Newbie question: OTM puts on indices

Discussion in 'Options' started by ChanTrader, Feb 20, 2008.

  1. Hi, I was looking to get some feedback on a simple/safe strategy to generate modest returns.

    You take something like SPY which is relatively stable and you wouldn't mind holding if you get assigned. Today it closed at 135.92. You sell OTM uncovered puts such that you make slightly over 1% (e.g. March 128 puts get you 1.32). Then you set aside enough money in your account in case you get assigned (e.g. $12800). Obviously you could get fancy and use margin to sell more puts than you have cash for if you get assigned.

    If things work out, in the most conservative case, you get around 1-1.2% every month, which is fairly reliable and safe. In the event you get assigned, big deal, it's a stable ETF that you can hold and sell covered calls on. So you could get around 15% annually without the huge emotional turmoil that happens when you own a stock that gets screwed (like WM)... because that's much less of a factor with something like SPY or DIA.

    Any feedback on this strategy?
  2. Many funds and accounts from pros and others, who should have known better, get wiped out by index puts. And when done with "sane" leverage, returns would barely (maybe) beat B/H. There are better methods, but they require an edge in stock picking, volatility, direction, etc. No free lunch.

    A safer method is spreads. Discussed here in great detail:

    Good luck.
  3. A simple 1 year chart will tell you what to expect. Doesn't look like an easy 1% per month.

    SPY 1 year chart
  4. There are an index and a bunch of funds that do this already. They do better than the index when the market goes down, and miss some of the fun when the market goes up, as you would expect.

    Assuming the options are well-priced (and they should be, since they're as liquid as can be), over the long term you should have about the same return as buy-and-hold, with less volatility and more brokerage fees.

    Some issues to bear in mind if you intend to create your own "fund": It will take you a little more time and effort than buying SPY and forgetting about it; market timing will be an issue for each of the monthly writes; and you'll only be able to invest in blocks the size of the underlying for one contract.
  5. mihalich


    if you want to own shares that's the best strategy to get'em. Put 12000 in money market or smth to improve return.