Last post. God, what a wind bag.
The last part of all this is that if the shares are called away-this applies generally, not right now when I’m trying to liquidate (sort of)-the next thing you can do is sell a put at a strike near where it is trading. Example would be QCOM selling around $50, goes through a good day or two or three. I sell the April 52.50, the April 55, and the May 55 call. QCOM pulls back and I buy back the 55 May, but the stock ends up closing at $53 on the third Friday of the month (options expiration day), the April 55 expires worthless and 100 shares get called away at $52.50. I then turn around and look for a chance to sell the May 52.50 (or 50, or 47.50) put, assuming I still want the stock. I can do this month after month, picking days when it is on a down swing and the premiums are a little higher, until the stock is put to me, and then start selling calls against that same 100 shares. Again, I tend to stay a little bit out of the money and sell a little at a time, always within the parameter of being ok with owning the stock even if it goes a lot lower. All this tends to work better in a tax deferred account, since there are capital gains and rare wash sale, although the vast majority of my trades have been in a taxable account, due to circumstances.
Now some more about putting this into context. When I first started doing this I was somewhat skeptical and figured I would try it out for a year as a test. The rules I came up with were mostly to allow me to test selling calls without getting in over my head and causing me to loose sleep. My life generally was get up at 5 A.M., leave the house at 5:30-6:00, work all day with no access to computer or quotes, pick up Grandson at 5-5:30 P.M, on drive home from work, wash rinse, and repeat. On the weekend I took a couple of hours to list the 10 stocks I might want to sell a call against, go through the options that were available, divide the prices by the # of days to expiration, and identify the ones that might make sense to sell. Then I would put a few day limit orders in at prices above the ask and if one or two sold, great. A quick review in the evening and a few more day limit orders for the next day, and so on until I had sold what I wanted to or the prices had retreated too far to be interesting. I had phenomenal success that first year. My first 100+ contracts sold were all profitable, either expiring worthless, or being bought back by me at a profit. In fact, I was starting to buy them back much too quickly near the end of that run just to keep the streak going, which was a problem. Of course a lot of that was that the market was going down, and the optimal course would have been to sell every call possible against every share I owned, but I only know that in hindsight.
Sept. 11, 2001 happened and my interest in the market generally disappeared, and I sold very few calls for about 10 months. We bought a condo and completely rehabbed it after that, and by that I mean we actually did the work, not just overseeing other contractors. Work and raising grandson continued. We sold the condo and bought this old house, and have been working on it the last two years, and there’s still lots to do. In the end, by not changing anything from that first year when I was testing it, I’ve ended up testing it for 6 years. Now there’s a certain amount of “if it ain’t broke, don’t fix it” going on, but there is no reason why it wouldn’t work as well with 2 or 5 contracts at a time. That trading account has 6000 shares of something or another, most of it optionable even after the liquidation so far, and yet I’ve only got 8 contracts outstanding, when even by my own rules I could have 20. My success rate really hasn’t changed, up market or down. I know that for every $1000 of options I sell $420 will end up in my pocket, and that’s with not wanting the underlying to be called away. I’m sure I can improve on that in a tax deferred account.
Anyway, now you know what I know. If you give it a try, let me know how it goes. If you decide not to that’s perfectly ok. I really did need to review all this and see where rules that were good for the test in the taxable account could be changed going forward.
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