Selling SPDR S&P 500 Puts - Getting Paid For Time Passing

| About: SPDR S&P (SPY)

My favorite investments are those that are almost guaranteed to perform well with the passing of time. I can't really think of a better bet than time will go on. If time were to stop, would you really be concerned about your investments anyway? One strategy that can reap rich rewards from time passing is selling Equity LEAPS puts.

When I started selling puts ten years ago, my thought process was pretty simple. I sold them on stocks that I wanted to own at lower prices anyway. Sometimes the stock price would drop and I would get to buy the stock at my target price and keep the premium. Most of the time, the option would expire worthless so I would just keep the premium. This got me interested in using a rolling strategy.

I decided to start selling puts on SPDR S&P 500 (NYSEARCA:SPY) because it is very liquid and eliminates the stock specific risk of using individual companies.

My Horizontal Rolling Strategy

Since options have a limited life, they will tend to lose value as time passes. This is known as time decay. Imagine that you initially sold 10 out-of-the-money put options on SPY for a $25,000 premium. A year later you decide to roll your puts forward a year. Basically, you would simultaneously buy to close your initial 10 puts and sell 10 puts with an expiration date that is one year longer. Imagine that you picked up an additional $20,000 for extending the time period out further. At this point you would have received $45,000 in premiums. Now imagine you just continue to do this year after year.

This is not an advisable strategy for most investors. You must make sure you have the available capital to cover any margin calls in case the market drops substantially. You need the discipline to not sell more put options that you can cover in case of a market panic. You will be tempted to oversell put options when the fear level is low. When the next panic inevitably comes, you could end up with a margin call that you can't meet.

Many investors have watched helplessly as their entire portfolios were liquidated at the worst possible moment. You never want to underestimate how severe a short term market downturn can be. Finally, this strategy involves a lot of patience. So, if you are not patient don't even bother.

Sell Into Fear

In my case, I generally keep the same amount of put options outstanding at all times. I wait for a fearful market before rolling my options forward. This has proven to be a very profitable trade over the years. I am patiently waiting for the next panic to roll my sold puts forward.

Disclosure: I am long SPY.

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