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But does this make sense to you as a lens to view it through? It seems very straightforward to me, but I wonder if I'm missing something here. It seems most times people write puts and calls simply for premium and the traditional thought (and most data supports this) buy and hold outperforms covered puts and calls, but no one has ever framed it as writing puts on future earnings that you wouldn't be able to use for buy and hold without actually borrowing on margin and paying the interest rate.
I also come at it from a bit of an FI perspective where this leverage could produce ~$6-$8k/yr in premiums and that's a decent chunk of change. I see people on the mustachian site talking about selling tradelines for $5-$6k/yr or constantly moving your savings account around to get a few K. This seems like a much easier solution to get a bit of "side income".
It makes sense and the real issue however you want to weight it is risk. Model what your income would be if you were to execute this on QQQ vs single stocks and see what that is. The worst case could be highly unlikely but it’s still there. As long as you understand the risk it’s doable. Maybe baby step into it
You do realize that if your put gets assigned before your paycheck arrives you'll be borrowing from your broker and paying margin interest on that loan. Yes??
That is something that often is over looked. If you are short options you can be assigned at any time. Now if you went long the stock, had the margin cash to cover the purchase you could dump it immediately and limit your borrowing costs
You do realize that if your put gets assigned before your paycheck arrives you'll be borrowing from your broker and paying margin interest on that loan. Yes??
Sure, but how often would someone exercise a contract early? It is almost always in their best interest to squeeze all of the theta out of their contract. If it ends up ITM I will just roll down and out 2-3 days before expiration. It would give me another 30 days to come up with the cash.
Quote:
Originally Posted by Lowexpectations
It makes sense and the real issue however you want to weight it is risk. Model what your income would be if you were to execute this on QQQ vs single stocks and see what that is. The worst case could be highly unlikely but it’s still there. As long as you understand the risk it’s doable. Maybe baby step into it
Yeah, I'm never going to be very leveraged. At this point I'm considering about ~$30k more than I have in cash currently spread over 2-3 companies. I could easily cover that in a few months of paychecks and my bonus would pretty much cover all of it. All of this ignores the fact that I can always BTC the contract. As the date to expiry approaches zero the cost of the theta is all gone and the price to close is equivalent to the different between the strike price and the price of the underlying. So if we assume I had 4 contracts out on AAPL 3/18 $155 and it blows up and goes down to say $120, which would be a 32% drop. It'd cost me $14k to close this position at a loss. I'd have that cash on me at all times.
I am already eligible to do this. I am asking if others have considered it.
If you can explain to me how I can buy shares today with cash from my paycheck March 15th I'd gladly do that. Emergency funds are there for a reason, to help my spouse sleep well at night. I've consistently over the years used my emergency fund to buy dips. I wiped it out in March of 2020 and then simply replenished it.
The main point I am making is that a person working always has future cash flow they are almost certain to earn that they don't have access to. I believe this is a reasonable way to leverage that a bit.
bingo. I just wouldn't have any available margin remaining to "borrow" against.
I look at this from a different lens as a former business owner. My need for "emergency" funds wasn't really needed like an employee. So I don't think it's wise for an employee to think they'll always have a future cash flow they're almost certain to earn.
I like your idea of selling puts; however, I would personally be more cautious using emergency funds for this or buying any dip. I would wait for the cash reserve to grow, then deploy.
Going long and writing calls requires more cash, and you risk 100% of your investment minus premiums collected.
I should have elaborated on the point I was trying to make. Sell weekly covered calls on the current positions to earn the extra income he's seeking, rather than risk funds pegged for emergencies.
I look at this from a different lens as a former business owner. My need for "emergency" funds wasn't really needed like an employee. So I don't think it's wise for an employee to think they'll always have a future cash flow they're almost certain to earn.
I like your idea of selling puts; however, I would personally be more cautious using emergency funds for this or buying any dip. I would wait for the cash reserve to grow, then deploy.
I think this is a fair perspective. I'm probably pretty lucky in that technically we could live off of my spouse's income and I see the probability of us both losing our incomes at the same time to be extremely small as we work in completely different industries. I see the emergency fund as not as much as protecting, but just something that helps the spouse sleep at night and covers things like the HVAC going out suddenly, etc. If we only had one income or if we had expenses that exceeded any one of our incomes I'd definitely be a bit more cautious.
Plus, we are basically FI. We'd just have to pull the kid out of daycare, which they wouldn't need if neither of us had jobs. More just working because we both enjoy our jobs and want a bit more financial security.
Sure, but how often would someone exercise a contract early? It is almost always in their best interest to squeeze all of the theta out of their contract. If it ends up ITM I will just roll down and out 2-3 days before expiration. It would give me another 30 days to come up with the cash.
Yeah, I'm never going to be very leveraged. At this point I'm considering about ~$30k more than I have in cash currently spread over 2-3 companies. I could easily cover that in a few months of paychecks and my bonus would pretty much cover all of it. All of this ignores the fact that I can always BTC the contract. As the date to expiry approaches zero the cost of the theta is all gone and the price to close is equivalent to the different between the strike price and the price of the underlying. So if we assume I had 4 contracts out on AAPL 3/18 $155 and it blows up and goes down to say $120, which would be a 32% drop. It'd cost me $14k to close this position at a loss. I'd have that cash on me at all times.
Your worst case scenario might happen prior to expiration as you can be assigned at any time and to that point you may not be able to BTC.
I think a member here actually had something like this blow up on him with the difference being he got autoexercised at expiration, was put the stock/or short and the stock went heavy against him over the weekend and he couldn’t close until Monday. Setting up a scenio he was on a payment plan to the broker.
You may not end up in a payment plan scenario but it could go really wrong in a way much worse than anticipated. Let’s say you are weeks from expiration, going into the close Friday you get assigned. The assignment hits Saturday morning in your confirms but as of Friday, you are long the shares after the bad news/catastrophic event occurs.
I’m not against the idea just go in eyes wide open
Your worst case scenario might happen prior to expiration as you can be assigned at any time and to that point you may not be able to BTC.
I think a member here actually had something like this blow up on him with the difference being he got autoexercised at expiration, was put the stock/or short and the stock went heavy against him over the weekend and he couldn’t close until Monday. Setting up a scenio he was on a payment plan to the broker.
You may not end up in a payment plan scenario but it could go really wrong in a way much worse than anticipated. Let’s say you are weeks from expiration, going into the close Friday you get assigned. The assignment hits Saturday morning in your confirms but as of Friday, you are long the shares after the bad news/catastrophic event occurs.
I’m not against the idea just go in eyes wide open
It's entirely possible I could get assigned early, but that would have to happen across multiple tickers/contracts for it to really bite me and even if it does I'd just sell the shares on margin the next day and eat the loss and start over.
Yeah, I've seen that happen too. I almost always BTC on Friday of expiration right before market close. Usually by that point you're only talking about $1-$2/contract and with my broker if contracts are below $10 in cost they don't charge you the options trading fee. Either that or I'd roll at that point to take advantage of the Saturday/Sunday theta.
Yup, the eyes wide open was why I posted it here. To get others perspectives and to make sure there isn't something glaring that I'm completely overlooking.
I'm talking about writing 4-5 puts per 30-45 days to squeeze an extra ~$8k/yr in income and potentially be able to take advantage of a stock correction of 10-15%.
The bolded part makes no sense. Writing puts is a strategy you use if you are bullish, or at least neutral, on the underlying stock. To "take advantage of a correction" you should be buying the put. I realize you understand the mechanics, but it seems your are twisting your thinking by suggesting this is a winning trade in all cases. It's not.
Writing options is certainly a decent enough strategy. However, to get worthwhile premiums you need to use strikes that are not too far from the market, and you need to accept that you'll get assigned on occasion.
It's naked in the sense that I currently don't have cash to cover it. I'm using the margin provided by my broker as the collateral, but margin as collateral isn't really margin in that they don't charge you an interest rate for the collateral. But per my example above it's not technically naked in that I could cover it if the derivative ended up ITM. I may just need to roll down and out a month or so to accept assignment with cash.
Sounds like it could be damaging if things go against you.
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