Little update
@cyanide12345678. Every 10 years or so, I do deep dives into things and just go nuts researching it and getting into the topic. For instance, like 15-20 years ago I spent every waking minute listening and learning about the Grateful Dead. And I'm happy for every second I spent doing that.
This thread, and our PM's, have really gotten me interested in options. I perused this thread again...I agree with just about everything you wrote. I have spent so much time learning more about options. Options have a bad reputation for being too risky. They are only as risky as you want them to be. You can do options with very little risk, in fact less risk that just plain old investing, and make small, predictable, reliable returns. Or you can do crazy spreads or make bets that are very risky with high reward potential. I don't understand why I haven't been doing this more in my life. Had I properly understood and learned about options 20 years ago, I would be up hundreds of percent by now on whatever initial investment I had made. MUCH MUCH more than what the market would have given me.
I really think one can find the right risk level for options. If people like to buy and hold stocks...you can buy and hold stocks and sell covered calls against them. Worst case scenario is you get called, you have made some money, and then you sell puts on the same stock the next day to get back in. If you don't get assigned the puts, you sell some more the next month. All along you are collecting money / premium. You can make money if the market is going up. You can make money if the market is going down. You can make money if the market is going sideways. It's a great way to give you fairly reliable income. Why have a bank account with 100K just sitting there collecting 1%/year...when you can sell monthly puts on low-volatility stocks like GM or T and make so much more money. GM and T haven't done anything in 10 years. They are duds. In fact because they are such duds makes it so much easier to earn like 2% / month on your investment, for instance.
Now...all that aside which I 100% believe...I've chosen more of the gambling aspect of it, but that is gonna change very shortly. I put 14K into a Schwab account on Aug 1 and have made, about 5-6 weeks later, $1,469.05. In the first month I made $1,255.14. I made 9% on my first month of solely selling puts. This is NOT a margin account either! I say this is gambling because I chose very strict criteria for selecting the stocks to do this on...and it turned out that almost all of the options I made money on were biotech stocks that had juicy premiums because these companies either make it or break it with their stocks. I chose deep OTM puts that expire in a few weeks that had returns of at least 5%. These were out of the money by at least 25%, if not more. And the only way to make 5% on your investment in 2 weeks with deep OTM puts is finding highly volatile stocks (some of them with an IV of > 300%!!!). I would do some research on the company, look when they would report earnings (I never sold contracts that expired after earnings!). Did some other logical things. And I'm happy to say that I've made money on every single trade. Haven't lost one yet.
I recognize though that this is not sustainable. I had a few that expired...and the following monday the stock tanked > 20%. No bueno on that. What I'm realizing now is that it's much easier to make 3-4%/month on relatively non-volatile stocks, and 4-6% on moderately volatile stocks. For instance...let's look at GM.
For the past 8 years GM has traded between 28-40 the entire time (except in March of this year). It's a dud of a company. Not doing anything. I see no point in owning GM as a stock holder for the long term. They just don't get it. However...for options it's a good relatively safe play: it's certainly reasonable to:
Sell Oct 2020 P @30 for 1.50. You make $150, and if assigned you now own GM at 28.5. If it expires worthless you have made 5% in one month (1.5/30). For those who are not cyanide who have read this far...what that means is you have to set aside $3000 for 1 month just in case you are assigned the stock. You can't use this money for anything else (unless you unwind your option position). But after the month your 3K is free to be used for anything you want, and you've made $150 on top of that. If GM is less than 30 (say 29 or 27 or whatever) you get assigned...you now own GM at 28.5. You can either just sell it then for little profit or loss...or just sell a call option on it. An example 1 month call might be worth 1.35. You collect another $135. GM is so unlikely to make any major swings in the stock price that you are not risking all that much. Looking at chart...it usually moves max like $2/month in one direction or another. For the past 8 years!!!!!! I would never do this strategy, certainly not now...with stocks like TSLA or AAPL. They are way too volatile. But you can do this with stocks like GM. That being said I haven't chosen to do it against this particular stock because my money is already tied up in other stocks...but it appears it's a pretty reliable way to make 3-5%/month against a stable, dud company like GM.
Of course you have to watch out for major market dumps. Like the one we had in March. But everybody lost money in March, option traders, investors, long term holders, etc.
Currently I'm in medium - to - high volatility, large cap companies that have been depressed since the market fall in March. These include industries like Energy, Banks, Airlines, Cruise Liners. All of these have dropped 10-40% unlike tech stocks, and I've picked companies that are relatively volatile as you get better premiums. I'm in AAL, UAL, CCL, NCHL, APA, SRNE, and CAPR. All I do are trades where the option expires 5-25 days out. I close half of them and let the other half expire worthless depending on how they are doing.
lastly I'll say this about margin. If you don't use margin it's fine. There are still ample opportunities to make good money. 3-5% / month in that range. It's fantastic. Its like driving the speed limit. If the speed limit is 65, then you drive up to 65 but not any faster. And it's safe. You'll never get pulled over for speeding, and you'll likely never get pulled over at all unless you violate other laws. With margin...you are allowed to drive faster. How fast depends on how much margin you use. Some people love to speed on the highways and want to go 90 in a 65 zone all the time. They will get caught one day. They will get caught many times in their life. They will get burned investing like that too. It's guaranteed. But it's thrilling when you don't get caught. I bet it's a lot of fun. I plan on using margin to speed just a little. I always drive 5-10 over the speed limit. And I've never gotten pulled over for speeding. So i'm going to be using a little margin to get me to my destination just a little bit faster.
Option trading is unfairly vilified.
