Tag: Options Strategy

Selling Put Options For Consistent Premium Income

Posted on by The INO.com Team

Options can be a great strategy under any market condition as a standalone method or in conjunction with a long-term portfolio to augment long-term positions. Options trading can mitigate risk; provide consistent income, lower cost basis of underlying stock positions and hedge against market movements while maintaining liquidity. Risk mitigation is particularly important given the market wide sell-off throughout October and into November. Maintaining liquidity via maintaining cash on hand to engage in covered put option selling is a great way to collect monthly income via premium selling. Put option selling can also serve as a means to initiate a position via being assigned shares strategically. Heeding critical variables such as historic and implied volatility, implied volatility as it relates to historic volatility along with probability and liquidity, one can optimize option selling to yield a high probability win rate over the long term given enough trade occurrences. I’ll discuss these critical elements and how they translate into high probability options trading to maximize option outcomes regardless of directionality, effectively maintaining a market neutral position. In the end, options are a bet on where the stock won’t go, not where it will go and collecting premium income throughout the process.

Put Options Overview

Covered puts can be implemented as a means to leverage cash on hand to sell options contracts and collect premium income in the process. Contractually, this type of option selling gives the option buyer the right to sell you (the seller) shares at an agreed upon price by an agreed upon date in exchange for a premium (cash payment). An account cash reserve can be utilized for selling covered puts thus not purchasing the underlying security with the end goal of never being assigned shares and netting premium income in the process. It’s important to bear in mind that covered puts shouldn’t be sold unless one wouldn’t mind being assigned shares in the underlying equity if the underlying moves opposite the option directionality and breaks through the option strike price. Additionally, restricting covered put contacts to high quality, large-cap, dividend-paying companies with high implied volatility, high implied volatility percentile and high probability of success (i.e., one standard deviation out of the money) will mitigate risk and decrease the likelihood of assignment to maintain liquidity and add to cash on hand. The end goal is to capture premium income and maintain liquidity which is accomplished before the expiration of the contract via buy-to-close to accelerate the closure of the contract and capture realized gains. Continue reading "Selling Put Options For Consistent Premium Income" →

Covered Puts: An Alternative To Buy and Hold

Posted on by The INO.com Team

Options can provide an alternative approach to the traditional buy and hold for the long-term strategy. Options can add value to one’s portfolio in a variety of ways, specifically, maintaining liquidity via maintaining cash to engage in covered put options, initiating positions via being assigned shares strategically prior to or upon expiration of the option contract and capturing premium income via closing out the contract prior to expiration as the shares move in your favor to realize income. Here, I’ll discuss these three different scenarios and strategies behind each one with real life examples.

Maintaining Liquidity and Capturing Premium Income

Maintaining liquidity is integral to any portfolio as cash can be deployed in opportunistic scenarios to capitalize on sell-offs or adding to a long position that has corrected to lower cost basis. Covered puts can be implemented as a means to leverage cash on hand to sell contracts that are covered by cash. This cash would be deployed in an effort to maintain this cash balance yet be put to work via an option contract. This cash reserve can be utilized for selling covered puts thus not purchasing the underlying security with the end goal of never being assigned shares and netting premium income in the process. Once the contract expires, the covered cash allocated to the contract will be freed in addition to the cash that was realized from the option premium at expiration. This scenario will allow cash reserves to be maintained while adding cash via covered put contracts. Continue reading "Covered Puts: An Alternative To Buy and Hold" →

Covered Calls and Covered Puts - Empirical Results and Lessons Learned

Posted on by The INO.com Team

Leveraging Options

I’ve written numerous articles on options trading and how one can leverage options over the long-term to mitigate risk, generate income and accentuate returns. Leveraging options to supplement portfolio returns can make a meaningful impact on overall returns, especially over the long-term. Here, I’ll focus on covered calls and covered puts with corresponding lessons learned over the course of the past year with empirical data.

Covered calls are intended to leverage a stock position while extracting value on a consistent basis via selling option contracts against that position and collecting premium income in the process. I liken this to a landlord renting a room for monthly income, however, in this case, one is renting the stock. The option contract is structured with the option seller (stock owner) collecting a premium in exchange for the right for the option buyer to purchase the shares of interest at an agreed upon price by an agreed upon date for a premium (income that the option seller will receive). In this scenario, the stock owner doesn't believe that the shares will appreciate beyond the agreed upon price and thus be able to collect income while retaining the shares and dividend rights. The option buyer believes that the shares will appreciate beyond the agreed upon price and be able to buy the shares at a lower price than the market currently trades.

Covered puts involve leveraging a cash position that one currently has on hand and collecting a premium in exchange for the obligation to purchase one’s shares at an agreed-upon price prior to an agreed upon date. If the stock falls below the agreed-upon price prior to the agreed upon date, then the individual that bought the contract from you will force the obligation (that you agreed to) for you to purchase the shares. In this case (when the stock falls throughout the contract lifespan), the shares can be sold to you (the put option seller) at a higher price than the market. However, if the shares rise in value then the shares will remain with the owner and the put option seller will keep the premium income and the cash earmarked for the potential purchase of the shares will be freed. Why exercise the contract and sell the shares to you (option seller) at a lower price when one can sell the shares on the open market at a higher price? Continue reading "Covered Calls and Covered Puts - Empirical Results and Lessons Learned" →

High-Quality Covered Puts - 78% Win Rate

Posted on by The INO.com Team

Introduction

I’ve written many articles highlighting the advantages options trading and how this technique, when deployed in opportunistic or conservative scenarios on a consistent basis may augment overall portfolio returns while mitigating risk in a meaningful manner. Here, I’d like to focus on leveraging cash to engage in options trading, more specifically selling covered puts. Here, I’d like to cover my approach and results in layman's terms about strategy and empirical outcome with commentary.

In short, I’m committing cash to purchasing shares in the future at an agreed upon price while being paid a premium. Usually, this agreed upon price is significantly higher than it currently trades and when factoring in the premium income, the agreed upon price will be slightly lower than the current price. Put another way; I’m committing cash to buying shares in the future for less than the stock trades today. Therefore, the seller of the option contract (in this case me) believes the price will increase, and the buyer (stock owner) believes the price will fall. The stock owner (buyer) and is purchasing insurance in the event the stock falls (paying for the right to sell the stock at an agreed upon price and date). As the stock appreciates in value and approaches the agreed upon price within the contract time frame the shares will be kept by the owner (buyer), and I keep the premium. If the shares decrease in value, then the shares will be sold to me at the agreed upon price (less the premium). My objective is to leverage cash and generate income without owning the underlying shares of the company via options contracts. Continue reading "High-Quality Covered Puts - 78% Win Rate" →

Mitigating Risk, Accentuating Returns and Realizing Gains - 27.9% Return

Posted on by The INO.com Team

Introduction

I’ve written a series of articles detailing the utility of options trading and how an investor can leverage a long position in an underlying security to mitigate risk, augment returns and generate cash. This strategy comes with two alternatives, in the end, depending on whether or not one desires to realize gains and relinquish his shares or remain long the security of interest. I’d like to highlight Salesforce.com Inc. (NYSE:CRM) as an example for this covered call strategy. I’ll be highlighting how I’ve successfully accentuated my returns via leveraging the underlying security in the form of collecting option premiums over a 20-month span. In this example, I decided to ultimately realize gains generated from the underlying appreciation of the stock combined with the options income and relinquish my shares. Taken together, the synergy of the options income and appreciation of the underlying security generated a realized gain of 27.9% over this timeframe.

I’m utilizing a high growth technology stock that’s at the intersection of syncing the customer and enterprise relationship via social, mobile and cloud platforms. Salesforce is a contentiously debated aggressive growth stock that trades on lofty valuations. Salesforce is marginally profitable and thus difficult to assign a valuation as measured by traditional metrics such as the price-to-earnings multiple (P/E ratio) and the PEG ratio. Due to its rapid growth, expanding footprint, major partnerships with Fortune 500 companies (i.e. Home Depot, GE, Wells Fargo, Coca-Cola, etc.), expansion into international markets and its overall ubiquity in terms of its consumer relationship management (CRM) platform, it's reasonable to see why investors are willing to pay a premium. Much of its revenue is deferred as a result of its subscription-based model thus deferred revenue is often discussed on earnings calls. Deferred revenue is not yet realized revenue however it’s been received by the company. Since Salesforce delivers its service over time, this received amount isn’t reported as traditional revenue since the service hasn’t been rendered. Due to these factors and the difficulty of placing an accurate valuation on Salesforce, options in the form of covered call writing may be an effective way to leverage this growth stock while mitigating downside risk. Salesforce offers the right balance of volatility, liquidity and a high level of interest which gives rise to reasonable yielding premiums on a bi-weekly or monthly basis. This set-up bodes well for those who are long Salesforce (or a stock similar in nature) and desire to leverage options trading to augment returns and mitigate risk throughout the volatile nature of this underlying security. Salesforce’s recent string of earnings has impressed investors, and covered call options may accentuate this underlying equity return. Writing covered calls in an opportunistic and/or disciplined manner may mitigate losses and smooth out drastic moves in this underlying security. Continue reading "Mitigating Risk, Accentuating Returns and Realizing Gains - 27.9% Return" →