Covered calls and Cash secured puts in TLT, GLD and SLV

[Cortopassi]

This is just a topic for anyone interested in following what I'm doing.

After many years of watching gold and silver go up, down and generally nowhere, and the same with TLT, I decided to start selling calls on a portion of my holdings (currently 25%).

What this entailed originally is selling far OTM calls to bring in a little income while still participating in much of the potential upside. After doing that for ~2 weeks (I am writing weekly options) I couldn't justify to myself why I was giving up premium by trying not to get called. In the 2 weeks since I have been writing the calls at at the money strikes to maximize premium.

I did get some portion of shares assigned last week, so this week I added writing cash secured puts to the mix to get more premium and possibly get the shares back. If the puts expired out of the money, I won't get the shares, but I can write puts again next week for more premium.

I had done this in the past with poor results, mainly because I was looking for very volatile stocks with high premiums, and got burned in the financial crisis holding a lot of underwater stock.

Since I do the PP now, I will always be holding TLT and GLD (and for me, SLV), so if I'm holding at a depressed price, I would have been holding anyway.

To track my performance, I am comparing my premiums collected divided by the total dollar value of the shares under this option setup as of Jan 1, versus the current dollar value gained or lost compared to the value on Jan 1 (buy and hold).

As of today, the buy and hold paper loss on my SLV, GLD and TLT shares I am writing on are down $3548, or -0.89%. Conversely, option premiums collected since Jan 1 total $4301, or 1.08% up.

That's currently a delta $7849 in favor of the option writing. On the paper loss, TLT is the major negative factor; GLD and SLV are somewhat up.

The most enticing thing is the $4301 is REAL income in my accounts, not paper gains that can and do vanish.

I am finding this attractive at this point. It literally only took me 15 minutes Monday morning to makes the trades, and maybe a 1/2 hour on the weekend to track and see what I needed to do (a lot of that was building a spreadsheet).

Many people call this the "Option Wheel"

What a crappy day today!

[Cortopassi]

Unless there's a huge turnaround in TLT, GLD and SLV today, all my call options will expire out of the money, and most my cash secured puts will expire in the money, so I will effectively be exactly the same share-wise cost as I was at the end of last week, but have $4434 added cash in my accounts.

On Monday, I will consider writing calls again, but since especially gold and silver have been beaten down, I may wait to write them, because writing them at these depressed levels risks them bouncing back and missing upside.

But...that would be prognosticating about future direction, and they both have probably as much chance of continuing down as up. So I'm not sure I should do that and instead mechanically continue to write ATM calls....

[barrett]

The most enticing thing is the $4301 is REAL income in my accounts, not paper gains that can and do vanish.

I believe this is faulty thinking but I am trying to understand your point of view. If gold is up 1% in a day and I hold $100,000 of IAU, I've "made" $1,000. If I sell a few shares of IAU so that the $1,000 goes into a core cash account, does that make the gain real? How is what you are doing different from my example? I'm asking you to just set aside the question of whether or not you are actually increasing your account value.

[Cortopassi]

The most enticing thing is the $4301 is REAL income in my accounts, not paper gains that can and do vanish.

I believe this is faulty thinking but I am trying to understand your point of view. If gold is up 1% in a day and I hold $100,000 of IAU, I've "made" $1,000. If I sell a few shares of IAU so that the $1,000 goes into a core cash account, does that make the gain real? How is what you are doing different from my example? I'm asking you to just set aside the question of whether or not you are actually increasing your account value.

Barrett,

I want people to poke holes in this because I am not totally convinced either.

The differences I see:

—if you sell like you say, yes, you’ve got cash from the gains. You now also have less IAU holdings, so going forward you are eating into your cash generating machine.

— the real case this past week is I took the income, while watching GLD fall badly, but I still have the full shares I had before, and can now on Monday, generate more cash off those same shares.

—the real pp situation would have been watching GLD fall last week, and shrugging my shoulders, going oh, well, it has to come back eventually, and hoping it does, for an eventual rebalancing to capture those gains.

Happy to do a million of these thought experiments to find holes!

[Mark Leavy]

The most enticing thing is the $4301 is REAL income in my accounts, not paper gains that can and do vanish.

I believe this is faulty thinking but I am trying to understand your point of view. If gold is up 1% in a day and I hold $100,000 of IAU, I've "made" $1,000. If I sell a few shares of IAU so that the $1,000 goes into a core cash account, does that make the gain real? How is what you are doing different from my example? I'm asking you to just set aside the question of whether or not you are actually increasing your account value.

Barrett,

I want people to poke holes in this because I am not totally convinced either.

The differences I see:

—if you sell like you say, yes, you’ve got cash from the gains. You now also have less IAU holdings, so going forward you are eating into your cash generating machine.

— the real case this past week is I took the income, while watching GLD fall badly, but I still have the full shares I had before, and can now on Monday, generate more cash off those same shares.

—the real pp situation would have been watching GLD fall last week, and shrugging my shoulders, going oh, well, it has to come back eventually, and hoping it does, for an eventual rebalancing to capture those gains.

Happy to do a million of these thought experiments to find holes!

Corto,

Options are fairly priced. Selling them is attractive because you consistently make small amounts of money. And then every now and then you lose a large chunk. Or you lose a large chunk of upside.

But the truth is that if you follow a mechanical strategy, with no insider knowledge, then you will theoretically break even by using options. But, since you are a retail investor, you will have a slight loss due to slippage and transaction costs.

I get it, it feels good to pick up pennies in front of a steam roller.

But, I repeat. Options are fairly priced.

[Cortopassi]

But, I repeat. Options are fairly priced.

I'm not disagreeing.

Let's imagine I had this in place last year, just on GLD. GLD started at 182.33 on Jan 1, 2021. Ended at 170.96 on Dec 31, 2021.

Per the PP, just holding it, it was a losing year for gold.

As the least "risky" case of selling way OTM calls on GLD, to try to not get the shares called, given what I've seen recently, you could probably easily pick up $25 per 100 share holdings per weekly option that way way OTM.

So 100 shares would have cost you $18,233 on Jan1, and given you a paper loss of $18,233 - $17,096 = $1137 for 2021

If you were writing weekly calls on those 100 shares, you would have brought in $25*52 = $1300 realized income. And still had your shares.

The only holes I think you can shoot into the above example is some black swan event that pushes gold up a couple hundred overnight (or down).

In the case of down, I would have been holding anyway. In the case of up, yes, I lost the upside.

But I am only doing this on about 25% of my holdings.

I may be singing a different tune in a few weeks or months, but it is working now.

[dockinGA]

But, I repeat. Options are fairly priced.

I'm not disagreeing.

Let's imagine I had this in place last year, just on GLD. GLD started at 182.33 on Jan 1, 2021. Ended at 170.96 on Dec 31, 2021.

Per the PP, just holding it, it was a losing year for gold.

As the least "risky" case of selling way OTM calls on GLD, to try to not get the shares called, given what I've seen recently, you could probably easily pick up $25 per 100 share holdings per weekly option that way way OTM.

So 100 shares would have cost you $18,233 on Jan1, and given you a paper loss of $18,233 - $17,096 = $1137 for 2021

If you were writing weekly calls on those 100 shares, you would have brought in $25*52 = $1300 realized income. And still had your shares.

The only holes I think you can shoot into the above example is some black swan event that pushes gold up a couple hundred overnight (or down).

In the case of down, I would have been holding anyway. In the case of up, yes, I lost the upside.

But I am only doing this on about 25% of my holdings.

I may be singing a different tune in a few weeks or months, but it is working now.

I think the comment about options being fairly priced is spot on. In the very long run, playing the options game will likely give you the same result you would've gotten with buy and hold. But, in the short term, that black swan event could leave you looking awfully foolish. I think it all comes down to how important it is for you to generate short term revenue.

[yankees60]

But I am only doing this on about 25% of my holdings.

I may be singing a different tune in a few weeks or months, but it is working now.

1) "Only" 25% does not feel like "only" to me!

2) You may well be "singing a different tune). I'd put a higher probability on that then you continuing to be successful. As Mark pointed out .... the odds are stacked against you when the friction costs are factored in.

[dualstow]

…
1) "Only" 25% does not feel like "only" to me!

That’s what i was thinking, too.

My friends write covered calls.
For my illusory/feel-good gains, I prefer dividends.

But, Corto seems to be doing fine.

[Cortopassi]

Thanks for the input, it helps me make sure I'm not going to become overconfident on this.

I am not following why there's some concern on 25%?

There's two outlier outcomes (please correct if I am wrong):

1) Gold gets hammered, drops $200 because of whatever.
a) The pp had me holding it anyway and I participate in a paper loss.
b) Writing calls on it, at least I got some income, reduced my cost basis and I still hold the same # of shares.

2) Gold rises $200 because of say Ukraine getting invaded.
a) The pp had me holding it, so I participate in the gains on 100% of my shares, but it is still on paper, subject to evaporation over subsequent days, unless it was enough to cause a rebalancing event.
b) Any calls I wrote on the 25% the shares would be called away. I still made the premium income, but now those shares were assigned and I don't have them anymore. I can either sit and wait for a pullback to get back in, or write a put to get back in with a little premium.

So I still see the worst case is not participating in some of the paper gains on some outlier event.

This is one of the reasons I felt more comfortable doing this on TLT, GLD and SLV vs. individual stocks -- sure there's market volatility, but no earnings surprises, company events, etc.

[dualstow]

…
I am not following why there's some concern on 25%?

For me it’s 2b. Not the end of the world of course, but it’s what keeps me from writing covered calls on pp assets or anything else so far.
Gold has been so flat for so long. If It finally soared and I had to wait to get to get back in, I’d be tearing my hair out. I guess the other side of that coin is that gold has been flat for so long, why not do it. Still, I’d rather let the rebalancing bands rule.

(2) b) Any calls I wrote on the 25% the shares would be called away. I still made the premium income, but now those shares were assigned and I don't have them anymore. I can either sit and wait for a pullback to get back in, or write a put to get back in with a little premium.

[Mark Leavy]

So I still see the worst case is not participating in some of the paper gains on some outlier event.

This is the right answer for your scenario. However, by selling at the money covered calls you are not participating in any of the gains. Ever. Not just outlier gains.

So, the cumulative option premiums would have to exceed any and all future gains.

It also means that you are continually reducing the value of your shares - as the only time your calls aren't exercised (and you get to keep your shares) are when the prices drop. Now you have to sell new options at the reduced share price - and again forego any gains.

If your options are called, and you want to buy back into the underlying, then you pay a higher price for it. Or you sell puts. And take the risk that the stock will tank well below your strike. Or the stock continues to rise and your puts never fill, thus you miss out any stock gains and hope the income from the puts covers it.

In any case, I am trying to show that there are plenty of scenarios where you are missing out - not just some outlier case. And the option premium needs to compensate you for all of those.

I'm not saying that you shouldn't keep doing what you are doing. Just that you might not fully understand it yet. Perhaps run a paper simulation "buy and hold" account in addition to your actual account and see how it fares after a few years.

[Cortopassi]

I completely understand I am giving up the underlying gains by writing ATM.

And I'm doing this only on a portion because I want to see if this can work successfully for ~ a year. I am within 5-10 years of retirement. While I'd love to think my net worth on paper will be large enough to support us for the rest of our lives, I would (personally) feel more comfortable being able to generate income on an ongoing basis and miss those potential large gain outliers.

If one week it took 100k of GLD underlying to generate 1k of income, and another period it takes 120k, and another period it takes 80k, should I really be concerned if I am looking only to generate income (this is not rhetorical, I am asking!)

It's only been a month, so I am sure I will have an opportunity to run into such a case soon, and we'll see how I take it. I know it turned out poorly in 2008 with individual companies, which is why I am writing calls and puts on the subject ETFs, to remove some, but not all of the risk aspects.

[Mark Leavy]

I fully support experimentation with real money. Everything else is bullshit. You will know if it works for you or not.

Here is a different way that you might think about it.

Whether you are selling calls or puts, if you are selling exactly at the money, then you are taking a guaranteed monthly check to hold a stock where you keep all of the losses and give away all of the gains.

Try out a few scenarios on paper and you will see that that is the essence of your strategy. Depending on how the markets move and how much you pull in each month, it could work for you.

[Cortopassi]

I won't dispute most of your statement.

Currently I sell calls at the money. If they were called I then sell puts at the same strike that the call strike was at, effectively leaving the underlying flat, so I am participating neither in the gains or the losses.

This has worked so far.

I can see the situation where I get called out because the underlying had a good run, and I couldn't pull any premium from a put because it would be too far out of the money.

Not sure if this is relevant yet or not, but the weekly calls I am doing only have five days to move before expiration, that may help in limiting outlier moves or longer term trends that might get longer term options in trouble.

[Mark Leavy]

I won't dispute most of your statement.

Fuck you. You can't dispute anything I said. I'm right. That doesn't mean that you are wrong. Just roll with it.

[Cortopassi]

See, now that I can tell was said jokingly…

I hope…

[dualstow]

[Cortopassi]

I did write some puts on TLT on Monday to get shares back, and wrote some calls on TLT and SLV today.

Current gain/loss delta is +$6311 realized option income vs. -$4459 buy and hold from beginning of year.

Most of the paper loss is from TLT, a little from SLV, and GLD still has a really small gain.

I await the jobs report Friday, which I know makes all three of these gyrate wildly at least for a little while.

[dualstow]

MJ has gone. Long live the new MJ

[Cortopassi]

Oh boy. I'll stop

[dualstow]

I was just kidding!

[Cortopassi]

I know.

[Cortopassi]

Short update. Thanks to TLT (mj where are you...) which is sucking, I have been hesitant to write calls on it, because, of course, at some last second it's going to pop 3 dollars. Uh huh. Been saying that for the past few days. This is what hampered me many years ago. Have to figure this one out, or this whole effort may become more of scalp some premium here and there vs. actually replacing my income.

Current delta is +$7129 CC strategy vs. -$12,900 buy and hold. All due to TLT...GLD and SLV are up.

I'm sure a lot of us are currently wondering about long term bonds...

As an aside, anyone ever look at BST? It's a closed end fund, focusing on tech and science, and writing calls on a portion of their holdings. What seems to set them apart is not only have they been able to maintain a 6%+ yield but they've also been able to participate really well in capital appreciation too. Thinking about some for my VP.

[dualstow]

…
As an aside, anyone ever look at BST? It's a closed end fund, focusing on tech and science, and writing calls on a portion of their holdings. What seems to set them apart is not only have they been able to maintain a 6%+ yield but they've also been able to participate really well in capital appreciation too. Thinking about some for my VP.

re: BST -
profile from Yahoo:

BlackRock Science and Technology Trust is a closed ended equity mutual fund launched by BlackRock, Inc. The fund is managed by BlackRock Advisors, LLC. It invests directly and indirectly through derivative such as options in public equity markets of countries across the globe. The fund seeks to invest in stocks of companies operating across the science and technology sector. It invests in dividend paying and growth stocks of companies operating across all market capitalizations. BlackRock Science and Technology Trust was formed on 28 October, 2014 and is domiciled in the United States.

https://www.blackrock.com/us/individual ... trust-fund

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