"You are making up an argument and refuting it. It's a waste of time to talk to you. " I agree. I don't know what the point of it is either. As rmorse says lots of people do it and make a consistent profit at it. I rarely sell naked puts except when I want to obtain the stock. Again VIX rants at his own straw man for no apparent reason. "I would view selling naked options as comparable to owning the equivalent stock" BINGO. It IS equivalent. In the example I gave of XLU you would earn 4% annualized. XLU pays 3.4% in dividends. So if you are interested in XLU as a stable, rel safe stock to collect dividends (there are such people) you are better off selling the 15% OTM naked put , collect your 4% (up front instead of over time) and have a 15% buffer on loss. i.e. owning XLU stock incurs capital loss from the word go if XLU would decline, while being short the 15% OTM put would only produce a loss from the decline if the decline exceeded 15%, and from then on the loss would exactly match the loss from owning the stock. The corollary of this is that selling the put, like holding the covered call to which it is equivalent, removes you from the possibility of capital gain if the stock should advance. It is obvious to me that there are people who might relish the choice of the short 15% OTM put position over buying the stock. Would I do this?? No. I don't relish this as a strategy for this stock because the yield, as I said, is too anemic. rmorse points out that my calculation of yield is for a cash account and the yield would be greater if a margin account were used. Of course this is true, and a margined account would boost the yield to, perhaps 12% or so which MIGHT be more acceptable to me than the 4% I showed. Still, I would like a little more than 12%. One way to boost yields is to use spreads instead of naked short puts which ups your yield AND protects from catastrophic declines. In my thread (Conservative Option Trades) I have about 4 years of real time trades many of which are selling pretty far OTM spreads. There are some naked short puts, but only as a means of obtaining a desirable stock at a price which suits me better than the current market price. Feel free to look at these trades and see how they did. HOWEVER please do not post on that thread as I use it for trading purposes. e.g. I have been short the $40 put on WNR because I would like to own WNR as a stock...at $40. This desire comes from my analysis of WNR as a stock to own. (e.g. WNR has had a Zacks buy rating for some time). So far WNR refuses to drop below $40 and I have been limited to collecting the 10% or so I am earning on the short put. That's OK with me and I will take WNR at $40 if market conditions so dictate. If not I will keep earning 10% while I wait. This, to me, is a better strategy than placing a GTC order for WNR at $40 which would tie up the money and yield nothing. One of the big differences between me and the other posters on this board is I use what most posters here would consider VERY long time frames for my trades. Seldom less than 6 months. This puts me solidly in the realm of stock investor rather than option flipper. Actually I think of it as selling insurance on other peoples stock holdings. I look at the stock's fundamentals, current projections for the stock and the market and decide if I am willing to insure the stock position for the premium available. Like any insurer I must take the risk of disaster into account. What I also do, mostly, is what many primary insurers do: They lay off the amount of risk they are unwilling to bear by buying re-insurance from a re-insurer like Lloyds. Selling spreads is selling insurance and then laying off a percentage of the risk to a re-insurer. If you manage it in those terms it is quite a viable business. One might note that Warren Buffett made his fortune by wisely selling insurance. http://www.investopedia.com/terms/r/reinsurer.asp Berkshire Hathaway is largely an insurance company...although they have been buying up reality companies where I live for reasons I can't imagine. I guess one of Buffett's big problems is keeping all his money working profitably. There have been several instances where Buffett has sold large dollar amounts of puts: http://www.optionmonster.com/news/article.php?page=why_warren_buffett_uses_short_puts_41541.html Another POV: http://www.forbes.com/forbes/2012/0806/investing-crash-insurance-spdr-make-money-from-fear.html
Here is a 10 year study of the profitability of selling puts from Goldman Sucks. http://www.investps.com/images/Art_of_put_selling.pdf The major conclusion (to me) is that stock selection is paramount. NSDT
The stocks they recommend (Large Cap, High FCF) are most likely dividend payers with very small options premiums. Capturing the volatility risk premium on a regular basis from individual stocks, if it exists, will give you the slimmest of transaction and premium margins. Sinclair has research on the lack of VRP in individual issues. I think we have to be more opportunistic/speculative on individual issues. I think they should have compared the performance of (b&h) dividend paying stocks which was the touted subsector of that time. In any case, the market needs a nice crisis to raise those volatility premiums back up.
Let's also not forget capital gains on individual equity options being taxed harder than broad based index options (of which ETFs don't count). That's sure to eat into any returns vs a 1256 60/40 setup.
"No one has advocated selling 15percent otm puts systematically." That's what's called moving the goal posts, and it's how losers debate. Look dude, we've been talking about significantly OTM and 15% specifically for a while now. Don't move the goal posts now that I've proven that even on the single highest peak of IV for the entire year it's a losing strategy. It's a spectrum of course, there's nothing magical about 15%. It just happens to be what we were talking about. 15% is a non starter. 10% is just as bad, but moving in the right direction. 5% OTM give or take can work if you are just trying to make 5% or so a year annualized. If you really want to make this strategy viable long-term, I'd suggest ATM - 3% OTM range. "I showed you examples of 15percent otm puts that had significant value" No you didn't, your examples were poor that over time won't beat inflation. You used a crystal ball in hindsight and still came up with nothing I'd even consider trading. What do you think happens when you look forward without the crystal ball? That's right, a terrible strategy. This is one of those no brainer everybody should know this already kind of thing. I'm absolutely floored that you don't just accept it as a mathematical fact and move on. The simple fact is, some strategies don't work without enough premium to justify the risk. Even on high IV times of the year, far OTM puts are getting fractions of a percent on capital and you still have to factor in transaction costs, inflation, and drawdowns. You don't have to come back here with the "last post to you" nonsense. You were wrong, I corrected you, move on. My ego isn't one iota larger than it was before I started talking to you. This isn't a dick measuring contest. For all I know you're a successful trader. In this thread, you're defending the indefensible. Shake it off my friend...
"In the example I gave of XLU you would earn 4% annualized. XLU pays 3.4% in dividends. So if you are interested in XLU as a stable, rel safe stock to collect dividends (there are such people) you are better off selling the 15% OTM naked put , collect your 4% (up front instead of over time) and have a 15% buffer on loss. i.e. owning XLU stock incurs capital loss from the word go if XLU would decline, while being short the 15% OTM put would only produce a loss from the decline if the decline exceeded 15%, and from then on the loss would exactly match the loss from owning the stock." Where do these people come from? Dude, just stop. You won't beat inflation long term with awful trades like that one. Do you get that? Trade costs, draw downs, ebb and flow of IV, you won't beat inflation long-term. Am I being trolled? There's no chance there is anybody who thinks 4% annualized on premium is a good trade. No way ! Nice joke my friend, you can stop now. XLU is 10% annualized on capital appreciation alone, and if you factor in re-invested dividends it's approaching 20%. Are your math skills so seriously primitive that you think holding 4% premium is the equivalent of holding the stock? Given the recession cycle of the last 100 years, your rookie strategy of holding the 4% premium rather than the stock will work for 1 year every 7. For the other 6 years, you'll be a laughable under-performer. At best, AT BEST, your strategy makes the 4% annualized, if you never get assigned. WOOHOO ! I smell Forbes list
"So I guess I'm not a retard for thinking ATM or near ATM strategies are the way to go?" Yeah, near or ATM works just fine. Long-term the premiums will justify the risk, and the potential ROC has a chance of outpacing the capital appreciation plus dividend on the underlying. If it can't, what the F is the point in the first place lol. Honestly, I would have thought anybody who has given these types of strategies even 10 seconds of backtesting would have come to the same conclusion. Isn't that just common sense? If the premium is so tiny as a percentage of capital invested, why even bother? But you know what, there is nothing common about common sense. It seems we have a few short bus kids posting in this thread. I can't wait to see what they come up with next. Who will it be? Who's going to keep defending the indefensible?
For anybody else keeping score, here's how awesome his XLU example is. If you would have done this strategy on the highest IV day in the last year, on that very day right at the peak, here's what you get. Feb 12th, 2015. The Jan 2016 (337) 39$ put paid 1.26$. How about on a more predictable IV rank of say 80%, since nobody can pick the absolute top. Feb 6th, 2015. The Jan 2016 (343) 39$ put paid 1.05$. That's an awesome year man. About 3% annualized IF you pick the highest IV day of the entire year. Honestly, do you even trade? I bet your paper trade account is to the moon !