fmikehugo: I, too, want to trade buy/writes for income. I've written CCs and naked puts before, with positive results most of the time. I did get burned a little with naked puts last fall, which has caused me to be much more cautious now. So, I'm paper trading two alternative portfolios so I can get the feel of how my ideas work.
(Previously, I did CCs and NPs "when it felt right", and didn't apply a consistent strategy. I'm trying to improve on that approach!)
I'm watching two portfolios: One made up of 4 reasonable tech stocks: CSCO, QCOM, DELL, and TXN. I could have chosen others, but those are the ones my dart landed on. The other 'portfolio' uses QQQ as a proxy for the NASDAQ. Intended to be lower risk.
I've been watching the first portfolio since the first of June, and the QQQ's since June expiration. Not long, to be sure, but I can make some observations:
The Stock portfolio is more volatile, and much of the return is derived from having the stock price of the underlying shares go up. Generally speaking, I wrote 1 strike OTM calls. None of the stocks were 'called out', in fact from the time I sold them they were on average down 11% at June expiration. (I used $400K, as starting capital, and the CCs generated $14.4K of "income". The value of the stocks deteriorated to $356K in about 3 weeks! This was only partially offset by the $14.4K in options premiums received.) So far in July, the stocks have rebounded. DELL and QCOM would now be called out, but the CSCO and TXN would not. I made the assumption that I would re-sell options on the same stocks if they were held over. The value if expiration were today of the stocks is $382K. Again, I have received another $14.2K in premiums. In all, my stock is worth $382, and I've recieved $28K in premiums, so I'm ahead about $10K.
Contrast that with QQQ. Mind, I've only followed QQQ closely since June expiry. (Since my capital dropped so badly during June, I wanted to research "safer" alternatives.) I bought $400K's worth of QQQ and sold 1 strike OTMs (nearly ATM) and received $24K in option premium. These are now ITM so the QQQ will be called for a small profit of $1,700. But the main difference I see is the larger premium received ($28K for the QQQ vs. $14K for the stocks) and the perceived lower risk of QQQ as opposed to trading individual stocks.
For income generation purposes I have found that writing ATM (or nearly so) generates more income and provides greater downside protection. I am more concerned about preventing capital losses than losing profits by having a stock run away from me. (I have a LTBH portfolio for that!)
And, I have found that paper trading is indeed an excellent way to learn how your emotions can be affected by the action of your portfolio! As long as you make your portfolio "realistic"!
Best of luck, and let us know how you doing. We're all learning to play this game...
Adairm |
