I first ran across the idea of selling puts and calls from this document from the Australian Securities Exchange's web site. Seems easy, right? Well, making sure the odds are on your side is not so easy. I think my approach may be a bit aggressive, but I'm not sure. Owning stocks isn't risky, right? Well, in my opinion, selling options is even less risky if you know what you're doing.
I'd like to earn between 3 to 5 percent on my money per month. That's actually a lot if you think about how much you'd have if you could consistently make such returns over an extended period. Earning 4% a month, you'd double your money in a year and a half. It would take only 5 years to turn $100,000 into a million! Getting rich overnight would be nice, but I'll settle for 5 years.
The first step is to choose good stocks, which have both good fundamentals and technicals. In an earlier post I mentioned using Navallier's PortfolioGrader Pro, which ranks stocks according to a number of important criteria. I always pick stocks with an overall rating of "A", and it just so happens that they also all have a Quantitative rating of "A" as well. These are the positions I've chosen to open over the past couple of trading days:
| Execution Date | Action Description | Quantity | Symbol | Description | Price | Commission | Reg Fees | Total Cost |
| 6/22/2009 10:42 | Sell To Open | 2 | .ZQNSO | AMZN JUL 75 Put | $1.53 | $14.95 | $0.02 | $291.03 |
| 6/22/2009 9:47 | Sell To Open | 4 | .QKUSI | SNDA JUL 45 Put | $0.75 | $14.95 | $0.03 | $285.02 |
| 6/22/2009 9:40 | Sell To Open | 10 | .CFQSC | CAKE JUL 15 Put | $0.30 | $15.00 | $0.07 | $284.93 |
| 6/22/2009 9:36 | Sell To Open | 3 | .UPASJ | PNRA JUL 50 Put | $1.70 | $14.95 | $0.04 | $495.01 |
| 6/19/2009 10:04 | Sell To Open | 3 | .OAQSK | APOL JUL 55 Put | $0.95 | $14.95 | $0.03 | $270.02 |
| 6/19/2009 9:30 | Sell To Open | 3 | .QGMSJ | GMCR JUL 50 Put | $1.65 | $14.95 | $0.04 | $480.01 |
| 6/19/2009 9:30 | Sell To Open | 7 | .NQZSX | TNDM JUL 22.5 Put | $0.35 | $14.95 | $0.05 | $230.00 |
| 6/19/2009 9:30 | Sell To Open | 8 | .EQGSD | ENOC JUL 20 Put | $0.45 | $14.95 | $0.06 | $344.99 |
| 6/19/2009 9:30 | Sell To Open | 6 | .SEUSE | SHOO JUL 25 Put | $0.70 | $14.95 | $0.06 | $404.99 |
| 6/19/2009 9:30 | Sell To Open | 5 | .QYGSQ | SYNA JUL 32.5 Put | $0.75 | $14.95 | $0.04 | $360.01 |
A bit more aggressive, with a total credit of $3,446.01. First of all you'll notice I'm selling the calls expiring next month. This is a conscious choice, since in the last month prior to expiration, the value of the options decays at the greatest rate (theta). The idea is to snap up as much premium as possible in the shortest amount of time. Of course, if an option ends up in the money, I'll be forced to buy stock at the strike price of the option, but since I picked awesome stocks, I don't mind getting put the stock because while I'm waiting for it to hopefully rise in price again, I can sell covered calls against it to make even more income.
The way I've chosen the strike prices is the most time-consuming but also the most interesting part of the whole process. I don't use any fancy lognormal curves or expectation percentages; instead, I pull up a 3 month graph of the stock, and overlay 20-day, 2-standard-deviation Bollinger bands. For example, look at the chart for TNDM:
The lower band is around $23.50, so I generally choose the nearest lower strike, $22.50. I also look for the most recent couple of points of support. You'll notice that back on May 14 there was a price spike to the down side to around $22.50, and again more recently on June 15 to around $23. In my mind this means that there would need to be a lot of selling pressure to break through to the downside past my strike price of $22.50 from the $28.73 level we're at now. My method is discretionary at the moment, and I'd like to quantify it mathematically at some point in the future.
The final criterion is, are the put options selling at a great enough premium to justify tying up my money for a month? As I said, I'd like to see at least 3% per month, which means that I'm looking to raise at least $3,000 on a $100,000 account. I don't want to risk getting a performance (margin) call, because in a worst-case scenario, all my puts would be assigned to me, and I'd have to buy tons of stock, so I've chosen not to max out my 50% margin. Assuming reserving $15,000 per trade in case the stock moves against me, this means that I should be looking for around $300 per trade if I do ten trades. I figure if I do ten trades in various market sectors, the diversification will cushion against all my positions being assigned. So, unless I can get at least $300 per $15,000 stock position size, I won't do the trade and will move on to the next stock on the list.
OK, I've blabbed on enough this time. Hope you've enjoyed it.
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