I was assigned IWM at 182 in early January, the 11th, so I wanted to stick with that strike until I got back to it.  That is underwater, last time it was assigned to me was around $220.  It popped up after that and hit a high of $199.23 but I knew/hoped it’d drop again into the 180s, so I just kept selling calls at around the 80-85% POS (.20 or .15 delta, same thing) strike and rolling now and then if I had to, to avoid assignment.  I let myself get assigned eventually so that I could start selling puts with the same 85% POS strike so I could buy it back at 182 or close to it.  Out at 182, back in at 182, and meanwhile, made some premium.  The weeks that the strike and the stock were close together I did real well.  There were some weeks those rolls didn’t make me anything because the spread between stock and strike was large, but they never cost me anything.  (Never pay to close a trade)  I was just biding my time.

Today I sold 182 puts for Friday the 3rd.  So I’m back to my strike and don’t care now if I get assigned or not.  If I do, I’m back in at 182, in time to collect the next dividend.  If not I’ll roll out again.  I still need to walk it back up to $220 or so before I am technically not underwater, although I’ve made enough in premium to wipe that out anyway.  But I like to mentally stick with my last or worst assigned price.

So I calculated my premium between today, Friday the 24th, and when I sold those 182 puts In January.  Between that January assignment at 182 and today, I made $8.62 in premium.  That includes the debits when I bought to close a few at around a nickel, mostly using set-and-forget limit orders.  That’s seven weeks, so that’s $1.23 per week.  Not too shabby.  Annualized that’s about 33% a year using $190 as an average IWM price.

I tried to only sell puts on down days and calls on up days, that seems to bend the odds in my favor, even the times I had to wait it out a day or three.  Using the 80-85% POS rule seemed to keep me from having to roll too many times, and kept me from getting assigned if I didn’t want to get assigned.  In other words, it worked.  Once I get out from being underwater, if/when IWM hits $220 again, it won’t matter so I won’t use the 80% POS strike guideline, I’ll go back to selling closer strikes so that the premium is better.

So I’ll repeat myself: Every trade, every situation, can be managed to your advantage one way or another if you pay attention, especially on expiration day.  Happy trading! 

Just a quick look at the increase in options trading volume in the last several years. I started in about 2000. My thought here is, if it didn’t work, this chart would be reversed.

In my endless quest to better inform you about options trading, (and always on the lookout for a way to make money work harder), I’ve been reading up on “Mini Options Indexes”, which are one tenth the size of etf options, ie:, if SPY is at 3000, the SPY mini, XSP, is at 300.  They are still 100 shares per option contract, and they have similar expirations.  The advantage I thought I saw was that they are European assignment, meaning no risk of unexpected assignments before expiration date, and they do not assign stock even when assigned.  Rather, they are cash-settled.  Meaning if you sell a put or a call and it is successful, the difference between your chosen strike and the settled strike is credited to your account.  Not the stock.  Wow, that sounded good to me.

However, once you really figure out how they work, you discover that all is good UNTIL you go underwater.  In that case, rather than being assigned the stock as we are now, they take that same difference, between strike and stock, out of your account in cash.
Well hell, that’s why I quit selling spreads.  I don’t mind owning the stock, I can always wait for it to go up again, but once you lose cash, that’s it. 

So forget that idea.  Once again, like a pinball destined to roll into that one exit at the bottom of the table, I find myself back to what I’m already doing.  There may be easier money out there, but I sure haven’t found it.

“When is the stock market going to recover?”  “A recession is coming!  Should I sell out?”  What do we do about this big crash we’re in?” 

I get these questions all the time.  Or I’m told, “We’re down 26% this year and it’s an emergency!”

Ok, folks, relax.  Consider this.  When I hear the market is down X percent, either from friends or on the media, my first thought is, down from what?  Invariably it’s from the last high, or the highest high of all time, or the highest high of the year.  But wait a minnit!  That is a blatant case of anchoring bias, and as efficient traders, we try to learn to manage our own biases, right?  After all, what’s the difference between using the last high to measure your account or using the last low?  Nothing.  They are the same numbers in that they both represent unrealistic points in the stock market’s history.  (Using the last low would sure make people feel better.) 

Anchoring bias occurs when people rely too much on the first information they hear when making decisions. For example, if you first see a T-shirt that costs $120.00 – then see a second one that costs $100 – you’re prone to see the second shirt as cheap.  If you see it at $140, it’s now outrageously overpriced and no way you’re going to buy it.  But the reality is it may be a $20 T-shirt.  Those other prices are meaningless advertising.  The anchor – the first price that you saw – unduly influenced your opinion.  Anchoring bias is an important concept in behavioral finance.  (And shopping for T-shirts.)  And that means we should pay attention to it. 

No high has ever held, just as no low has ever held.  So why do we use those unrealistic and unsustainable markers to judge our accounts?  We pick the higher one because of anchoring bias and because it felt so good to see those big numbers in our account.  But it’s not really an accurate picture.  If you want to gauge how your account is doing, try looking at the 365 day moving average over a year.  After all, you keep your stock far longer than 365 days, correct?  A long term moving average is a more accurate picture of the stock market than picking that one day last year when markets hit a high as your reference.  We know, as rational traders, that high was an anomaly, right?  Just like the last crash or bear market or pullback, whatever you want to call it.  Neither one, the high or the low, gives an accurate picture of what’s going on.

Check out my chart.  You’ll see that IWM’s 365 day moving average has actually spent most of the year around $200.  That last spike in December 2021 was unrealistic and does not give a good picture of what the stock did over the year, any more than the drop in June does.  So why do we focus on that high?  Anchoring bias, pure and simple.  But that’s like a tourist going to Hawaii and being treated rudely by just one native.  That tourist will bad-mouth Hawaii when he gets home, even though the rest of the people there may be absolutely delightful.  We all do this to an extent, the key is to recognize when we’re doing it.

Not that I wouldn’t love to see IWM hit $240 again! 

Whew.  What a market lately.  Five weeks down in a row, first time that’s happened since 2011.  So everyone is underwater, and now what?  Wait? Sell calls high or low?  Run in circles, scream and shout?

Recently I came across an ETF, RYLD, that has a pretty good track record, although that’s only a few years old right now, and has a nice 11% dividend.  They manage that by selling calls every month on VTWO, which is an IWM clone.  (I don’t use VTWO because it only has monthly options, and is low volume.)  Thing is, their method is to sell calls at the money each month, regardless of the stock price.  That’s what I used to do, and when I got assigned underwater I would buy the stock right back on Monday morning.  In effect, that just leapfrogs over the weekend.  The odds are such that most of the time, you make enough in premium over multiple weeks to more than offset the infrequent times you have to buy the stock back at a higher price than you were assigned.  Apparently RYLD does just fine with that.  They’re using over a billion dollars, so I suspect they have a few quants who did the math on this.  (That’s five million contracts a month, contracts, not shares, for those of you who don’t believe the options market dwarfs the stock market.)  So I studied and studied and decided that I still like my method of selling at around the 85% POS strike when I’m underwater, and that only on an up day.  Meaning when IWM is in the green for the day.  This week, for example, I didn’t sell any calls on Monday, but I did on Tuesday morning, since IWM was up about $3.  My reasons for sticking with 85% are different from anyone else, I’m sticking to an 85% POS strike because that brings in enough premium each week to meet my goal.  But back when I started this I was selling calls just like RYLD does, with an eye to maximize premium.  Once IWM climbs back up and gets closer to my cost basis, I can then sell calls closer to the money and increase my return.  But when I’m underwater so far I can see the bottom of the Marianas Trench from here, 85% keeps some income coming in and is way less likely to be assigned.  At 85% POS, that is around .4-.6% a week, which still works out to about 20% return a year.  I’ll take that in a bear market.  If I am assigned, I’ll buy IWM back the very next trading day and keep on trucking.
And to clarify, when I say I’m underwater, I mean on this trade cycle.  The last time I was assigned IWM it was at 207, so that is the price I keep in mind.  I’ll work this trade until IWM gets back to 207, one way or another.  I started selling options on IWM when it was $70, so my actual cost basis is a negative number.  But I play every trade cycle in and out using my last assignment strike.

Here is some discussion about RYLD if you’re curious:
https://www.globalxetfs.com/content/files/RYLD-IM.pdf
https://www.globalxetfs.com/content/files/2022.Q1-Covered-Call-Report-GX.pdf
https://cdn.cboe.com/api/global/us_indices/governance/BXR_Methodology.pdf
https://seekingalpha.com/article/4505723-ryld-math-behind-yielding-fund-why-i-own-it