Hi Dr Joe
We have corresponded a number of times in the past and I very much enjoyed your description so I thought I would comment on it as it is a strategy I believe in.
Your strategy of setting up naked puts 2,3 or more months out to expire for additional income is excellent. By picking an index or a strong stock, it is only a matter of examining the percentages vs premiums to determine a proper strike point that can:
A) Bring in the income required to meet your monthly goals
B) Set up enough percentage protection (ie 8%, 10% or more) that should the stock or index fall to your strike point, you are low enough that if assigned, you have an excellent valuation to commence writing covered calls or continuing to roll the put into subsequent months.
By establishing a trend of selling two, 3 or more months out, the likelihood of assignment decreases but the cashflow can actually be predicted. This is a strategy I have employed for years on specific stocks such as KO, JNJ, RY, BMO, BNS, ETC. I refer to it as a reverse put ladder, basically meaning that the further out you go, the lower the strike can be and the option premiums usually increase.
I was taught years ago, to determine a monthly amount needed to meet my goals. Back then it was a whopping $1000.00. Then we studied the large caps (there were no ETFS back then) to see what patterns or ranges were available. You could pick high and low points and it was amazing how many stocks had ranges to select from. Then we would plot out our naked puts and begin selling them until we reached the goal of $1000 a month in income from the naked puts. Because we were always out 2, 3 or more months the strikes were low, often more than 15% below current stock prices. Soon I had naked puts expiring every month that once expired I would again sell another 2,3 or more months out to repeat the cycle. In the 1990’s the option premiums began to reduce and I had to move my strikes somewhat higher, but the strategy always worked. Sometimes I was assigned, but these were stocks I wanted and I would turn and sell covered calls until taken out and then start the process over. The goal was the monthly income stream and the objective was to stay with naked puts and keep my capital in money market accounts earning an additional 3.5% (wow, remember those days?).
Today I continue to employ this strategy with great success but the higher volatility is definitely a welcome thing as it pushes up those put premiums making the strategy a lot easier.
Kudos to you and I love your Russell 2000 and SPY picks. If the Russell 2000 gets down to the level of your strikes, then we have had a very good sell off indeed and put premiums should be excellent. My strategy is explained in detail on my site under the heading (of all things) “My Strategy” and on the weekend I updated it with an example using KO. I also explained why I like when stocks go on sale and why periods like what we are currently going through are welcomed by me. I believe that naked puts are superior to covered calls and I explained why under my heading “Naked Put Strategies” on my site, but it’s an argument that has been ongoing for years and definitely a personal opinion.
By studying stocks and indexes I believe an astute investor can set up an income stream that will meet their needs, however many become a little too greedy and take on more risk than they can actually afford or end up convincing themselves that they would pick up the stock if assigned only to find when that day comes, they in fact do not want the stock. When Microsoft falls from 31 to 26, a 16% decline (which it has just done in the past few weeks), it’s amazing how many put sellers who sold the 29 and 28, jump ship and take a loss. The key, I believe, to an income stream from naked put writing is, select the stock you truly would own, sell the strike you are happy with and contemplate rolling the put forward if caught in the money, should premiums allow it, delaying assignment until premiums dictate it is time to accept assignment.
In my experience, consistency in the strategy, setting a realistic goal and holding to the objective are the keys to successful naked put writing for an income stream in any market environment. Thank you for your great detailed description of your recent trading.
Your friend,
Teddi Knight
www.fullyinformed.
From: ConservativeOptionS
Sent: May 23, 2010 9:25 PM
To: ConservativeOptionS
Subject: [ConservativeOption
Dr. Joe, as usual, your explainations are greatly appreciated.
Hey, thanks for the information. your posts are informative and useful.
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