Smooth Sailing With Options

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:

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