Hi Longhorn,
Thanks.
I've been selling puts now for over 10 years.
It amazes me how these puts get manipulated to scare the heck out of an investor.
I started out selling a contract far out in time and just watched the price action. It is unbelievable.
I always sell out far in time to build premium, such that if assigned it will yield 6.5 to 8 percent with the dividend.
During the long time to expiration , I noticed how the premium could easily double and/or triple. Always on times of clx climax periods.
Take this month's KMI and T. I sold June T 16.00 puts 10 months ago, when I was buying T for $15.50,and it went to $14.46 last October 2022. T subsequently went straight to $20.00 and change like it never looked back.
This month (after Q1 earnings webcast where it beat EPS but Free cash flow came in light, it collapsed to $14.85. On June 2nd just two weeks ago, it Made it look like it is going to zero.
Low and behold today it popped up over $16.00 with a day to go.
What's the clue as to why not to bother/worry? Heck I hope they get assigned!
It lies in the open interest. Today there are ($16.00 strike price) 15245 calls and 27910 puts. Now I always go on the premise the MM is always the largest seller of both - its part of a monthly paycheck for them.
If the MM did indeed sell the majority of the open interest, where doe the MM stand to benefit the most if they expire to zero. I always bet on the greatest number in this case the 27910 puts. That means that by the close of tomorrow T will be higher than $16.00. It climbed from the depths of yesterdays low @ $15.82 to above 16.00.
This single price action in T is mirrored in all of the stocks that have options. It is the best example of market make manipulation and you can count on it happening on a monthly basis.
If you sell a put when the market is down and fear is palpable, it works and that is why CLX is so valuable to me.
There will be a August of 1987 and 2008 general market sell off that this approach goes awry.
That's why you only sell puts on stock you are OK with buying and holding - as th dividend yield will meet your desired goal of return.
It takes the fear out of trading.
I have a large position in Cohu, which suspended its dividend. Even with that I have a dividend yield on my total account of 4.75%. With the put premium revenue I receive divided by the total dollars of stock I must have cash or equity in my account to collateralize the puts sold with, I generate another 3.25 percent return in premium. That annualizes to 8%.
Rule of 72's says I'll double my account size in just under 9 years.
I have no margin, I never use my account's equity to collateralize my puts. I sell only so many puts, that if assigned I have cash. I do extrapolate my dividend stream, such that if assigned I have the cash and the future dividend revenue stream that is received before the option expiration, so it is a bit levered.
It's not risky, its not levered , its not fast, but it is steady and worry free.
I swear it is what annuity sellers do, but I do not know that for sure.
It's not speculation, it is simple slow wealth creation.
I'd be remiss if I did not thank Cheif for his helping me learn CLX, as it is CLX and it's climax confirmation that has helped me tremendously to determine when to time the put sales. Premiums can triple from normal trade days to peak premium days and I always get too anxious to sell too soon as my percent yield target gets hit way before the max premium gets reached.
Every trader has their risk tolerance, and mine is very low. If I don't have a dividend to receive if a stock is assigned, I'm a scardy cat trader. I hate losing money and will wait for a safe trade.
If anyone is interested in this approach I often post over on the "option strategies" thread my trades and analysis.
All folks interested are welcome to visit or post questions directly to me.
In between, lets hope that Cohu provides that cash to buy you a Ram Cummins and Me a Denali Duramax.
My trailer towing truck is a 2005 HD 3/4 tin Silverado LT and it has 90,000 miles on it. Still like new, but I get nervous pulling my 1955 Nomad around the country to shows. I too need an upgrade! <smile>
PS: my fruit trees are just exploding with new growth after putting compost on them and a nice soft 3 day rain. Thanks for the great advice.
Bob |
