I've spent the past couple of months working to qualify conditions when selling PUTs is appropriate. Applying these new conditions makes many of my existing PUTs inappropriate. Overall the corrective actions on these positions should be a inexpensive learning lesson (I hope).
When to start a position:
1. Stock below 200 and 50 day moving averages.
2. 200 DMA and 50 DMA trending down.
3. Nice if stock is still below 10 DMA.
4. Check your own valuation to make sure you believe stock is undervalued.
5. Check stock versus your 15 Point Rule (2x yield + DGR) > 15.
6. Check opionion of stock from other sources (MStar, S&P, Reuters).
7. You must be willing to own the stock.
8. Try to initiate PUT position on down days.
What PUT to sell?
1. At least 10% discount to the current stock price.
2. DELTA under 20 (-.2). IRA: Delta under 33 (-.33).
3. Duration: Try to keep your expirations balanced, but 6-18 months are OK.
4. Position size. Exposure of <1% of total portfolio for naked PUTs or PUT spreads. Start with 1/2 position willing to 'double up' at a better price.
Saturday, December 10, 2011
Thursday, July 21, 2011
PUT Spreads....
On 7/21/2011 I sold my first PUT spread.
PEP was selling for ~$65.50 when the order filled.
Sold PEP Jan2013 $57.50 for $3.39
Bought PEP Jan2013 $50.00 for $1.70.
I've decided to use PUT Spreads when creating long term PUT positions to limit the EA (Exposure Amount). With this limited exposure, I'm using a Delta limit of 30 (-.30) (versus 20 for naked PUTs) as my sold PUT limit (OK, the PEP one was 31, more likely 30.1 as I always round the Delta UP).
I'm computing the CAGR as (EA/(EA-UPG)^(1/(Days/365))-1 or (7.5/(7.5-1.658)^(1/(548/365)-1. Note: 1.658 is difference in $3.39-1.70 net of commissions.
This computes to an 18.1% CAGR.
While this computes correctly, I'm not sure I'm willing to create a total exposure amount equivalent to my naked PUT exposure using spreads to increase my total return. I'll likely tread slowly here.
I've contemplated adjusting the Exposure Amount computation for naked PUTs to 50% of the actual EA as this seems to me to be a reasonable 'black swan' price drop amount. All of this will take some additional contemplation.
What is the real exposure amount for selling only a naked PUT? Theoretically it is 100% of the PUT strike price, but is that reasonable for a stable company like ABT? I think not. So what should we use as the basis for computing returns? I think the 'black swan' can answer the question. We have several recent examples:
MRK: In 2004 MRK's drug VIOXX was pulled from the market resulting in a 45% drop in the stock price over just a few days.
BP: In 2010 BP's Gulf oil spill sent the stock down nearly 60%.
BAC: (and others) down 95% from Oct 2008 to March 2009. Rallied to only a 60% loss by July 2009, now at nearly 90% loss. I'm sure the JPM and WFC numbers are better that BAC's. Of course BAC's are better than some others.
On balance looks like 50% of the stock price is a reasonable number to use to compare the returns of a naked put versus a spread. Still contemplating the change.
PEP was selling for ~$65.50 when the order filled.
Sold PEP Jan2013 $57.50 for $3.39
Bought PEP Jan2013 $50.00 for $1.70.
I've decided to use PUT Spreads when creating long term PUT positions to limit the EA (Exposure Amount). With this limited exposure, I'm using a Delta limit of 30 (-.30) (versus 20 for naked PUTs) as my sold PUT limit (OK, the PEP one was 31, more likely 30.1 as I always round the Delta UP).
I'm computing the CAGR as (EA/(EA-UPG)^(1/(Days/365))-1 or (7.5/(7.5-1.658)^(1/(548/365)-1. Note: 1.658 is difference in $3.39-1.70 net of commissions.
This computes to an 18.1% CAGR.
While this computes correctly, I'm not sure I'm willing to create a total exposure amount equivalent to my naked PUT exposure using spreads to increase my total return. I'll likely tread slowly here.
I've contemplated adjusting the Exposure Amount computation for naked PUTs to 50% of the actual EA as this seems to me to be a reasonable 'black swan' price drop amount. All of this will take some additional contemplation.
What is the real exposure amount for selling only a naked PUT? Theoretically it is 100% of the PUT strike price, but is that reasonable for a stable company like ABT? I think not. So what should we use as the basis for computing returns? I think the 'black swan' can answer the question. We have several recent examples:
MRK: In 2004 MRK's drug VIOXX was pulled from the market resulting in a 45% drop in the stock price over just a few days.
BP: In 2010 BP's Gulf oil spill sent the stock down nearly 60%.
BAC: (and others) down 95% from Oct 2008 to March 2009. Rallied to only a 60% loss by July 2009, now at nearly 90% loss. I'm sure the JPM and WFC numbers are better that BAC's. Of course BAC's are better than some others.
On balance looks like 50% of the stock price is a reasonable number to use to compare the returns of a naked put versus a spread. Still contemplating the change.
Wednesday, May 4, 2011
Seeking Alpha comment to Dividend Growth Investor Article 5/4/2011
http://seekingalpha.com/article/267560-6-dividend-stocks-to-hold-forever
I have a problem buying stocks when they are significantly above their 200 DMA. All of these stocks seem somewhat expensive by that standard.
What I don't have a problem with is selling covered calls on long term dividend growth companies that have made significant runs above their 200 and 50 DMA's.
CL and KO both qualify, haven't looked at the others.
The CL Jan2012 $100 Calls would get $1.00. CL requires a 26% stock price CAGR to get to $100 by 1/21/2012.
The KO Jan2012 $77.50 calls would get $.41. KO CAGR is 14.2%
Won't get rich with these and I've been told that the income from this type of trade is insignificant. Problem is that no one has been able to define to my satisfaction exactly how many insignificants make up a significant.
John
I am short WMT CC's Jan2012 $65's, but these were written in Oct 2010.
I have a problem buying stocks when they are significantly above their 200 DMA. All of these stocks seem somewhat expensive by that standard.
What I don't have a problem with is selling covered calls on long term dividend growth companies that have made significant runs above their 200 and 50 DMA's.
CL and KO both qualify, haven't looked at the others.
The CL Jan2012 $100 Calls would get $1.00. CL requires a 26% stock price CAGR to get to $100 by 1/21/2012.
The KO Jan2012 $77.50 calls would get $.41. KO CAGR is 14.2%
Won't get rich with these and I've been told that the income from this type of trade is insignificant. Problem is that no one has been able to define to my satisfaction exactly how many insignificants make up a significant.
John
I am short WMT CC's Jan2012 $65's, but these were written in Oct 2010.
Tuesday, April 19, 2011
Periodic log of issues/comments/notes on PUT activity.
5/23/2011 Had HPQ options assigned. I was looking closing this before the SCHEDULED earnings, but HPQ had leak and moved up announcement and stock dropped over $2.50 before getting a chance to close at a profit. Selling CC's against this holding. Rolled the BRK.B May$80 to Sep11 $77.50. Closed 3 positions (EXC, TEVA, TEVA) in taxable account to open up some leverage $ for new PUTs.
5/9/2011 Sold SU PUTs in taxable account for my first energy related PUT in quite a while now that the price per barrel of oil is under $100. High IV allows for higher return with a delta within my investment criteria.
4/21/2011 Sold more TEVA PUTs today in taxable account after $4.00 drop in one day due to results of a BIIB MS Drug appearing better than a TEVA drug. We'll see in a few months if my strategy of selling DOTM PUTs in my taxable account can overcome a mini-black swan in a stock.
4/15/2011 GREED IS BAD!: Had BAC Apr11 $13 PUTs in IRA account set to expire at the close of trading on 4/15. BAC announced earnings that morning with the stock at $13.20. Stock moved up in early trading to $13.30+ so I didn't close the position. I had to leave for several hours and when I returned BAC was down to $12.80-$12.90. I closed the position for $.15, still made money, but could have closed for $.02 in the AM. Greed cost me 30% of my profit on this position. At least closing the position was correct as BAC was down 3-4% on 4/18 when I sold Jun11 $12 PUT.
5/9/2011 Sold SU PUTs in taxable account for my first energy related PUT in quite a while now that the price per barrel of oil is under $100. High IV allows for higher return with a delta within my investment criteria.
4/21/2011 Sold more TEVA PUTs today in taxable account after $4.00 drop in one day due to results of a BIIB MS Drug appearing better than a TEVA drug. We'll see in a few months if my strategy of selling DOTM PUTs in my taxable account can overcome a mini-black swan in a stock.
4/15/2011 GREED IS BAD!: Had BAC Apr11 $13 PUTs in IRA account set to expire at the close of trading on 4/15. BAC announced earnings that morning with the stock at $13.20. Stock moved up in early trading to $13.30+ so I didn't close the position. I had to leave for several hours and when I returned BAC was down to $12.80-$12.90. I closed the position for $.15, still made money, but could have closed for $.02 in the AM. Greed cost me 30% of my profit on this position. At least closing the position was correct as BAC was down 3-4% on 4/18 when I sold Jun11 $12 PUT.
Friday, April 8, 2011
Abbreviations used in Covered Call and PUT posts.
AY: Annualized Yield
CAGR: Compound Annualized Growth Rate.
CACAGR: Call away CAGR. Stock price compound growth rate required before stock is price exceeds strike price.
CC: Covered Call
CD: Current Delta. I treat the "Delta" as a positive whole number.
CSP: Cash Secured PUT
EA: Exposure Amount (PUT strike price * # shares)
SEA: Stististical Exposure Amount (EA * Delta * .01).
WSEA: SEA when option written.
CSEA: Current SEA (EA * CD * .01)
IV: Implied Volatility
RAY: Realized Annual Yield. Used when a PUT is closed.
WD: Delta of option on date written. Delta is always shown as positive number between 1 and 100.
CAGR: Compound Annualized Growth Rate.
CACAGR: Call away CAGR. Stock price compound growth rate required before stock is price exceeds strike price.
CC: Covered Call
CD: Current Delta. I treat the "Delta" as a positive whole number.
CSP: Cash Secured PUT
EA: Exposure Amount (PUT strike price * # shares)
SEA: Stististical Exposure Amount (EA * Delta * .01).
WSEA: SEA when option written.
CSEA: Current SEA (EA * CD * .01)
IV: Implied Volatility
RAY: Realized Annual Yield. Used when a PUT is closed.
WD: Delta of option on date written. Delta is always shown as positive number between 1 and 100.
Thursday, April 7, 2011
Use of PUTs for income in IRA's.
I use PUTs in IRA accounts for income and to maintain at least some conservative investment positions. All PUTs are written out of the money (OTM) (Strike price is lower than the stock price when the PUT option is sold).
Goal with these options is 12%+ annualized return on the option. These options are usually sold 3+ months into the future.
Recent trades
4/18/2011 BAC Jun11 $12 $ .35 AY 16.5% WD: 37 CD: 56
4/6/2011 BRK.B May11 $80 $1.35 AY 13.3% WD: 38 CD: 47 Clsd 5/20 CAY: 8.2%
3/11/2011 BRK.B Jun11 $80 $2.11 AY 9.6% WD: 27 CD: 54
3/11/2011 HPQ May11 $39 $1.09 AY 14.0% WD: 30 CD: 22 Assigned
2/15/2011 SNY Jun11 $32 $1.80 AY 16.4% WD: 30 CD: 6 Clsd:5/9 $.10 RAY:22.6%
1/24/2011 BAC Apr11 $13 $ .49 AY 16.1% WD: 30 CD: 25 Clsd:4/15 $.15 RAY:10.4%
5/20/2011 BRK.B Sep11 $77.50 $2.57 AY: 9.9% WD: 40 CD: 44
CD values updated 5/20/2011 after close.
Goal with these options is 12%+ annualized return on the option. These options are usually sold 3+ months into the future.
Recent trades
4/18/2011 BAC Jun11 $12 $ .35 AY 16.5% WD: 37 CD: 56
4/6/2011 BRK.B May11 $80 $1.35 AY 13.3% WD: 38 CD: 47 Clsd 5/20 CAY: 8.2%
3/11/2011 BRK.B Jun11 $80 $2.11 AY 9.6% WD: 27 CD: 54
3/11/2011 HPQ May11 $39 $1.09 AY 14.0% WD: 30 CD: 22 Assigned
2/15/2011 SNY Jun11 $32 $1.80 AY 16.4% WD: 30 CD: 6 Clsd:5/9 $.10 RAY:22.6%
1/24/2011 BAC Apr11 $13 $ .49 AY 16.1% WD: 30 CD: 25 Clsd:4/15 $.15 RAY:10.4%
5/20/2011 BRK.B Sep11 $77.50 $2.57 AY: 9.9% WD: 40 CD: 44
CD values updated 5/20/2011 after close.
Wednesday, March 30, 2011
Using Preferred Stocks and PUTs for Income in Taxable Accounts
One of the strategies that I use combines owing preferred stocks that I feel are very secure in their income and value and combine this with selling conservative PUTs to generate a nice income.
The combination should generate near 12% annual income.
Examples:
I own a variety of preferred shares where my current average yield over 7%.
Have sold the following PUTs:
1/27/2011 ABT May11 $44.00 for $.93 AY: 6.5% WD: 30 CD: 3 Expired.
1/27/2011 PG Jul11 $57.50 for $.96 AY: 3.1% WD: 19 CD: 7 Clsd 5/12 CAY 4%
3/10/2011 JNJ Jul11 $55.00 for $.94 AY: 4.7% WD: 22 CD: 4 Clsd 5/12 CAY 8.2%
3/21/2011 WMT Jun11 $47.50 for $.52 AY: 4.2% WD: 19 CD: 3
3/22/2011 MCD Jun11 $67.50 for $.77 AY: 4.5% WD: 19 CD: 1
3/24/2011 INTC Oct11 $17.00 for $.55 AY: 5.3% WD: 20 CD: 7 Clsd 5/12 CAY 14.5%
3/24/2011 MSFT Jun11 $23.00 for $.38 AY: 6.6% WD: 20 CD: 10 Clsd 5/9 $.12 CAY 7.3%
3/25/2011 EXC Oct11 $35.00 for $.95 AY: 4.6% WD: 22 CD: 17 Clsd 5/23 CAY: 8.8%
4/4/2011 BRK.B Jan12 $70.00 for $2.24 AY 3.9% WD: 19 CD: 23
4/7/2011 TGT Jan12 $40.00 for $1.25 AY 3.9% WD: 17 CD: 15
4/11/2011 TEVA Sep11 $42.50 for $1.03 AY 5.4% WD: 20 CD: 25 Clsd 5/19 CAY: 9.3%
4/21/2011 TEVA Jan12 $37.50 for $1.20 AY:4.1% WD: 20 CD: 15 Clsd 5/19 CAY: 19.8%
5/2/2011 BRK.B Sep11 $72.50 for $1.18 AY: 4.2% WD: 24 CD: 22
5/9/2011 MSFT Aug11 $23.00 for $ .44 AY: 6.5% WD: 26 CD: 27
5/9/2011 SU Dec11 $33.00 for $1.46 AY: 7.1% WD: 18 CD: 20
5/12/2011 BTU Dec11 $43.00 for $1.40 AY: 5.3% WD: 13 CD: 12
5/12/2011 COP Nov11 $55.00 for $1.21 AY: 4.1% WD: 13 CD: 11
5/26/2011 PRU Dec11 $50.00 for $1.66 AY: 5.8% WD: 18 CD: 18
CD updated 5/23/2011.
The combination should generate near 12% annual income.
Examples:
I own a variety of preferred shares where my current average yield over 7%.
Have sold the following PUTs:
1/27/2011 ABT May11 $44.00 for $.93 AY: 6.5% WD: 30 CD: 3 Expired.
1/27/2011 PG Jul11 $57.50 for $.96 AY: 3.1% WD: 19 CD: 7 Clsd 5/12 CAY 4%
3/10/2011 JNJ Jul11 $55.00 for $.94 AY: 4.7% WD: 22 CD: 4 Clsd 5/12 CAY 8.2%
3/21/2011 WMT Jun11 $47.50 for $.52 AY: 4.2% WD: 19 CD: 3
3/22/2011 MCD Jun11 $67.50 for $.77 AY: 4.5% WD: 19 CD: 1
3/24/2011 INTC Oct11 $17.00 for $.55 AY: 5.3% WD: 20 CD: 7 Clsd 5/12 CAY 14.5%
3/24/2011 MSFT Jun11 $23.00 for $.38 AY: 6.6% WD: 20 CD: 10 Clsd 5/9 $.12 CAY 7.3%
3/25/2011 EXC Oct11 $35.00 for $.95 AY: 4.6% WD: 22 CD: 17 Clsd 5/23 CAY: 8.8%
4/4/2011 BRK.B Jan12 $70.00 for $2.24 AY 3.9% WD: 19 CD: 23
4/7/2011 TGT Jan12 $40.00 for $1.25 AY 3.9% WD: 17 CD: 15
4/11/2011 TEVA Sep11 $42.50 for $1.03 AY 5.4% WD: 20 CD: 25 Clsd 5/19 CAY: 9.3%
4/21/2011 TEVA Jan12 $37.50 for $1.20 AY:4.1% WD: 20 CD: 15 Clsd 5/19 CAY: 19.8%
5/2/2011 BRK.B Sep11 $72.50 for $1.18 AY: 4.2% WD: 24 CD: 22
5/9/2011 MSFT Aug11 $23.00 for $ .44 AY: 6.5% WD: 26 CD: 27
5/9/2011 SU Dec11 $33.00 for $1.46 AY: 7.1% WD: 18 CD: 20
5/12/2011 BTU Dec11 $43.00 for $1.40 AY: 5.3% WD: 13 CD: 12
5/12/2011 COP Nov11 $55.00 for $1.21 AY: 4.1% WD: 13 CD: 11
5/26/2011 PRU Dec11 $50.00 for $1.66 AY: 5.8% WD: 18 CD: 18
CD updated 5/23/2011.
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