$10,000 Income Portfolio

[GOB]

You are right - put selling is not equivalent to long stock and short call - there is so much variation due to the behaviour of the stock, strike price chosen etc.

Part of me wanted to buy 100 shares of AAPL right away and sell covered calls on it, but I had told myself from the start that the only way I would take shares is if I sell a put and get assigned. I tried to stay disciplined. Unfortunately, AAPLs rapid rise means that purchasing the stock outright would have been a much more profitable venture. However, this is only known looking back after the fact.

What this portfolio has shown is that this strategy is not the best for a rapidly rising (or falling) stock. Conversely, we can infer that it would be excellent for a stock that is flat or rangebound. Unfortunately I just started at the wrong time, but on the bright side I have made a good amount of money and the portfolio return has been excellent thus far.

When AAPL begins to range for months on end (as it seems to do every year) I think this strategy will really start to shine.

A slight correction - I would not have been able to buy 100 shares or sell naked puts on AAPL with just the $10,000. About $17000-$19000 of equity is needed, so I wouldn't have been able to buy AAPL as early as you indicated.

[GOB]

Wow, this is really unbelievable. I've never been so annoyed with making money! Most valuable company in history...amazing, yet totally predictable years ago.

Aug 20

Bought to Close: 1 AAPL 24AUG12 $640.00 P: -$306.06 (Total profit +$193.31)
Sold: 1 AAPL 24AUG12 $645.00 P: +$413.93
Bought to Close: 1 AAPL 24AUG12 $645.00 P: -$215.06 (Total profit +$198.87)
Sold: 1 AAPL 24AUG12 $655.00 P: +$455.93

I have to look at this in perspective. Despite the fact that I could have easily made thousands of dollars if I bought the stock and sold calls, I'm still making outstanding gains by sticking to my strategy. This is really a unique move. A retracement could be just as vicious to the downside, and it could put me in a tricky spot. Let's see what happens.

[Lephturn]

Are you calculating your ROC - Return on Capital - or really in this case return on margin tied up? When I start doing that I end up selling various spreads as it gives me a better return with less risk.

In terms of short put = stock + selling CC's - really that's only "at expiration" if you don't adjust the position at all. It makes more sense in terms of risk, as a short put is equivalent to long stock + short call from a risk perspective if the security moves against you. Again - insert the works "at expiration" and in terms of maximum potential loss. In reality there are the rest of the greeks to worry about - so when you are short a call and the stock moves down quickly you will also get hurt by a jump in volatility as well short gamma quickly accelerating your short delta position.

[GOB]

I'm calculating the return on the equity I've put in. Basically that's how much I stand to lose so my gains should be measured against that. Even if I have $40k tied up in margin, the liquidation value of my account is the most accurate measuring stick, I think.

What kind of spreads do you recommend? I have done a few but they were mostly relatively safe plays made either far out of the money or at times when AAPL was very undervalued. While I'll continue to do these as the opportunity arises, I've changed my strategy somewhat to get a more consistent weekly and monthly cashflow. How would you recommend incorporating spreads into this strategy?

[humble_pie]

hey Lilliput is doing great. You know what they say, gob. Never look back, never look off-course, never what-if, never second-guess ...

actually, retracements imho are nearly always faster & more brutal than the harder climb upwards. After exercise at 655, a mere downward dip of 10% would drop aapl back to 590; 15% & stk would be down to 557 & one might have to start worrying about the margin.

i didn't look at call prices but they must be dazzling. Cash from a call sale will help the margin.

it's great how you're sticking to your guns. Superficially it does appear that Lilliput would have done better if exercise had occurred the 1st week. But it's been a record-busting month & one swallow does not make a summer. Six short weeks of Lilliput are not enough to generate any predictable pattern.

meanwhile, it looks like coasting along selling short puts might harvest $500 or more a week, or at least 2000 a month. Soon - assuming no assignment - you'd be able to sell 2 puts. No matter what, life is sweet in Lilliput.

[Lephturn]

I'm calculating the return on the equity I've put in. Basically that's how much I stand to lose so my gains should be measured against that. Even if I have $40k tied up in margin, the liquidation value of my account is the most accurate measuring stick, I think.

What kind of spreads do you recommend? I have done a few but they were mostly relatively safe plays made either far out of the money or at times when AAPL was very undervalued. While I'll continue to do these as the opportunity arises, I've changed my strategy somewhat to get a more consistent weekly and monthly cashflow. How would you recommend incorporating spreads into this strategy?

Well, I simply look at what my ROI would be and when I'm selling a naked put for example, I'll look at what happens if I buy another put further out and turn it into a spread. Even if it's a REALLY wide spread, simply doing that will often get me a better ROI such that I free up more margin for another trade - or failing that I can sell 2 spreads sometimes instead of just 1. Otherwise it's all situational.

Too bad I work all day - if I had the time to get my call back spread on last week I'd be way up. OH well. The reason I say a back spread is that by selling a call back spread I'm short an ATM call and long two further out calls. That spread works well in a low volatility environment so long as you give it enough time to work (I like 60 days or more). In AAPL that usually means a very small loss worst case if it goes down, with a loss hole between the strikes and then a wide open upside. Just what I like for a stock like this that could really run. The bonus is that it's great when vol is low and when the stock moves the vol increases. With volatility that low chances are even if the stock goes down you can make some money as the vol pops.

[humble_pie]

... when I'm selling a naked put, for example, I'll look at what happens if I buy another put further out and turn it into a spread.

i find it hard to agree with this, because the sequence of short puts in Lilliput are not being sold for their own sake. Each is sold purely to trigger exercise. It's a bullish strategy. To buy a different put to pair with the first that was sold would be to add a bearish torque. And i don't see that there would be a good reason for this.

because even if a put is bought, & if the stock is assigned, & if the stock then drops sharply, gob will not be able to exercise that put. Why not ? because he will need to hang onto the stock to cover the short call that he sold when the stock was first assigned ...

(it's true that he could exercise the put & end up with a naked short call in aapl. Which, even for Lilliput, would be totally cray-zee, imho.)

[GOB]

I've got to admit some of this stuff is a little over my head. I'm relatively new to options but I make sure to fully understand the plays I make. Options are amazing - there's so much you can do with them and you two seem well versed in various techniques and I thank you for contributing. humble_pie is right that this is a bullish play and I am actually indifferent to or even seeking assignment. A good chunk of the returns I expect to get are from getting assigned, selling covered calls on my underlying share and getting those premiums in addition to a $5-20 per share capital gain.

I will soon be adding to the account so I have more breathing room for margin (and so that I'll be able to trade two lots more quickly). Probably another $9500 to bring my total deposits to an even $30,000.

In all honesty, no matter what my "potential" gains would be, if I can get a consistent $1000-2000 per month from a portfolio this size, I'd be EXTREMELY happy. And I think it is possible, though periods of drawdown will be inevitable. If AAPL ever does make a big retracement I'll be adding LEAPs that will juice returns even further. Win or lose, these upcoming months are going to be extremely interesting!

[humble_pie]

gob i apologize if we are focusing too much on your account. The thing is, it's a perfect teaching module because of its tiny size & also because of its time compression. Every move you make shows up in magnification.

& let's spell that word magnificent. You're making all the right moves, although i suppose this is what we should expect from you, you've posted here long enough to earn your marvellous reputation.

moving on to lephturn's long put suggestion - which you have not done - this would serve as insurance if aapl shares are assigned & if they subsequently plunge in value. After such a plunge, you wouldn't be able to - or at least you should not - exercise the put because such a move would leave you with a naked short call, which is the riskiest option position of all.

however, such a long put acting as insurance would have value because its price would soar. You could sell this long put insurance for good cash ... if ... but only if ... you would be assigned 100 aapl shares for 655, say, but price would crash to 580, say.

myself i don't think i'd do this. I wouldn't spend the $$ to buy the put in the 1st place. Because there already is a hedge of sorts in Lilliput.

the hedge is Lilliput's tiny size & its segregation from the mass or bulk of your portfolio. Gob, you are, i believe, already long aapl shares which have gained immensely. At least, this is how i've read your posts under the aapl thread. By splitting off a small fraction of $$ & creating Lilliput as a pilot project, you've already hedged. You didn't use your master account & pledge everything to a brand-new option program. Instead, you carved out just a small manageable portion of cash & used it to seed Lilliput.

i'm hoping enthusiasm won't induce you to add more cash to Lilliput in its early stage than you can afford to totally lose. Done right - steady as she goes - Lilliput is a strategy that means buying lower, selling higher, always with an added premium, forever & ever. It's a strategy that can last you for the rest of your life.

[GOB]

I appreciate the comments and welcome the focus on my account! I made the thread for people to look at and comment on, so please don't apologize.

I'm not sure if I'm interpreting correctly, but you've alerted me to the possibility of selling a put after I've been assigned. This would provide me a bit of downside protection. I wouldn't end up with a naked call because I'd have the underlying shares and a covered call. An interesting point, and depending on price action I may decide to test it out - that is, if I ever get assigned (it's up to $670 pre-market...).

You are exactly right about the segregation of this portfolio. I am very long on Apple in other portfolios and have already cashed in a bunch of options and am still long a few that are quite deep in the money at this point. I have been very successful so I decided to redirect a portion of the proceeds to test this strategy out. As risky as it is I don't see myself losing too much from it. I will be funding more, but be assured it is money I don't need and don't mind losing.

I guess I'll do another flip this morning to add another few dollars this week...we'll see how early trading goes.