually decreases downside (and decreases upside to premium only) - So lower volatility.

Will you stop investing if the markets went down 70%? I personally would buy more. So it doesn't matter if the future holds a 70-80% drop. That's where people make their money

3) Your statement about agreeing to sell 100 shares of a stock I dont own is called a naked call - That's dangerous stuff. You need a level 3 margin account to do that (I have one, but I'd never do this trade). That's dangerous. That's how people lose their shirt on options according to what I'm learning. What I'm doing is SELLING the contract (aka option) that I will BUY 100 shares of VTI/SPY/IWM if their price was BELOW strike price, that I pick, at a certain date, that I pick ($50 for IWM for Dec 2022 in the example above. Literally, the promise to pay $50/share when it is less than $50, is the promise I'm selling, and I'm getting paid for that promise/option/contract a premium ($1.3/share or $130/contract in above example). I'm not buying anything unless that strike price is met at the target date. Which is why my margin account lets me place all these options, without ever using any margin money because no trades are actually being made.

4) The other person who is buying this put from me (the person paying me $130/contract in above example) basically feels that the price will be less than 50 in Dec 2022. Then they will get me to buy something for 50, when its worth less. So if IWM evaporated and all 2000 companies in IWM went bankrupt and that index fund went to 0; then I'm still paying $50/share for something that is worth $0. Then they can give me 100 shares worth 0; and I'll pay 5000 for them to that person. Then they made $5000 on a $130 investment (the premium they paid me). Other reasons to buy this put - most option traders don't hold something till expiration - they buy and sell options like stocks. So lets say person X paid me $130 for IWM at 50 at Dec 2022. 3 months later, IWM goes from current market price of 150 to 100. Now, even though that price of $50 isn't reached, it becomes a lottt more likely that the option may reach that $50 mark by Dec 2022 and stay below that. So now, that promise that I sold to person X, is a lot more valuable. So someone may be willing to pay $200/contract for that option since it's much more likely to happen. Person X can then sell what they bought from me, to another person for $200/contract. Then, they made $70/contract of profit on $130 of investment (50+ percent return). Buying options is the dangerous stuff that people talk about. As you can see, HUGE returns possible. But that's risky because huge losses are also possible. BUYING puts = Risky; gambling; big risk and big rewards. SELLING Puts - Small Premiums; Consistent income stream, lower volatility, decreased downside and upside.

 

[cyanide12345678]

This thread looks like wing dings to me. My mesmerized self keeps following it though naively thinking magic money will suddenly just start flowing out of this matrix making me financially independent. I know I’m rightly skeptical because if this consistently worked then everyone would be doing it and everyone would be talking about it. I don’t want to come across as too critical of your interest since I don’t follow most of what you are saying.

Financial independence can easily be accomplished in 1 decade without this investment strategy and maybe even more easily. Financial independence doesn’t typically take several decades even without this kind of investing as alluded to by wamcp above. If you need more than 1 decade it’s because you want to spend more money, not because you need a slicker strategy to get to that independence. Thats ok if it takes more than 1 decade, but it needs to be recognized that you are working longer or saving less because you want to spend more. Here is my secret multimillionaire maker 6 step plan. If you use it, then you owe me 2%. Hey! I found my side gig. ¡Ándele!

1) Work as an EP for 10 years.
2) Pay off your debt.
3) Live below your means.
4) Save most of your money.
5) Invest in low fee index funds.
6) Don’t sabotage yourself.

Already done with 2, 3,4,5.

But i agree. That is the recipe to success for a majority of the people.

And for people early in their financial independence, it's excellent advice.

 

[cyanide12345678]

Just saying.... That's a lot of green in my etrade account for anyone with questions. So anyone who doesn't understand the numbers, that's fine. Options aren't for everyone. I would have been dismissive too months ago. I'm playing with small numbers to get the hang of things for now as well.

The downside of every trade that I've made that you see is that i need to be willing to buy spy, vti, iwm. Which i am. And so are all of you etf/mutual fund investors. That's literally all you most smart investors do.. Buy and hold low cost etfs/mutual funds.

Having my put option exercise where i have to buy vti for $100 when it's market price is 80, is essentially the same as buying vti at 100 at market price and seeing the price decline slowly.

Literally.... I'm picking between free money when a put doesn't exercise, or opportunity to buy index funds at low prices and doing long term buy and hold. I'm okay with both.

 

[DoctwoB]

This is the recipe for success for everyone.

This is excellent advice for everyone. I’m not exactly early in my financial independence.

Will be interesting to see how your run plays out. Hope you don’t lose your cash, or worse your shirt. Unless of course you get lucky and are FIRE on a beach.

That’s the point, you can’t really lose your shirt, at least no more then you can by buying and holding index funds, so long as you’re not selling more in options then you can afford to cover.

And if broad index funds go to 0, we will all lose our shirts regardless of how you invest. There is some risk you can’t protect against. If that happens, it means our whole economy has tanked and bank deposits, cash, even gold or property may be worthless in the resulting social upheaval.

 

[cyanide12345678]

That’s the point, you can’t really lose your shirt, at least no more then you can by buying and holding index funds, so long as you’re not selling more in options then you can afford to cover.

And if broad index funds go to 0, we will all lose our shirts regardless of how you invest. There is some risk you can’t protect against. If that happens, it means our whole economy has tanked and bank deposits, cash, even gold or property may be worthless in the resulting social upheaval.

Hey finally someone who understands something and isn't just painting with a broad brush and assuming options are dangerous lol

 

[cyanide12345678]

That’s fair. I maybe overinflated the risk without completely understanding the potential risk. My primary argument is that I don’t feel this is necessary to do. If this is so great, why isn’t it widely recommended? If you have a couple million with the simple things I outlined above, then how is your life bettered by spending energy learning about advanced investment strategies (that I’m skeptical really have a higher consistent return) unless that is truly your hobby? I’m guessing most physicians aren’t interested in the nuances of investing as a hobby.

Actually you ridiculously over inflated your risk. If i lost my shirt with this strategy, then my losses from the put trades are going to be significantly lower than regular buy and hold market trades. So if i lose a large amount of money, others have lost A LOT MORE money than me. In my example above - if the entire russell 2000 small cap etf went to 0, my loss is capped at 50/share minus the premium i received. Your loss is capped at 150/share (market price if purchased recently).

Options mitigate risk. They don't add risk. They were always meant to decrease risk. So I'm losing my shirt, most people are running around naked.

Your primary argument is correct. To create wealth you need to be a good saver and do index investing. Its good financial advice. But it doesn't take away the fact that mathematically what I'm talking about gives higher returns. If my portfolio returned 9 percent and yours returned 7 percent. Most likely we will both be financially independent sooner or later.

As to your question, as to why it's not widely practiced or recommended. It actually is widely practiced. There term "hedge" fund comes from option trading. Hedge funds uses "hedges" to limit their downside risk. The SPY and iwm get millions and millions of daily option trades.

Why is it not widely recommended? Let's see... Well half of America can't afford a 400 dollar expense without going broke. So they're out. Half of the US also has an education and understanding of an 8th grader (think an average ER patient) so they are out. Most people couldn't afford to buy 10 SPY stocks let alone but 100 at the same time as 1 option trading. Literally if my puts materialize, i will have to purchase 20-50k of spy/iwm/vti stocks (though at very low prices). Very few people can do that but with our physician income, we can do it. I get a almost 40k a month from my day job that i can use to cash flow those purchases. Also literature says that 20-30 percent of portfolio should be in actual real estate. How many of you are investing like that?

Most physicians are also terrible with money. I'm literally one year out. Debt free. Paid $200k in loans. Cars are paid off. My networth today within 1 year of being an attending is more than 250k. They are spending thousands in AUM fee, don't understand crap about their finances. I can literally retire in 3 years if i truly wanted to.

It's a mind set. Some people are just hungry for more. They swing for the fences more often, they miss a lot, see a lot of disappointment, but sometimes they get that home run.

So... To answer your question. Yes, it's not for everyone. Yes most of you won't do it. But that doesn't negate the MATH of what I'm doing.

The math is binary. Either markets drop 60+ percent or they don't. If they do, my outcome is the same or better than a buy and hold etf investing strategy because then I'm just index investing at that point by being forced into buying massive amounts of spy, vti, iwm with purchases made at really good discounts. Or markets stay above my strike prices and i increase return of my index investing. Literally that's just math.

 

[d2305]

 

[B-Bone]

Actually you ridiculously over inflated your risk. If i lost my shirt with this strategy, then my losses from the put trades are going to be significantly lower than regular buy and hold market trades. So if i lose a large amount of money, others have lost A LOT MORE money than me. In my example above - if the entire russell 2000 small cap etf went to 0, my loss is capped at 50/share minus the premium i received. Your loss is capped at 150/share (market price if purchased recently).

Options mitigate risk. They don't add risk. They were always meant to decrease risk. So I'm losing my shirt, most people are running around naked.

Your primary argument is correct. To create wealth you need to be a good saver and do index investing. Its good financial advice. But it doesn't take away the fact that mathematically what I'm talking about gives higher returns. If my portfolio returned 9 percent and yours returned 7 percent. Most likely we will both be financially independent sooner or later.

As to your question, as to why it's not widely practiced or recommended. It actually is widely practiced. There term "hedge" fund comes from option trading. Hedge funds uses "hedges" to limit their downside risk. The SPY and iwm get millions and millions of daily option trades.

Why is it not widely recommended? Let's see... Well half of America can't afford a 400 dollar expense without going broke. So they're out. Half of the US also has an education and understanding of an 8th grader (think an average ER patient) so they are out. Most people couldn't afford to buy 10 SPY stocks let alone but 100 at the same time as 1 option trading. Literally if my puts materialize, i will have to purchase 20-50k of spy/iwm/vti stocks (though at very low prices). I CAN DO THAT. Very few people can do that. I get a almost 40k a month from my day job that i can use to cash flow those purchases. Also literature says that 20-30 percent of portfolio should be in actual real estate. How many of you are investing like that?

Most physicians are also terrible with money. I'm literally one year out. Debt free. Paid $200k in loans. Cars are paid off. My networth today within 1 year of being an attending is more than 250k. They are spending thousands in AUM fee, don't understand crap about their finances. I can literally retire in 3 years if i truly wanted to. Most people are not me. They also don't own a travel site and two other 2 commerce stores. They also don't plan on buying 1 rental property a year, if not more. They likely don't spend hours on bigger pockets and bogleheads forums because that's their entertainment. They also didn't just pay their college tuition through a tutoring company they formed in college. Most of you would have also happily have made $22/hr tutoring high school kids in college. But after working a while for such a tutoring company I just wanted more - and decided to be the company that charged 55/hr to parents instead of the guy who got paid $22/hr by the tutoring company. I was literally advertising on Google ads 10 years ago as a 20 year old when most of you were partying in college. I had literally only been living in this country for 1 year only when i started my first LLC at 20.

Some people are happy with average. I'm just not meant to be average. My dad ran an engineering company with 50+ employees for over 25 years. Did he need to bid on a multi-million dollar world Bank funded project that multinational companies were going after, no he could have just been someone's employee for life. But he singlehandedly designed a 8M dollar project on the living room table with his old type writer in 1985, a lot of money then. Formed his company, hired people, and finished the project to also be a millionaire in his late 30s in the 80s. My older brother, 34, just sold his consulting firm for 10M+ this January. His firm was on the fastest growing companies list (inc5000 list) for 3+ years when they sold. How many of you would drop your 6 figure computer architectural engineering job to have 0 income for a year and less than 30k for a couple years before becoming established? Not many right? I would be extremely under accomplished in my family if i just stuck with average.

It's a mind set. Some people are just hungry for more. They swing for the fences more often, they miss a lot, see a lot of disappointment, but sometimes they get that home run.

So... To answer your question. Yes, it's not for everyone. Yes most of you won't do it. But that doesn't negate the MATH of what I'm doing.

The math is binary. Either markets drop 60+ percent or they don't. If they do, my outcome is the same or better than a buy and hold etf investing strategy because then I'm just index investing at that point by being forced into buying massive amounts of spy, vti, iwm with purchases made at really good discounts. Or markets stay above my strike prices and i increase return of my index investing. Literally that's just math.

 

[cyanide12345678]

View attachment 314489

Just defending myself in response to the things said... Because apparently I'm coming up with voodoo economics. But when if you sit down and do the math and really understand the principle, you realize it makes sense. Whether that is worth it or not, is up to the person for the effort and time.

And just answering the question that if this is something so effective why isn't everyone doing it. Fear and need for security hold a lot of people back. I've personally had entrepreneurial ventures and been surrounded by them in my family, so i seek opportunities that others might not.

That's all. If it comes across as annoying, i apologize.

 

[DoctwoB]

Just defending myself in response to the things said... Because apparently I'm coming up with voodoo economics. But when if you sit down and do the math and really understand the principle, you realize it makes sense. Whether that is worth it or not, is up to the person for the effort and time.

And just answering the question that if this is something so effective why isn't everyone doing it. Fear and need for security hold a lot of people back. I've personally had entrepreneurial ventures and been surrounded by them in my family, so i seek opportunities that others might not.

That's all. If it comes across as annoying, i apologize.

Another reason not everyone is doing it. It requires you to be willing to be long (and long term) in the fund you’re selling the option on or risk losing a big amount (difference between market price and stroke price * number of shares) if you sell immediately. That makes sense for long term retirement investors, but not for Hedge funds, day traders, those looking to make outsized returns in short term (ie a lot of Wall Street). If your fund strategy is “we’re going to buy and hold index funds” then you offer no value to an investor over just buying the funds themselves.

 

[thegenius]

your image

So you are on the hook to buy those securities until the strike date?

Can these contracts ever be cancelled?

Can you sell the contracts you bought?

I counted 12 contracts, which means you are obligated to buy max 1200 shares if they are all in the money or whatever it's called.

 

[wamcp]

Just defending myself in response to the things said... Because apparently I'm coming up with voodoo economics. But when if you sit down and do the math and really understand the principle, you realize it makes sense. Whether that is worth it or not, is up to the person for the effort and time.

And just answering the question that if this is something so effective why isn't everyone doing it. Fear and need for security hold a lot of people back. I've personally had entrepreneurial ventures and been surrounded by them in my family, so i seek opportunities that others might not.

That's all. If it comes across as annoying, i apologize.

some people just have ingrained built in biases that block their ability to think critically even though they may be fantastic doctors. It is crystal clear that if you sit down and construct a profit loss and risk curve for selling way out the money index puts with a small amount of margin PLUS buy and hold indexing, you will beat a simple buy and hold fund alone

 

[wamcp]

So you are on the hook to buy those securities until the strike date?

Can these contracts ever be cancelled?

Can you sell the contracts you bought?

I counted 12 contracts, which means you are obligated to buy max 1200 shares if they are all in the money or whatever it's called.

You can buy back the put contracts you sold any time. You can even buy it back for a profit the very second after you had sold, if it is lower in price than what you sold it for. Liquidity / bid ask spread may be thin though for these way OTM and/or long dated contracts

 

[DoctwoB]

To be fair, people are generally right to be skeptical of any investing strategy that claims to beat the market returns. You’ll be right a lot more then you’re wrong in those settings.

 

[thegenius]

Who are buying these puts you are selling anyways? The ones that are 1.5 years out with VTI down to 50.

I'm not sure I would want to pay money to sell VTI at 50 in 1.5 years...I would hope that I would have bailed before then. It is an event with such a low chance of happening that it seems the buyer of your puts are just giving you money with virtually no chance of ever recuping it.

I could understand buying a put option to sell VTI at 130 in 6 months. But I'm not sure how much that would cost. It's an interesting exercise to determine what one thinks is the value of the option they are selling. You might think one thing...and nobody buys it or it gets bought immediately...and in both scenarios I would fear that I didn't price it properly.

Just curious.

 

[cyanide12345678]

You're correct. I have other interests in life. That's totally fine for both of us to not have that same interest.

This is somewhat arrogant. You weren't the only one to work hard to get to where you are. I would guess almost everyone on this forum has worked harder than the average individual, and didn't get to where they are by solely partying in college.

This is somewhat condescending. Wisely saving and investing in low fee index funds as strongly recommended by many isn't necessarily average. As you stated, many people in this country live paycheck to paycheck and don't or can't save/invest. We are fortunate in that regard. Many people have the option to save/invest and don't choose to invest like you are doing. If you want to get into more nuanced investing, that's totally fine. You need to be careful in elevating your self over others because of this though. If your goal is to become comparable financially to your father and brother with your self worth determined by that financial success, then maybe working as an EP isn't the best way to achieve that outcome.

This is also condescending in an oddly back handed way. You can critically evaluate something and decide it's not worth pursuing.


In the grand scheme of things we are debating a minor strategy when in reality we agree on most of the big picture related to financial independence (I think). Studies have shown that increased happiness in life is correlated with increasing income up until a certain point. Once you cross a threshold, increased income or wealth hasn't been shown to correlate with increased happiness. I doubt my happiness will increase significantly with a 9% return versus a 7% return. I'm not sure I need to FIRE at 5 years of working as and EP versus 10-15 years. I enjoy math as well as learning about finance and taxes to a degree. My personal hobby and interests are not in some of the more nuanced aspects of investing. If that is your interest, that is perfectly okay. I'm just providing the counter argument that I think needs stated as I don't think this type of investing is for most EPs. I believe we are in agreement on other more important aspects that shouldn't be diluted by this debate.

Yes. Agreed. Condescending and arrogant. I apologise. Do not mean to come across as that. I will edit it.

You are right, investing in a 3 fund beats 80 percent of people and all physicians here have worked hard to be in the top 5 percent of income earners, if not the top 1%.

Otherwise we are in agreement with pretty much everything. We're both saying that this sort of nuanced trading isn't for everyone if it's not something they find worth their time and don't enjoy. And obviously as a boglehead at heart i truly believe in a 3 fund portfolio as being Superior to stock picking, which is basically what you're saying all along. But those interested in more, can definitely benefit from this nuanced strategy. But at the end of the day, like you said, the winning strategy is living within means, saving aggressively, investing early in broad market, low cost etfs/mutual funds. Then if anyone is interested in increasing returns, they may choose to learn option strategies if interested.

 

[Southpaw]

What is your reward for each contract? Is it literally $130, I think you said up there? With a risk of $5000? For each contract? Also, why is your timeline so far out? Why not accept a lower return for a 6 month timeline?

The risk as I see it is that if it's really a $130 return if your stock doesn't fall I mean that's not a great return unless you're buying tons of contracts. Say you buy 10 contracts, your max return would be $1,300 with max risk of $50,000. And if max risk actually plays out you'd be buying $50,000 of a stock you could be buying for less because the price is actually below $50. Also, your money is tied up for two years as opposed to being invested in other areas and earning dividend or rent in the case of a rental property.

Am I missing something? I'm interested in your strategy and interested in learning more about options. I've read this thread with interest but wanted to ask you some questions about your strategy because I'm not fully sure I understand. Also, thank you for raising the issue because it's an interesting discussion.

 

[cyanide12345678]

What is your reward for each contract? Is it literally $130, I think you said up there? With a risk of $5000? For each contract? Also, why is your timeline so far out? Why not accept a lower return for a 6 month timeline?

The risk as I see it is that if it's really a $130 return if your stock doesn't fall I mean that's not a great return unless you're buying tons of contracts. Say you buy 10 contracts, your max return would be $1,300 with max risk of $50,000. And if max risk actually plays out you'd be buying $50,000 of a stock you could be buying for less because the price is actually below $50. Also, your money is tied up for two years as opposed to being invested in other areas and earning dividend or rent in the case of a rental property.

Am I missing something? I'm interested in your strategy and interested in learning more about options. I've read this thread with interest but wanted to ask you some questions about your strategy because I'm not fully sure I understand. Also, thank you for raising the issue because it's an interesting discussion.

Yes, you're missing a few things. Let me try and explain.

Reward in the example above is $130, correct. You can make the drop 50%, so 75 instead of 50, and make your return better if you want. You can even make the drop 10 percent and get a lot of premium if you want. Also, I'm not "risking" $5000 exactly. I'm basically promising to buy 100 shares of iwm at $50. It's the the exact same thing as my buying VB or IWM on the market at today's price and the stock subsequently declining. If you think of the 5K as "risking money" - then everytime you invest in your retirement in a 3 fund portfolio, then you're risking money the same way. So the $5000 you're calling as "risk", to me if i have to buy that, that's part of my normal long term buy and hold investing. The risk of buying something for 50 when it's $40 is the same as buying something at market and seeing the price decline in the future. So it's not as much risking $5000, more of just investing an extra $5000 when the market is really low - the money doesn't evaporate if you use it to buy IWM - You end up owning 100 tangible shares. Just like normal investing, those shares change prices.

The only reason I'm more interested in longer term is because the longer the term the higher the premium. I'm basically selling time. I could get a smaller premium for shorter duration, do more trades. Just more work, but it's a personal choice.

The biggest thing you are missing is that I'm not tying up ANY money. $0. Nada. So let me explain how that works.

I have a level 3 margin account.

Let's say my start balance in my account is 0.

Let's say i transfer $10k to this etrade margin account.

My BUYING POWER is actually 20k from transferring 10k due to margin.

If i buy 20k of vti then Im paying interest (margin) to etrade for 10k at their current interest rate. Because I'm borrowing money from etrade to leverage. This is not worth it. Dangerous and stupid.

But, if i buy vti for 10k. Then that's still money that i own. THEN I DON'T PAY ANYTHING FOR MARGIN. So no interest. But my buying power is still 10k after buying 10k of vti. Make sense? Out of my 20k buying power, i used only 10k of what's mine.

Now for my remaining "buying power" of 10k. Selling the PUT for iwm at $50, takes $1000 of buying power (hard to explain this, something to do with current price, price at margin, and the etf itself when owned is marginable). But forget the complexity. Just understand - i put 10k, get 20k buying power, buy usual things i buy for 10k (VTI/VXUS). Have 10k buying power, sell this particular PUT option and consume buying power.

The most important point is - the $1000 buying power used for the 1 contract is actually not money borrowed. I didn't buy anything YET. I only just sold the contract that i will buy something at a certain price and time. The reason buying power was used is to make sure i have money in case i have to buy that item in the future as an insurance by the Broker (etrade). BUT NO PURCHASE IS MADE BY ME. So no margin used. No interest for margin.

So essentially i don't have any money set aside. Etrade margin buying power is what is set aside in case the buy goes through. But i don't pay interest unless i use that money to actually make a purchase. So.... Let's say i had to buy $5000 of stock of iwm because the price becomes $40. Then my etrade margin gets used. Then I'm on the hook for paying them interest. UNLESS....i put my own money in and eliminate the margin interest. Then essentially, that's the equivalent of my buying 100 IWM shares at $48.7 cost per share at market price (I subtracted my profit of $130/contract). And then seeing the market decline to $40.

So in essence, that 10k invested -> 20k buying power -> 10k into usual vti/vxus -> 10k remaining buying power -> 10 contracts using all buying power if you want -> collect whatever premium and return ($1300 for 10 in above example) -> but ideally scatter 10 contracts over several months (pick your favorite 10 months - will change premiums per trade). Staggering makes sure I'm on the hook for 5000 each month rather than 50k over 1 month. -> invest more money in vti -> buy more contracts > stagger over 2.5 years of time line -> as time goes on and contracts expire, buy more in the future to replace them -> At some point it becomes a cycle, contracts regularly expire, and regularly you sell new ones to have a regular income.

And since the contracts are over several months, some will not materialize, unless the entire year is a huge year in the negative. The ones that materialize, just put money in from income and cash flow it so you don't get charged margin interest. Just that simple.

I have a picture uploaded from my account a few messages above. Look at the dates, look at the money i made with each trade, look at how the dates are staggered, and look at the different strike prices I've picked and the associated premium at the time of the trade to get an idea.

Hopefully this made sense

Edit: The idea of having my own money in the account in case I had to buy 100 shares of IWM per contract is called "Cash covered Puts". That's technically safer. The margin account allows for "naked put" trades - Buying using buying power from margin basically. You can also run the wheel and play the game on the other side - aka Covered calls. Eg - If you end up buying 100 shares of IWM for 50 and the price is $40; then you can SELL a "call" that you promise to sell 100 shares of IWM at Price X (Eg 55) by date Y (3 months etc), in exchange for premium Z. So if the price went from $40 to 60 in 3 months, then you get paid $55 for something that is worth $60, but also get paid a premium. If it stays less than $60, you keep the premium. And you cankeep doing that until the item sells. Then you revert back to the Puts

 

[cyanide12345678]

Who are buying these puts you are selling anyways? The ones that are 1.5 years out with VTI down to 50.

I'm not sure I would want to pay money to sell VTI at 50 in 1.5 years...I would hope that I would have bailed before then. It is an event with such a low chance of happening that it seems the buyer of your puts are just giving you money with virtually no chance of ever recuping it.

I could understand buying a put option to sell VTI at 130 in 6 months. But I'm not sure how much that would cost. It's an interesting exercise to determine what one thinks is the value of the option they are selling. You might think one thing...and nobody buys it or it gets bought immediately...and in both scenarios I would fear that I didn't price it properly.

Just curious.

Premium for VTI at 60+ percent declines are less money. IWM, VB, and the small cap ETFs have slightly higher volatility, so their premiums are higher. Honestly, I don't know who in this world is betting that SPY/VTI/IWM are going to drop more than 50-60 percent. Who knows?

All I can tell you that there are A LOT OF PEOPLE. Look at attached screenshots. One is a 6 month SPY options chart for Jan 2021 - Someone is willing to give away $70 (bid price) for the bet that SPY will fall below $155 in 6 months (52% decline). Someone thinks it will be less than$135 in 6 months (Screenshot 6). If you open screenshot 7; I opened the $155 strike price trade -There are 1838 contracts where people are willing to pay you $70 for that $155 SPY in 6 month trade. Similarly, screenshot 8 and 9 look at SPY 1 year from now roughly.

I personally would never BUY an option, unless I'm buying to close a PUT that I sold, to relieve myself of the obligation of buying 100 shares at expiration.

 

[Brigade4Radiant]

If I don’t fully understand something I don’t do it with my investments so I’m not gonna try out this new method I don’t even really understand it so there’s that.

 

[cyanide12345678]

Who are buying these puts you are selling anyways? The ones that are 1.5 years out with VTI down to 50.

I'm not sure I would want to pay money to sell VTI at 50 in 1.5 years...I would hope that I would have bailed before then. It is an event with such a low chance of happening that it seems the buyer of your puts are just giving you money with virtually no chance of ever recuping it.

I could understand buying a put option to sell VTI at 130 in 6 months. But I'm not sure how much that would cost. It's an interesting exercise to determine what one thinks is the value of the option they are selling. You might think one thing...and nobody buys it or it gets bought immediately...and in both scenarios I would fear that I didn't price it properly.

Just curious.

Also to appease your curiosity - if you were to BUY a VTI put at 130 at 6 months like you suggested, you would pay someone $290 and make the bet that VTI will be below $130 in 6 months (20.7% decline at least). The person Selling the put (people like me), will take the $290. If VTI goes to 110 in 6 months, then you buy $110 market price and sell for $130 because the PUT seller has the obligation to purchase at $130. Then you made 20 x 100 - 290 = 1710 while risking only $290 (580 percent return).

 

[Southpaw]

Also to appease your curiosity - if you were to BUY a VTI put at 130 at 6 months like you suggested, you would pay someone $290 and make the bet that VTI will be below $130 in 6 months (20.7% decline at least). The person Selling the put (people like me), will take the $290. If VTI goes to 110 in 6 months, then you buy $110 market price and sell for $130 because the PUT seller has the obligation to purchase at $130. Then you made 20 x 100 - 290 = 1710 while risking only $290 (580 percent return).

What determines the rate of these puts/calls? Like what determines the $290 in the example above, or the $130 in your previous example?