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TMFPostOfTheDay (< 20)

The Year of Writing Puts

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January 08, 2013 – Comments (1)

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Board: SA Options

Author: hachmujt

One Year of Writing Puts: Stock Advisor Picks/Motley Fool Options Style!

I started writing puts for income at the beginning of 2012. The income from writing puts accounts for 19.6% of my 2012 gains. This is a 5.75% MWR. These are naked puts which stack the 5.75% on top of my core portfolio returns. I made 26 trades associated with the campaign and 23 were profitable, 88.5%.

I follow the guidelines in TMF’s Options Whiz. http://www.fool.com/fool/free-report/1321/optionswhiz-home-1...

Personal Guidelines:

1. Write SA picks, this allows the leverage of knowledge I already have, SA analysts and community.
2. To reduce risk only lever a solid balanced core portfolio based on modern portfolio theory.
3. Have reasonable and conservative goals when writing puts for income. Being satisfied with these goals will help avoid the worst case scenario.
4. Conservative income goal: 3% total annual portfolio boost. Average ARR 15% on 20% of portfolio. With a big picture view 3% is huge when considering things such as compounding and average market returns.
5. Do not expose more than 20% of net liquidation value to naked put writing.
6. Write puts with as much downside protection as possible while getting 15% annualized rate of return or better.
7. Favor safer companies, use SA risk rating when narrowing down choices.
8. Try to be patient and write on red days when the VIX is up, but on the same hand do not try to time the market.
9. Diversify by writing many different expirations, strikes and companies.
10. Using Interactive Brokers with options trades usually around $1 makes it possible to write small premium puts.
11. Buy to close early when 85-90% of premium can be gained. Use GTC orders and make it mechanical which removes the emotion. In practice this has been very successful and SAO boarders get credit here.
12. This is a methodical, long, slow boring process. Do not expect excitement and jackpots.

Some lessons learned:

1. In a strong up market it is easy to feel like a put writing genius. In a down market you quickly realize you are not a put writing genius.
2. Recovery strategies are fairly simple such as rolling out and down but it is much better to avoid the need in the first place. One roll can tie up capital and delay income. Write as conservative as possible while still getting enough return for the risk.
3. The urge to over lever with this strategy and write riskier puts for greater returns is very strong. I must have rules written down or I could quickly get swept away.
4. Be patient.
5. Honest accounting is a powerful learning tool.
6. The put candidate finder that dollarfor40cents wrote and shared is very useful. http://remote.exigo.com/op/find/writtenput
7. Leverage can make a portfolio do scary things and adds personal stress to the management of my SA portfolio.
8. So far this is a cash positive experience but 12 months does not make a scientific study. One would need data from a peak to peak or trough to trough market cycle.
9. The community on the SA Options board is generous, helpful and occasionally humorous (but looks are not everything).
10. It is easy to tell myself little lies. For example: I see a huge premium and say “I would not mind having this put to me, it is an SA pick after all.” These little lies are a huge enemy. When you get something put to you it is an extremely different feeling, especially if your debt is compressing. This is one of the biggest lessons I learned over the 12 months. How will I really feel about the shares when put to me? If they are a solid company with a good balance sheet, dividends etc. I will be able to calmly and patiently make a prudent decision (example TIE.) If it is a speculative play without a good balance it is extremely difficult for me to make a good decision (example CLNE.) The biggest enemy I face is the one in the mirror every morning. Before writing I ask myself, “Honestly how will I feel if these shares are put to me?” This keeps me out of a lot of trouble.

Jim Gillies and Jeff Fischer’s Options Whiz gets serious praise. The content along with the presentation is top notch. These options concepts take time and patients to grasp. The material is presented in three formats: web based, self study book/quizzes and videos. After working through all of this material twice I was ready to start my short put campaign. Over 90% of my campaign guidelines are straight from Jim and Jeff’s program on writing puts for income.

JSergeant and the rest of the SA Options Community get credit for sparking my interest and patiently sharing. My spread sheet was developed with resources from this board. I posted every trade on the SAO board. This is truly a quality community resource.

Why I am so excited about the goal of a 3% boost: http://www.bogleheads.org/wiki/File:Annual_Return_-_Fee_Impa...

Link to my spreadsheet where my put writing activity is recorded: https://docs.google.com/spreadsheet/ccc?key=0AvO9sCQm_1MhdDV...

Link to my core portfolio: http://boards.fool.com/1081/mechanical-sa-portfolio-q4-2012-...

This campaign has been hugely successful so far and I will continue using it as my primary leverage. Knowing that I have not gone through a full market cycle renews my caution and prudence. For my sanity and the boards I will stop posting every single trade. I will likely move to a quarterly posting of the spreadsheet. Thanks again everyone for a great year.

Take care,

Jason

Long IBKR, common and LEAPS.

1 Comments – Post Your Own

#1) On April 22, 2017 at 12:47 AM, EdGrey (< 20) wrote:

I would add a few things:

1) I rarely write puts on a stock if I have a reservation about owning it.

2) I often look for good stocks that dropped in price recently for temporary reasons. This worked especially well not that long ago with Illumina, since it's a strong company, and the stock bounced back up and allowed me to buy the put fairly early for almost nothing. At first, the price dropped more, but I wasn't too worried; I would have been all right with having to buy the stock.

3) It's not necessary, but I prefer a larger choice of put prices and expiration dates

4) I've sometimes ended up in situations (e.g., with Gilead) where the stock is put to me, and I end up making additional money by selling calls. Sometimes a stock will jump, but I have to sell it at the lower price of the call I wrote. I've also thought of the possibility of buying back the call at a loss to harvest a short term capital loss, and later be able to sell the stock for a long term capital gain.

5) If I write puts in a margin account, the reserve required is fairly small, and is reduced further by the income from the put. There's no interest charged while waiting, though the reserve can't be used to buy something else. It does increase the income derived from put writing. Fairly frequently, the stock closes pennies below the strike price when the put expires, so if I'm going into my margin to buy, I can simply sell out right away to get rid of the leverage and still come out ahead.

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