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K202 is now back to just the original author again, Mark Bern. Mark is both a CPA and a CFA charter holder. He has a bachelors degree in Business Admin. with a concentration in Economics. His experience includes both private and public sector and careers in accounting, financial and market... More
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  • Love your articles, very informative
    6 Jan 2012, 09:16 AM Reply Like
  • Author’s reply » pdtor - Thank you for the kind words. I put this blog up as a convenience tool and as a forum for idea sharing. I hope it catches on as there are many investors out there using this or similar strategies who have a wealth of information that could be shared and be very helpful to each other.
    6 Jan 2012, 12:37 PM Reply Like
  • I enjoy your articles as well. You have inspired me to take some more risk selling puts. I wish I had more money to try some of these methods on stocks I want to own anyway. Thanks again.
    6 Jan 2012, 01:11 PM Reply Like
  • Thanks for the time you spend putting these articles together. How do you choose which Put you short to acquire the stock?
    17 Jan 2012, 01:45 PM Reply Like
  • Author’s reply » I have to find a balance between the discount that I will get if the put is exercised and the rate of return I'll get if the put expires worthless. I have a couple of rules, but many of the articles and comments go into greater detail on this subject.

     

    1) I want at least 1% return from the put. Example: If stock price is $20, then I want at least $0.20 net of commission from the premium.
    2) I like to get 1% per month during the holding period, but my bottom line is at least 8% annualized.
    3) If the annualized return is the same for two or more different expiration months, I tend to go with the month that offer the largest discount from the price.
    4) I try to get a minimum of 8% discount, but prefer 10% plus. What is available depends on the stock. I have to watch the premiums for a few weeks to get a feel for what is going to be available before I narrow down to what I can expect on any given issue.

     

    I hope this helps.
    17 Jan 2012, 02:26 PM Reply Like
  • Hi, do you have any templates you use or suggestions on how to measure performance calls and puts in XLS?

     

    With covered calls I usually add the call(s) with my regular dividends and measure against my starting price for the year. When I get called, then things get tricky...at least for my.

     

    As with Cash Secured puts, I just put the amount of cash tied up in the put and measure the puts against it. It gets tricky when I am assigned.

     

    This kinda hurts my head. Maybe I am over thinking this :)

     

    Thanks anyways, these are fun reads.
    28 Jan 2012, 11:10 AM Reply Like
  • Hi - I am a retired 67 yr old novice trader. I am trying to learn trading options and so far not doing very well. I am using scottrader elite trading platform for my trades. I downloaded thinkorswim but thought it was too complicated. I havent sold any puts or calls yet because i am still learning on paper trades. When you sell a call against your existing stock and the strike price is less than the stock price will it be immediately called away or do i keep it open until expiration and keep the premium assuming the stock at the end of expiration is less than the stock price? thanks
    7 Feb 2012, 02:07 PM Reply Like
  • Author’s reply » jimmyg1234 - I commend you for making the smart move in trying things out on paper first. That is a good idea and will serve you well in the long run!

     

    You can sell an ITM (in-the-money) call, which means the stock price is already above the strike price of the call (as you described in you comment) without having your stock called away immediately. The problem is that you could have your stock called away and you have to be prepared for that eventuality if it does happen. Usually what happens is that the options don't get exercised until the expiration date. If the stock price is still above your option's strike price at that time it will be called away from you. But if, as I think you ask, the stock price falls to a level below the call option strike price, the option should expire worthless and you would keep your premium. Actually, the writer (seller) of an option always keeps the premium, but how it is treated for tax purposes changes depending upon whether the option is exercised or not.
    7 Feb 2012, 02:35 PM Reply Like
  • Hey K202 -

     

    I am with TD Ameritrade and I have noticed that in the money calls at the date are automatically exercised now. Are they doing that for revenue?
    8 Feb 2012, 08:39 AM Reply Like
  • Author’s reply » Actually, I think that practice is fairly standard now. But the revenue is probably part of the reason. My though is that if one does not want to be exercised against an open position, they should close out the position sometime during the week prior to the expiration date when the option is in the money. Sometimes that ends up meaning taking a loss, but for long-term owners with tax implications, it may be the better decision than giving up the stock position.
    8 Feb 2012, 09:09 PM Reply Like
  • thank you for your reply - are put and call options treated the same for taxes as they are for stocks. buy/sell = gain or loss? also in your opinion what is the best entry for an option? itm,otm, or atm. selling options is confusing. if i own 1000 shares of f stock can i sell 1 contract (100 shares) at the higher premium to get the biggest return? When i sell a put i dont have to own the stock but have cash in my acct to cover it. I may be forced to buy the stock if the trade gos against me. also do i sell a put and try to get the higher premium? also is there a video showing how to make these trades and their strategy. i watch options on fast money where they are trading options and they show where they are risking $.50 by selling calls buying puts. this is very confusing. are they using a strategy that works or is it just better to buy a put or a call? thanks again - novice trader
    9 Feb 2012, 11:05 AM Reply Like
  • Author’s reply » That's a lot of questions, most of which are answered in the first article link above at the top of this blog post. You need to develop a strategy and adhere to it. The strategy can have some flexibility to it based upon market conditions; sometime I refer to this as variations. If you haven't already ready the first article and the comments to below it, I suggest that it is worth your time and you should get answers to most, if not all, of you questions there. If you are still confused after that I'll be happy to answer any remaining questions.
    9 Feb 2012, 03:27 PM Reply Like
  • hello again - after reading your article i found your income strategy to be interesting. not only are you investing in high quality stocks but the dividends are great as well. lets say bby is selling for 25 and i want to sell 1 put contract @ 27 (10% above) for 1 month which has a premium of 1.94. if the option expires below the 27 strike price i keep the premium of $194 however if it expires above 27 i keep the premium but i have to buy the stock at lets say 28. since i now own the stock i will sell 1 call contract for $26 (10% below) and again collect the premium at expiration unless the stock increase to 29 i will have it called away. the put option owner who received the stock at 29 pays me 28 for the stock plus i keep the premium and he makes $300 on the trade. am i reading this right or did i miss something. thanks
    12 Feb 2012, 03:00 PM Reply Like
  • Author’s reply » jimmyg1234 - It seems like you may have things backwards. Let's start at the beginning with cash. You sell a put option with a strike price below the current price, say 10%, and collect the premium. In the case you used, if the stock is selling for $25, you would sell a put option at a strike price of about $22.50 with an expiration in a month or two. If the stock remains above the strike price on the expiration date, you just earned the premium. If the stock falls below and closes below the strike price on the expiration date, you are obligated to buy the stock at the strike price, in this case $22.50. You cost basis will be the strike price less the premium collected.

     

    Now that you own the stock, you want to sell a call at 10% or more above the current price. Let's say the price remains at $22.50 , so you sell a call option with a strike price of $25 and, once again, collect the premium. If the stock remains below the strike price at the expiration date, you keep the premium and repeat. If the stock price rises above the strike price to, say $26, you are obligated to sell the stock at $25. In either case, you get to keep the premium since you were the seller, or as they often are called the "writer" of the call option.

     

    So let's say you ended up having to buy the stock and then having it called away again. Let's also assume that the premiums are about $0.50 each way (hypothetically speaking we don't want to make it sound better than it is really likely to be). You collected $50 ($0.50 premium per share multiplied by 100 shares) and paid a commission of $10, so you netted $40. You were required to keep $2,250 in your account in cash to secure the put option that you wrote/sold, so we'll use this amount to calculated the return. Then you were obligated to buy the stock for $22.50 per share, or $2,250, but you will have to pay an exercise fee of around $15. So, you have a cost basis for tax purposes of $22 ($22.50 - the $0.50 premium) and an actual cost basis of $22.25 ( IRS cost basis + the $0.10/share commission and $0.15/share exercise fee). You then sell the call option and collect another premium of $0.50 (less the commission) and the stock is called away at $25, so you have to sell. Again, you'll likely have to pay an exercise fee. So you end up with $2500 + $50 premium - $10 commission - $15 exercise fee, or $2,525 less your actual cost basis of $2,250, or a net profit of $275 or 12.36% in two months or less. The other iterations work out well also, with the exception of getting put the stock and watching the stock fall even lower. But remember, if you restrict yourself to quality companies that aren't apt to go out of business, have sound management and balance sheets, as well as a superior business model that has lasted the test of time, there is a very strong probability that the stock price will again rise to new heights eventually.

     

    That is why the most basic rule of this strategy is to only use stocks that you really, really want to own. At some point, you will. And you should want stocks that you'd like to own for the long term, also, such as those that have a great record of raising dividends every year for decades on end.

     

    Good Luck!
    12 Feb 2012, 07:27 PM Reply Like
  • Thanks for your recent email. In the first article of the series you listed the criteria by which you would choose the underlying . Which software do u use to make that selection?
    20 May 2012, 07:33 AM Reply Like
  • Author’s reply » I am old school and do it the hard way. I use a spreadsheet I constructed in Excel. I also do some initial screening for certain criteria (debt, earnings/revenue history, return on capital, etc.) using the Value Line database. After that I list all those that passed and fill in the additional data points. The hard part is that I have to re-calculated all of the growth rates because I want the information in a compounded annual growth format. Value Line and other use different approaches with which I don't agree; such as one 5-year period average compared to another 5-year average, or just using the mathematical mean of the annual growth rates. Neither gives me the data I am looking. So my way is tedious, but it's consistent and it is less misleading, imo.

     

    Sorry that I can't point you to an easier way.
    20 May 2012, 12:14 PM Reply Like
  • ty very much
    20 May 2012, 05:54 PM Reply Like
  • any chance of getting a template of that spreadsheet?

     

    i am attempting to create one of my own and having something to learn from would be excellent.
    11 Jul 2012, 01:48 AM Reply Like
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