Hi, I never traded options before ,so i would appreciate yours input on strategy i would like to execute. I am buy and hold type of guy,in my portofilo i have only SPDR 500 index (SPY),which i plan to hold forever . Recently i have read about options and one idea come to my mind, how to earn few extra percentage points on my portfolio using options. let say today price of SPY is 200$,let say i have 500 spy stocks,so i would sell 5 monthly naked put contracts strike price 190. so if SPY that month go up in price,i keep premium and my portfolio grows. if SPY goes down in price,when it comes near strike price of 190,i plan to sell 500 stocks of SPY so if price goes below 190 i have enough cash to buy assigned stocks when options are exercised. so how i look it, it is a win-win situation ,if price goes up a keep a premium and have 500 SPY stocks,if price goes down i also keep premium and have 500 SPY assigned stocks. what i am missing?
Well it is a nice way of earning some bucks via premium, but you do risk holding a whole bunch of SPY as you move forward. You will have to sell more and more puts to cover your risk... so just keep that in mind.
thank you for your answer,wouldnt i hold only 500 SPY like i already do,as i said before i plan to hold it forever. my problem is, that this seems like easy way to beat the market,and all the time we read that beating the market is very hard thing to do. so it must be some problems in this strategy which i dont see
There is a contradiction in what you wrote. You said you're a buy-and-hold investor and plan to own SPY forever, but you are talking about naked shorting SPY puts and selling SPY when price drops. A 10-point drop has been happening about every three months during this record bull market. It might well happen more often going forward. Selling your stock generates a short-term loss and eliminates the opportunity of getting long-term gain tax treatment. As probe1957 mentioned, you might consider selling covered calls instead. If the calls are far enough out of the money and never get exercised, you preserve long term gains on the underlying. If you do lose your stock, you can recover it by selling cash-secured puts. Probably a wiser arrangement would be to leave your investment account alone, and open a separate account for your gambling.
Well if you are selling PUTs for lets say strike 190.. so if SPY is below 190 at the expiration, you will either take a loss on your PUT and close it OR you will exercise it to buy 500 shares of SPY at 190 (even the mkt price is below 190 at that time).. so you will end up holding more SPY shares. Again this is ONLY if the price is below 190. So You are holding 500 SPY shares right now at 200. and you sold 190 PUTS for 31st OCT expiration currently trading at $1.73 a contract [you go 173 times 5 = $865 in premium (ignore the commissions)]. Now if by Oct 31st the price is above 190... You are good you keep your 500 SPY and the premium. Now if the price is lets say 189... two ways after this: either you take a loss of $865 on your PUTs and close it OR buy 500 (as you sold 5 contracts) SPY at 190 (because the PUT buyer will exercise his/her option to sell you his/her shares for 190 which are currently trading for 189), This way you now have 1000 shares of SPY. Next month it is upto you to sell only 5 PUTs or 10 PUTs to completely hedge your position. I hope I made sense here.
thanks for your patience with me,i am beginer. my plan is ,if price come near 190,let say 190.5,i will sell my 500 SPY stocks ,and i will be all in cash ,so if options are exercised at 190 ,i will buy it and have again 500 SPY on my account
Well if it comes down to 190, and you sell'em..you will lose on your position because you will be cutting your losses. And you will already be losing on your PUTs, but in case you get called at 190, Yes you will buy SPYs back at 190.. but whats the point. You just lost money in all this transaction...
If you sell SPY at 190 and then SPY goes up, what do you plan on doing? If you do nothing and SPY goes up to 210, you missed 20. If you buy back at 195 and then SPY goes back down to 190, do you sell again? This up and down cycle from 190 could go on many times.