Smooth Sailing With Options

SmoothSailing#29

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.

Smooth Sailing With Options

SmoothSailing#28

At the end of the year I like to look at how everyone is doing.  So I just went over a friend’s account who has mirrored my trades.  I traded pretty conservatively this year, timing my trades, waiting when I have to, and since I’ve been underwater all year, selling at around 85% POS.  As you can see from the screenshot, IWM, over the last calendar year, is down 14%.  The account is up 4%.  So by selling options the account made 18% return, overall.  Without selling options the account balance today would be around $196,987. A pretty significant difference. During one of the worst market years in recent times. I remain convinced the “SmoothSailing” method works.

Smooth Sailing With Options

SmoothSailing#27

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.

Smooth Sailing With Options

SmoothSailing#26

In my never ending quest to make my money work harder for me, I discovered this little gem of an idea.  It’s a program by Fidelity, but every other brokerage I checked offers something like it.  Basically, if you own stock, you can loan it to Fidelity and get paid for that.  Your stock is still yours, and backed up by Fidelity, and you still get any dividends.  You can’t sell options on it at the same time, so for me, this works best for stock that’s sitting in a non-tax protected account that I am not trading.  But this way you get the dividend, any growth, and some extra for loaning it out.  As far as I can tell, rates vary from 5% to 10%.  Sounds good to me! 

https://www.fidelity.com/trading/fully-paid-lending

Smooth Sailing With Options

SmoothSailing#25

“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! 

Smooth Sailing With Options

SmoothSailing#24

Just an observation to sharpen our trading: Today, the day after Thanksgiving, volatility on IWM is around 14%, which is 1/2 or 1/3 what it usually is. It’s because it’s a holiday week and volume is very very low. So even though I could sell calls, there’s no point at such low volatility, so will wait for Monday. Timing is everything. Will remember this for Christmas and New Years and sell out a full week or even a week and a half.

Smooth Sailing With Options

SmoothSailing#23

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

Smooth Sailing With Options

SmoothSailing#22

I like to experiment by trading one contract on something and logging the activity for months to see just what happens when I try some new thing. Today I took a look at my Disney, my most unsuccessful trade in the last few years. I have been selling puts on DIS since November 2020, thinking that covid was going to resolve and people would be going back to the parks and the cruise ships. Well, that didn’t hold. After a nice climb it sank again. I was assigned back and forth but it dropped too fast and I ended up owning it at $144. It’s in the toilet now, at $103. But DIS has some volatility which means premium and so I just kept selling calls on it, week after week. Since it was so crazy far down I was forced to sell calls underwater, so I used the 85% rule and just sold there every week.  Didn’t seem like I was making much and I did get assigned underwater at least once, so I promptly bought it right back the next trading day. Today I downloaded my Fidelity history as a spreadsheet and totaled all the option premium from January 1 2022 to March 31 2022. The answer was better than I expected. The grand total, taking everything into account, is 5.1% return over the three months.  And that’s with a stock that is down 34% in the same time frame.  So I’m down 29% instead of 34%.  Another way to look at it is, at 5.1% every quarter, I’m making 20.4% annualized return on a stock that is in the toilet. If/when DIS recovers I’ll be in good shape. I don’t plan on selling it until it is back above $144, and even then all I’m really after is the cash flow. 20% a year is not bad!

Happy trading!

Smooth Sailing With Options

SmoothSailing#21

As we all know, there are various ways to manage a position.  Up down or sideways, whatever the market does, most are pretty easy to manage.  Except the one when you sell calls underwater and risk assignment at less than your cost basis.  Fortunately it doesn’t happen too often, but we just had six weeks of down market and just about everyone is underwater by now.

I’ve been working this one for a long time and finally have a satisfactory answer.  I was determined to figure out how to make premium each and every week, no matter where my position was or what the market was doing.  I traded emails with Alan Ellman (Blue Collar Investor) about this and he said something that clarified my view.  He didn’t actually have a good answer, but he gave me the insight to figure it out.  He handles this two ways; either he jumps to another stock or he does a “stock repair strategy”.  Well, jumping from stock to stock seems too erratic.  If the whole market is going down, so will whatever you try to jump to.  Not for me.  The “stock repair strategy” is just adding a call spread to your trade.  Well hell, if you’re going to trade spreads, trade spreads.  Don’t add a complex trade to an already losing one. 

However I think there is a way to manage this one that’s successful.

Let me use a recent example to explain.  I’m in IWM at 207, the last price I was assigned.  IWM went down to 177 and I sold 182 calls, using my 85% POS rule.  Got away with that for weeks but finally IWM popped up and now I’m looking at getting assigned at 182, far lower than my 207.  (I do not take into account any premium, I prefer to only look at cost basis.)IWM is at 185.  If I let myself get assigned and promptly buy IWM back on the next trading day at 185, I’m down three dollars per share, or $300 a contract.  However, if I roll on expiration day up to 185, that costs me .56 cents per share, or $56 a contract.  Much better, and either way, my new strike is 185.  So by spending .56 cents I have retained the intrinsic price gain of $3.00.  A loss, yes, but one that I can make up in one trade.  When the difference between stock price and my strike price is smaller, the cost to roll goes down and can be flat or even positive.  Going out in time a few more days helps there.  Lately I’ve been selling two day trades, selling on Monday for Wednesday expiry and on Wednesday or Thursday for Friday.

And since I’m using the 85% POS strike when I sell these underwater calls, the times this happens and I have to incur a cost to roll up or out are far fewer than the times my trade expires successfully and I don’t have to worry about it.  Of my last 14 trades, I had to roll 2.
If the strike is very close to the closing price at expiration, then there’s no need to roll and the method of letting assignment happen and buying right back in the next trading day works just fine.


In both cases, there is a risk of having to spend some money to stay in the game.  That’s what I was missing when I was trying to figure this out, I was looking for a fool-proof method.  There ain’t one.  But if I can generate premium while a position is far underwater while I ride it back up, and if overall, the hits outweigh the misses, I’m happy.  There is even a term for this, it’s called “strategic mediocrity.”  Hitting lots of small wins to make up for occasional losses.  This does work better the closer you are to the money, like any option trade.  A stock that shot up dramatically in a short time might really sting.  But IWM doesn’t do that so I feel ok doing this.
I remain confident that the market will recover and my IWM will get back to 207 and above, at which point I’m back in regular selling mode.  Meanwhile, I’m making some premium.

Smooth Sailing With Options

SmoothSailing#20

RBLX.  Crappy little stock with no earnings and not something I’d trade myself.  But one of my friends wanted to try it because of the insanely high weekly premium and wanted me to do the trading.  So back in March I sold puts on it in his account and soon got assigned at $48.  I’d actually made a couple of bucks by then, but we’ll start at $48.  With the big drop in the market this year it soon hit a low of $21.88.  Pretty ugly, but the weekly premium was nice.  Right now calls are paying like 7% a week at the money.
The history:

Got assigned April 22th 2022 at $48. 

Sold 85% POS or thereabouts covered calls every week since, and got blown out three times and had to roll out and up at no profit for those trades.
RBLX is now $50.49, finally in the green.  I made $6172 in premium to date.  Started with 400 shares assigned at $48, which is $19,200 invested.
$6172 divided into $19,200 is 32% gain, April to August.  And now I can sell calls close to the money and really knock back the premium (7%!) until I get assigned and let it go. 

Or quit, that’s not such a bad year.

I love this hobby.