Writing Puts for Income/Take Up Stock

Hi All,
I have been reading through some of the posts on this forum and can see there are some seasoned ETO traders here. I am wondering how common & successful people have been at writing puts for income with the strategy to take up the stock if assigned?

I was doing this strategy on ASX ETOs when the pandemic had its run up and just started again now as vol is more favourable. I am only doing a couple of hundred $ a month which equates to one - two day of daycare but better than nothing...

galax7 said:

Hi All,
I have been reading through some of the posts on this forum and can see there are some seasoned ETO traders here. I am wondering how common & successful people have been at writing puts for income with the strategy to take up the stock if assigned?

I was doing this strategy on ASX ETOs when the pandemic had its run up and just started again now as vol is more favourable. I am only doing a couple of hundred $ a month which equates to one - two day of daycare but better than nothing...

Click to expand...

It's depends on strikes, expiry on *management*.

With good management you are basically reducing volatility of holding the underlying, perhaps slightly increasing return before tax.

Never underestimate the effect of taxation when considering this sort of strategy as against buy-and-hold, as you are creating numerous taxable events throughout the year.

This of course is affected by your personal tax situation and well beyond the scope of anybody here to advise.

yes i do use this strategy a lot (i would say 90%+ of my trades are either selling covered calls or cash covered puts) and do find it to be quite profitable, though you will of course have to take this with a truckload of salt, as i'm not willing to post brokerage statements for privacy reasons.

it is not quite as simple as "i'm happy to buy the stock at X anyway, so if i sell puts struck at X for Y premium, it's basically free money", that line of thinking is flawed. you have to consider; if it drops well below X i could've bought the stock for much cheaper if i hadn't sold the puts and tied up my collateral in doing so, alternatively if it rallies well above X + Y before expiry, i miss out on the gains i would've made had i just bought the stock outright instead of selling puts.

a better line of thinking in my view should be, is the premium (or essentially, the IV) i'm receiving sufficient to compensate me for those risks? if yes, then i look to sell the puts. if not, then i consider buying the stock outright or waiting and watching in case it ends up breaking support/resistance etc. even then everyone won't have the same interpretation, my idea of what constitutes a fair IV could be different from yours, and that's what makes a market after all.

@wayneL I probably should think more about tax implications but because I have been doing small positions it has just not been on my Radar.

To expand on what I do post assignment which is sell covered calls on the stock. I honestly have only done this a couple of times given the market direction after the covid crash. I am not very scientific but I do maintain ATM IV data for each class & expiry month which I use to help select a stock for the strategy.

galax7 said:

@wayneL I probably should think more about tax implications but because I have been doing small positions it has just not been on my Radar.

To expand on what I do post assignment which is sell covered calls on the stock. I honestly have only done this a couple of times given the market direction after the covid crash. I am not very scientific but I do maintain ATM IV data for each class & expiry month which I use to help select a stock for the strategy.

Click to expand...

That's all good. The trick with IV, is to forecast whether realised vol is less than IV. If accurate, well done you should go okay over the long term.

I like that you aren't (or don't seem to be) leveraging up and creating a gamma monster... smart.

Do think about tax implications though, especially if the intention is to hold the underlying.

But if you're just doing short puts for the "income", consider rolling down instead of allowing assignment and the conversion to the synthetic.

You get a nice tax loss and the equivalent payoff diagram for that period. Think about how that affects your tax position overall and over time (and the timing, re deferring tax liabilities)

Additionally, never ignore Vega.

wayneL said:

That's all good. The trick with IV, is to forecast whether realised vol is less than IV. If accurate, well done you should go okay over the long term.

I like that you aren't (or don't seem to be) leveraging up and creating a gamma monster... smart.

Do think about tax implications though, especially if the intention is to hold the underlying.

But if you're just doing short puts for the "income", consider rolling down instead of allowing assignment and the conversion to the synthetic.

You get a nice tax loss and the equivalent payoff diagram for that period. Think about how that affects your tax position overall and over time (and the timing, re deferring tax liabilities)

Additionally, never ignore Vega.

Click to expand...

Noted and noted, maybe I should put more thought into my primitive approach ?.

I just work off published vols from the Span parameter file and then only look at ATM just to get a picture of how all the classes compare each day. I actually publish there here: https://etohub.com if anyone else finds this useful. I want to track these over time so I can get a better picture of historical vols but that is a work in progress...