Anyone doing this? What is expected annual return of this passive income strategy in regard to low risk?
Between trades I have large amount of idle cash on my account. I do want to earn some additional low risk returns on this. Purchasing 1m T-bills or ST interest rate ETF's currently return less than 2%. So I figure selling weekly or monthly SPY puts against the cash may give a higher return than 2%. What is a reasonable expectation of annual return? 3%? 4%? less? more? In cases I get assigned I will take delivery of the shares. But the goal is to have the puts expire worthless to pocket the premium. I'm looking at selling rolling weeklies in SPY options.
All you probably want to know is here: http://www.cboe.com/products/strate...write-indexes/cboe-s-p-500-putwrite-index-put and here, for weeklies: http://www.cboe.com/products/strate...xes/cboe-s-p-500-one-week-putwrite-index-wput In the latter, note the link to Oleg Bondarenko's 2016 paper, "An Analysis of Index Option Writing with Monthly and Weekly Rollover
If you have an Interactive Brokers account you can do this on options and futures and diversify away from the stock market. You are then copying Warren Buffett's modification of an insurance company business model. Instead of selling insurance/options (they are the same thing) and buying bonds you sell insurance/options and buy equities that pay a dividend. Compounding he calls it.
If you are comparing against buy and hold: You will average 10% annually with drawdowns that mirror the index. It's the kind of strategy you run for 5 years to reap the risk premium which is typically 1%/year over the index. And there are times it will underperform. For this 1%/year risk premium, you will incur many short term taxable events, which won't be the case if you just buy and hold the index. If you are comparing to absolute return: Then this strategy is not appropriate.
Anything less than 15% would be shit in the long term IMO. Too risky for less... Do you plan to roll the puts up when we trade higher? Or leave it until expiry? You will miss much of a bull market, and when turning to bear with a large drop would mean you can't exactly time entry at some point in the bear market... So, to get to about 15% you would have to sell ATM puts every monthly expiry at current vols. Or probably even 14 day expiry.... You can't do further out of the money because your cash secured strategy means you can't find any illegible puts with sufficient value... but that depends on how much you want to be able to make in the best case scenario. If you aim for 10% it gets a bit easier. 5% more doable... but again, you do kinda lock in your cash and can't move as freely as you would think in a bear market, especially when you take a into account a vol-shift.
If you're so inclined then do it out of a prop account. Put up a deposit, get a license and you're set. The reason I say this is because as a professional you don't have the burden of Reg-T and you're capital will be used much more efficiently. Me personally? I'd never use that strategy. But, to each his own.