Milking The Cow - Using Options In The Time Of The Coronavirus

Serge d'Adesky profile picture
Serge d'Adesky


  • In these volatile times, options can provide steady, safe income.
  • Learn how to "milk the cow" by selling options retail and buying them wholesale.
  • This strategy will appeal to conservative investors who need higher income without sacrificing safety.

Difficult Times for The Income Investor

Let's face it. These are crazy times. The global economy has fallen off a cliff with the Corona Virus pandemic. As I write this, official unemployment is running around 12%, while real life unemployment - counting the severely underemployed gig economy workers - is probably far higher. The airlines have lost 90% of their business, probably for at least a year. Cruise lines are decimated and retail stores countrywide are reeling. The Fed has added $3.5 Trillion in debt since January, or 25% of GDP! This has literally doubled the Fed's debt in less than 1 year. In the process, the Fed has literally bankrolled any public corporation with a pulse, viability be damned. Before this crisis hit, the number of zombie companies was hovering right around 20%. Who knows how high that count is today?

Yet the stock market is trading close to all time highs, with the Nasdaq surpassing all time highs. Apparently, new small investors have opened brokerage accounts by the millions and have powered marketed to unheard of price-earnings fueled by pure Fed-induced "hopium". More and more real time hedge managers are holding their noses and investing based on Fear Of Missing Out...

If you are a conservative investor, you really don't like the miserable returns you can find on muni-bonds, long term treasuries or investment-grade corporate bonds. Given the enormous money printing of the Fed, you're right to think that that could eventually result in much higher inflation, which would decimate those bond investments.

"Milk The Cow" - An Options-Based Solution

There are a few paths that make sense, but the most attractive I have found I have labeled my "Milk The Cow" strategy. The analogy is to a dairy farmer who has to spend a few thousand to buy a decent milk producing cow, but then gets a secure and steady stream of income from the 3 gallons of milk it can produce a day for many years thereafter. In this strategy, my upfront investment in the "cow" is the purchase of a long term call option and a long term put option. These give me the set number of contracts at the strike price I determine, and conversely to sell the same number of contracts at the strike price I determine, for a period of at least one year.

I milk this financial investment by selling call and put options around the current market price each week, and sometimes several times during the week if the market is very volatile. When these sold options become unprofitable, because the underlying security has moved more in one direction or the other than I have collected in premiums, I roll the options towards the new market price, and if needed I roll further out in time, making sure I never become cash flow negative.

Learning By Doing

Two years have passed since I first explored this idea in my Seeking Alpha article Leap Secured Options Writing - The Ultimate Safe Strategy. Well, back then the concept was just a little seed gnawing at the root of my brain. It made sense to me, and I thought by exposing it to the critical eyes of Seeking Alpha readers I'd quickly identify any weaknesses.

Well, the article was well received and none of the objections raised to it seemed compelling. So I plunged ahead with real money. The strategy has rewarded me well in the two years. producing very handsome returns. And that's despite making my share of rookie mistakes.

How did I fare during the recent roller-coaster ride up and down on the Coronavirus Express? Well this strategy kept on plugging along, minting money and allowed me to face the situation with calm confidence.

So what I'll do today is describe some of the things I've learned along the way, that will help an investor to maximize returns, while minimizing mistakes. I encourage you to go back and read the previous posting on this strategy, as well as the numerous comments and feedback it generated.

The Basic Rationale: Buying Cheap Options Wholesale - Selling Expensive Options Retail

The reason this strategy makes money is that options cost a lot more retail than they do wholesale. By retail I mean short-term options that expire quickly. By wholesale I mean long-term (LEAP) options that expire 1 to 2 years out.

An example will help. At time of writing, the SPY (S&P 500 ETF) closed at $304.21. Let's say you think the stock market is dropping and want to make money if that happens. Buying a JOTM (just-out-of-the-money) put of SPY at a strike price of 305, expiring in 9 days on Jun 22 costs $6.72 per share. The same strike on a put option expiring next year on Jun 20, 2021 costs $33.09. Divided by 52 weeks of validity until expiration, the yearly contract costs only $0.64 a week. So as we see the "retail" (weekly) price is around 10 times more expensive than the wholesale rate (1 year option).

Why does anybody buy weekly options then? Well it's because the initial cost is much lower, and most investors believe they can somewhat accurately predict how long it will take for their security's anticipated move to happen. If they are off by just one or two weeks, buying the weekly options on 2 or 3 occasions will still cost them less than a one year option. In the example of a bearish investor above, if the drop in the market does occur, but takes 9 months to happen, they'll have spent much more money than the would have buying the yearly option. In fact, they may have spent so much that they still lose money even though they are right about the direction and strength of the move.

So as an astute investor, you want to be buying at wholesale costs and selling as frequently as possible at retail. If volatility never changed, and the price of a security never moved, you'd make a cool 1000% return ($645 of income for a $6.72 investment). But I've got really bad news for you. That never happens. The strategy is profitable, but nowhere near that profitable. Because securities do move around a lot.

Milking Your Cow - It's A Weekly Chore

My strategy is simple, but requires steady maintenance. (Remember that cow needs daily milking, and you have to give her her shots...) You begin by buying a long term call and a long term put option to to ensure you are buying wholesale. This limits any potential loss and reduces margin requirements. The you start selling sell both call options and put options on a weekly basis right at the money , where the strike price equals the current price. You do this for the nice fat premiums these pay you.

An example will clarify how your potential losses are limited by the long-term calls and puts you own. I will use an extreme example - which is frankly unrealistic - but that clearly demonstrates the protection and peace of mind the long call and puts provide you.

Let's say I buy the long-term call and put options right at the money. This is not optimal but it will make the example more easy to follow.

That will cost around $71 per share, buying a jun '21 305 call and put. At the same time I sell a 305 call and sell a 305 put expiring in 9 days. That brings in $ 12.61 ($6.72 + $4.89) per share.

Imagine that the market were to drop by 70% in a week, to a level of $92 (I know , I know, that big a drop in 1 week is highly improbable, but humor me here).

I would have to pay $213 to buy back my short-term $305 put, before it is exercised on me. Yet I only had only originally collected $6.72 by selling it. That's a pretty hefty loss.

But wait. The long-term put that I still own at a 305 strike price would have gained more than $213. Given the increased volatility and remaining time value in it, it would probably sell for around $290 ($213 intrinsic + delta + vega + theta). So I could sell the call, use the funds to buy back my short put, at a handsome $77 profit (per share).The sold call would expire worthless, but my long call would still have some small residual value , because it is still valid for another 51 weeks and the market could reverse sharply. Closing those positions would bring in additional funds.

Here's the sequence of transactions (on a per share basis. multiply by 100 shares in an option):

($72) original cost of long options (buying the cow)
+$12.62 revenue from selling short options (milking)
+$77 - $82 closeout of all positions
$17.62 - $22.62 overall profit in 1 week
$59.38 cost basis
+30% to 38% percentage return in 1 week
1982% to 1976% percentage annualized

So in such a calamitous event - a so called worse case scenario - I'd still make a fabulous return of over 30% in just one week! The same logic applies to a huge unexpected upside move. I'll let you do the math.

Facing The Volatility with Equanimity

So now you can understand how this strategy will allow you to sleep at night. In fact, I would argue that it is less risky than owning a mutual fund and holding it. Just a few months ago, mutual fund investors faced a roller coaster drop of 40% in many funds, before recovering 30-50%. Many are bracing for the next round of the Corona Virus Express...

The Nitty Gritty of Setting Up The Long Term Hedge

Now let me demonstrate the best way to milk this financial cow. The first thing to decide is how far away from the market price you want to set your put and call strikes for your long protective wrapper.

In the two graphs below, you can compare the initial margin requirement of placing the strikes right at the money to further away. In the first graph (the straddle) the initial outlay is $62.74 per share or $6274 for one contract. The initial margin requirement in $0 , with a maximum lifetime margin of $6274.

The straddle: (what's a straddle?)

SPY straddle LEAP

The strangle: ( What's a strangle?)SPY straddle LEAP

How Your Choice Affects Your Margin Requirement

In the second graph (strangle) the initial outlay is $3651 and the initial margin requirement in zero.

Now let us consider the effect of selling weekly options. To illustrate this, I simulated the effect of a huge drop in volatility that accompanies a doubling of the underlying indexes price in less than a week. Again this scenario is extremely unlikely, but it allows us to simulate a worse case scenario. Here's how the more expensive straddle would be impacted:

SPY strangle volatility collapseAs you see, no additional margin was required, since the initial outlay was equal to the maximum loss.

Compare that to the cheaper straddle:

SPY straddle volatility collapse

You see that with a strangle, although the initial margin requirement may be zero, when you add in the sold options it will not remain a zero, and can actually expand a lot. However, the maximum margin, added to the original outlay, will not exceed the cost of the straddle shown above.

Because a strangle only becomes profitable as the outer strike points are breached, it requires more margin than a straddle would. A long straddle immediately starts gaining in value, but a strangle does not. So in the case of a strangle, you usually will require a lot less capital, but you could be subject to a margin call. Be aware of that and make sure you have sufficient funds at all times.

My Preference of Long Term Hedge

Other things being equal, it's more profitable to buy a strangle (out-of-the-money-strikes) , rather than a straddle (at-the-money-strikes). Both offer you good protection to enable you to sell short term options safely. Remember, regardless of which you buy, you'll make the same amount of revenue selling and rolling those weekly options for income. However, the return on investment is much higher if your base outlay is lower:

$1200 (arbitrary sample weekly income) / $3651 (LEAP cost) = 32.84%
$1200 (arbitrary sample weekly income) / $6274 (LEAP cost) = 19.12%

Maximizing Your Milking Income By Selling Premiums

As far as choosing the strike levels at which to sell the weekly options, I prefer to place these right at the money, in order to maximize the premiums. Options at the money have higher "vega" - the amount by which their price will increase or decrease for any percentage increase in the underlying - and thus command a higher premium.

While this brings in more premium income, it also means that I will have to perform more transactions of rolling the premiums. If you've sold options bringing in $12.00, and the underlying moves in one direction or the other by $4.00, you could choose to do nothing. You're still $8.00 ahead and perhaps the underlying will reverse in the other direction. It would have to move in that same direction by another $8.00 before you start losing money on the weekly positions.

At that time, you could roll out the option for a later dated option, selling that one at the money to bring in more revenue, and rolling the opposite side - call or put - also to maximize revenue.

If you have picked a stock or ETF with low bid-ask spreads - which you always want to do with this strategy - my preference is to roll frequently and every time the stock moves by an amount I consider "significant". In the case of SPY this is $1.00. I have just one rule of thumb: never roll at a loss of premium, when taking both puts and calls into consideration, as well as all trading fees. At times this will require you to move out 2, 3 or even 4 weeks in time. Try to keep the dates as close to the current date as possible. And if you have been forced to move out in time, another price swing in the opposite direction may allow you to move forward in time at the same strike price without giving up already collected premiums.

Will I Get Exercised? How Do I React?

By the way, it is interesting to note that sold options that come into the money will rarely be called prior to expiration. I've been doing this strategy for two years on 6 different stocks and ETF's. I've only once been exercised twice before the Friday 4:00 pm bell. So I always roll my options at 3:30 pm, to maximize the loss of time value, unless the stock has moved significantly.

But what happens, you ask, if you are still exercised on one of the short options?

Say the stock drops to $297 overnight, and the put options are exercised against you. You are suddenly the proud owner of 100 shares of stock at a cost of $305 per share. Yet they are selling for $297, an $8 difference. Even after subtracting your $6.72 premium, you've still lost money on the short put.

Well don't panic. It's not a problem.

You first sell the shares, losing $8. Then you sell another put, 1 week out, at the new lower strike price of $297. This brings in around $6.50 (option price has gained in volatility but lost in time value). Then you buy back the short call for a cost of usually no more than 1 penny, and resell a new call at the lowered $297 strike, bringing in another $5.50 or so.

Not only does your situation not worsen. It has improved. You had originally collected $12.60, but now your collected an additional $4.00. Congrats, you've milked your first proverbial cow. Let's do the math:

($6.72) sale of 305 put
($4.89) sales of 305 put
$8.00 loss on sale of exercised put when stock at $297
$6.50 sale of 297 put
$0.01 buy back of 305 short call
($5.50) sale of new 297 put
($15.60) premium credit cash flow

Use Current Volatility to gu-estimate Your Earnings

Another important thing to consider is the general volatility at the time you are putting on the trades. The greater the uncertainty, the greater the volatility of prices and the higher the premiums on options that can serve to hedge that volatility. If volatility is at a relatively low level compared to history, it is likely to rise, and conversely if it is at a very high level it may be likely to fall. The higher the volatility remains over the entire year period, the more profitable this strategy will be.

With current volatility levels around 40% on the SPY - unusually high - the strategy is extremely profitable. It would seem to pay for all initial costs within about 6 weeks. At that point you have developed a "riskless" trading situation in which all further sold premiums over the next 46 weeks are pure profit. Unlike with a mutual fund that has risen in value, you no longer can lose money as long as you keep milking your cow.

In a more normal period, the volatility will range in the low teens. Your long calls and puts will be cheaper, but you can still expect that it will take longer - perhaps 10 to 12 weeks, to reach profitability.

I currently expect that volatility will remain at elevated levels over at least the next 6 months to a year, until such time as a vaccine for the Corona Virus has been developed and is in widespread use. And even then, many aftershocks to the global economies will persist.

Comparing to A Calendar Options Strategy

This Milk The Cow strategy is similar to performing a series of calendar spreads, in which you sell a short term option at a given strike and buy a longer term option at the next date out. (For rationale see The calendar spread explained)

Some people have asked me why I like it better.

I believe it's much more profitable. Why? Because you are paying less overall for your strike coverage. If you were to perform 52 calendars selling the current week and protecting it with identical strikes at the next week, you probably would make money on average, yet you would have spent a lot more to minimize your risk.

At the time I'm writing this, a two week call option costs an "average" of $3.75 per week of coverage. The yearly option goes for $0.58.

With a traditional calendar strategy, you would need to purchase up to a maximum number of 52 weeks of protective outer long options. Each time you are going to lose additional money due to slippage in the bid-ask spreads.

You might end up spending anywhere from 30 to 60 times more to protect the risk from your short options. ($3.75-$0.58 = $3.17 x 52 weeks ).

This Milk The Cow strategy does not touch the outer options for the entire year.


All investments involving options are risky. This strategy is very rewarding, but you should be an experienced options trader in order to undertake it. Performing this strategy optimally can easily double or triple your returns, so don't be shy of paying a professional a few percentage points a year for doing so.

The biggest risk in this strategy is one of implementation. Simply making "fat finger" errors. Each week (and sometime more than once during the week) you will be rolling your options up and down to maintain the short strike levels close to the current price. It's easy for a beginner to miss that. It easy to confuse an option in one month with one in the next year for the same month. It's easy to undersell options too cheaply by always accepting the lower bid price. Finally, you want to be discerning in which option you choose to sell on a given roll. On SPY, for example, as I update this file today the 25th of June, you can choose from dates that expire June 26, 29, 30, July 1, 2 and 6! An inexperienced options trader may not recognize which one offers the best value.

Another BIG risk is that of being locked out of your account due to pattern day-trading restrictions. Unless you maintain at least $25,000 in your account at all times, you are subject to the "pattern day trader rule". Your broker will freeze your account if you make more than 4 same day round-trip trades in a 5 day period.

Rolling a set of call and put options (305 put/call for 303 put/call) will count as 4 trades if done on the same day you initially set up the trades! So just 1 more round trip trade on that or another stock will cause your account to be frozen for up to 90 days!

My advice if you have a small account is never to roll an option on the same day you put it on, even if there is a huge move to the underlying. There are other ways of protecting yourself on the same day in fast-moving trend, but again, that's for an experienced options trader.

Become The Insurance Company

Instead of my analogy of milking the cow, you might liken this strategy to insurance underwriting. An individual investor may be richly rewarded for a one time hurricane hit, but most insurance buyers pay out more than they collect, and its the underwriting company that wins big on average. Don't believe me. Just check the profit margins on those insurance stocks you had been meaning to buy...

Happy Investing.

This article was written by

Serge d'Adesky profile picture
Serge d'Adesky holds a B.A. in Political Science from Yale College and an M.A. in International Economics from the Johns Hopkins School of Advanced International Studies.He is the President and Chief Financial Advisor of Northstar Strategic Investments, Inc., a Florida registered IAR. Northstar has been serving individual investors since 2008.  Serge is also the President of, a decentralized, online marketplace for short-term trading opportunities.  Besides Seeking Alpha, Serge's writing and commentary are featured on his two  blogs : ( and , and  two YouTube channels  (decryptofied , tradejolt). He is a very active poster  to Twitter (@tradejolter).

Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are currently invested in a market neutral position in SPY, using this strategy.

Investing in options can be a risky proposition, especially for the novice investor. Consult with a professional broker or RIA before attempting any of these strategies.

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