My approach to selling puts.

I have been receiving a fair bit of questions since posting this 12 months performance chart earlier and decided to do a post instead of replying individually to all questions.

Motivation: I have learned a fair bit here and have not contributed much, so this is a small payback sort of speak.



My approach (mine and only mine, do your own homework to find something that suits you):
1) I sell exclusively naked puts that I call TCSPs, short for Their Cash Secured Puts. In other words, I underwrite credit insurance (selling puts, earning premium) against cash rich balance sheets. It is not me, the underwriter/guarantor/investor who needs to be cash rich to do TCSPs but the borrower/investee that does. I hope this makes sense, this is key to what I do.
2) I could not care less about the vix, greeks, IV, wings, spreads, boxes, rollover or any other jargon relating to options. Let alone mean reversion, technical analysis or anything else around crowd behaviour. I sell puts for a yield premia that compensates the balance sheet risk I am facing - I never ever look at anything else, and particularly not the greeks. I don't even know what they mean actually.
3) My big wins are when a defensive cash rich balance sheet with an option chain is facing an event of some sort that the market does not understand. I spend my days reading SEC fillings so I have an edge here.
4) I am getting assigned more since february and never rush to dump the shares. I know them inside out and am comfortable holding for a few weeks until the market turns. But I am a fixed income investor (yield chaser) and do not speculate on equity. Never do wheels or the likes. (I tell the wife that I trade like Jay Leno who has famously never sold a car, only bought many). I never close before expiry.
5) I love highly illiquid options and tend to move markets. I do my homework before entering the trade and never exit before expiry (same as buying illiquid bonds). I can run a highly concentrated profolio as well, with 1 option >70% of my risk.
6) 100% US mid-caps and I most often act as liquidity provider.
7)I do not care at all about algos, automation, writing code, monte-carlo simulations, etc... just yield and balance sheets.
8) I do not trade often, but when I do I trade big tickets. I spend most days reading fillings instead of trading.
9) The only tools I use are the followings: TWS for order entry, Risk Navigator for assignment modelling, BAMSEC for fillings, MS excel for everything else. I only trade with fully visible limit orders on the ask. I never look at an option charts, only the underlying's at rare occasions when I am bored.
10) I do this full time. I do not follow any other investors on twitter, etc, and stick to my own style instead of learning from other. I have done mistakes, never huge ones, and keep improving my approach all the time.

I hope this helps.

 

Do you stick with a specific basket of stocks or wing it?

 

Never more than 10 shares, but watchlist has about 90 on it today.

 

Are you hedging for market crashes? If so how are you doing it?

 

I am not. Do you think I should?

 

you mentioned illiquid options. ones where you can move the market. what qualifiers do you use for strike selection?

 

Only yield, annualised, nothing else. Never longer than 9 months maturity.

 

i would suspect it varies, but do you have a qualifying annualized yield?

 

I have a minimum return I target and add a risk premia on the top.

 

i don't understand this. you sell puts against balance sheets that have a lot of cash? Like insurance companies and aapl? are you levered (in that you can't take a full assignment)?