# Investing with Option



## Valuex (Feb 16, 2019)

*Investing with Options*

Hello, I am along time value investor and one of my methods is to use Options before investing in stocks.
Strategy: Buying stock at discount price from their intrinsic value. Once I found a discounted stock I sell Cash Secured Put to lower my entry price. If assigned I sell Covered Call to further down my cost basis and increase my income
This kind of operation is ideal for investors and not for traders. 
Risk: Cash Secured Put is not like a selling naked put. In case of assignation ,your maximum risk is to own the stock.

Example 14 Feb Sold Pepsi Cash Secured Put strike [email protected], Exp Feb 22. Weekly return 0.45% , Annual return on investment 20%.


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## goldman (Mar 18, 2017)

The TastyTrade community calls this the "wheel of fortune" approach if I'm not mistaken. They do quite a bit of research studies on options trading strategies to show what work over the long term.
I often sell puts on stocks I like the fundamentals on. I'd recommend taking a look at a great research paper available online called "The art of put selling" from G.S.

Overall I think the strategy can work on the higher volume options markets of US stocks. But not sure how well it can work with the limited TMX options volume? I'm interested if anyone has any experience with doing this on the TMX/TSX stocks and ETFS. Using TD's TOS platform is good for US options trading but the commission fees are far better at IB. To make it worthwhile on Canadian stocks I think the low fees at IB may be necessary.


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## Valuex (Feb 16, 2019)

*Investing with options*



goldman said:


> The TastyTrade community calls this the "wheel of fortune" approach if I'm not mistaken. They do quite a bit of research studies on options trading strategies to show what work over the long term.
> I often sell puts on stocks I like the fundamentals on. I'd recommend taking a look at a great research paper available online called "The art of put selling" from G.S.
> 
> Overall I think the strategy can work on the higher volume options markets of US stocks. But not sure how well it can work with the limited TMX options volume? I'm interested if anyone has any experience with doing this on the TMX/TSX stocks and ETFS. Using TD's TOS platform is good for US options trading but the commission fees are far better at IB. To make it worthwhile on Canadian stocks I think the low fees at IB may be necessary.


Yes work better on market with high volume like NYSE and some European blue chip


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## Valuex (Feb 16, 2019)

Valuex said:


> Yes work better on market with high volume like NYSE and some European blue chip[/QUOTE
> 
> Sorry I see now my answer is cut. No it's not the wheel.


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## humble_pie (Jun 7, 2009)

that ancient goldman sachs put selling text might have been a decent document once upon a time

but the text is now so deteriorated by multiple copying & regressions that it's incomprehensible

worse, it's being proffered by a russian spam site. Unwise to browse there.


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## goldman (Mar 18, 2017)

Valuex said:


> Sorry I see now my answer is cut. No it's not the wheel.


Whats the difference between what you described and the wheel strategy? It seems like it to me.

The wheel starts with a selling a cash secured put. After selling the first put, it will either expire or shares are assigned. You either keep the premium and start again or are assigned shares. At this point you sell a call against the stock to turn it into a covered call (and may sell another put). The call either expires worthless and you sell another call against the stock or stock gets called away at the call strike. 





humble_pie said:


> that ancient goldman sachs put selling text might have been a decent document once upon a time but the text is now so deteriorated by multiple copying & regressions that it's incomprehensible


 Don't be silly, you obviously didn't even look at it. And it was published only a few years ago after doing a decade worth of research. There's also many other sites where the study is available for reading. For example: Here, Here, Here, or Here

One of the key points that stood out to me from the study was using fundamentals like the price to free cash flow ratio could improve the results of the put selling strategy. According to the study put selling based on FCF outperformed stocks by 250bps annually with lower overall volatility:


"Over the past 10 years, selling listed 1-month at-the-money puts in S&P 500 stocks allowed investors to collect 3.4% per month in premiums and showed 7.1% annualized returns with a 12% standard deviation. Over the same period, the S&P 500 annualized total return was 7.3% with an 18% standard deviation. The put selling Sharpe ratio was 1.3 times the SPXTR.
...
We find that choosing stocks and strikes based on Free Cash Flow (FCF) yield dramatically improved put selling returns. Selling puts on stocks with FCF yield in the top quintile each month led to annualized return 250bps higher than the SPXTR and a Sharpe ratio 1.7 times the SPXTR. Further, choosing put strikes on each stock based on their FCF yield led to a Sharpe ratio 2.7 times the SPXTR. 
...
- Choosing Stocks with high FCF yield has systematically improved passive put selling results (added +250bps annually without adding volatility) and has greatly
outperformed the risk adjusted returns of simple screening methodologies based on absolute implied volatility or market cap.
- Choosing Strikes based on FCF yield improved put selling results further to achieve a Sharpe ratio of 1.35 over the past 10 years, nearly triple the SPXTR.
- Choosing Term: We find selling 1-month options had higher returns and risk adjusted returns than 12-month over the past 10 years."


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## Valuex (Feb 16, 2019)

Basically I am more a cash secured put sellers and if there are right condition I sell Call. Example I don't sell call if stock goes down under my bep. 
With Wheel You sell put and If assigned you sell call and at the same time you sell another put.
Anyway do not worry because starting point of this strategy could be equal.....You are not the first person who asked me .
Wheel is considered a strategy for traders, mine quite different because I sell put when I want to own stock at discounted price. Purpose are different. But I understand you, at first sight you could misunderstand.


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## Valuex (Feb 16, 2019)

Thanks for GS file. I am more in line with it


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## humble_pie (Jun 7, 2009)

Valuex said:


> Basically I am more a cash secured put sellers and if there are right condition I sell Call ...
> 
> Wheel is considered a strategy for traders, mine quite different because I sell put when I want to own stock at discounted price.





but in your first post you declared yourself to be a sell-put-get-assigned-sell-call trader

look at the trade example you gave. It's a penny weekly. On 14 feb you sold a put expiring 22 feb on a $108 underlying stock for 49 pennies. That's a very low premium.

if assigned you said you'd sell call.

this is an ultra-short term trading strategy. It should be at a broker like IB. Not even TOS can offer the necessary low commissions.

with your sold call, you'll be trading on minor oscillations in market price of the underlying. You'd be ready to surrender stock in call assignment, then flip back into put assignee mode, then flip again into call selling, then flip back ...

as the goldman sachs paper reports, ultra-short term put strategies are generally more successful, dollarwise, than longer-term strategies. However, GS goes on to warn - very accurately - that the compression of time heightens the risk that the entire account could be margined out in the event of a sharp crash in the underlying.

lLonger-term strategies allow time for position repair, while weekly trading means no time.




Valuex said:


> Hello, I am along time value investor and one of my methods is to use Options before investing in stocks.
> Strategy: Buying stock at discount price from their intrinsic value. Once I found a discounted stock I sell Cash Secured Put to lower my entry price. If assigned I sell Covered Call to further down my cost basis and increase my income
> This kind of operation is ideal for investors and not for traders.
> Risk: Cash Secured Put is not like a selling naked put. In case of assignation ,your maximum risk is to own the stock.
> Example 14 Feb Sold Pepsi Cash Secured Put strike [email protected], Exp Feb 22. Weekly return 0.45% , Annual return on investment 20%.


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## Valuex (Feb 16, 2019)

You right and I confirm what I said ....in case of assignation I sell covered call. But it's not the wheel strategy . In private I give you a link about the wheel strategy (It seem your box mail is full.Tell me when you are available to receive it. Thanks)
Second I sell covered call if there are market condition to do it. This is valid for cash secure put too. None of us want to trade or invest if there are not the right condition to do it. Investors don't buy if there are not the right condition to do it, the same concept is true for traders or newbies. We are here to gain. I do not use CC o CSP if my probability to lose is high or just because market conditions do not permit it. In this moment market condition permit to use both and I use both. Sometimes market permit me just to use one of them and I pick that chance. 
But this is a basilar concept that everyone of us must have when we enter the market. This is the base. No matter if we invest or trade, "the right condition" is the first basilar rule everyone of us must have in mind.
Third: If I had to choose which strategy to use between CSP o CC ( Remember I use both) of course I prefer CSP and I explain why. CSP is more in line with the value investor nature (we always try to buy at discount) and CC is more in line with the Income investor nature. But I repeat I use both and I underly it, I use them when market conditions permit it . 
Fourth: Flexibility is the rule. Do not see things in a rigid way. Investing or trading is more an art than a science. 
I hope I make myself clear without misunderstanding.


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## Valuex (Feb 16, 2019)

.."this is an ultra-short term trading strategy"........ 

Humble permit me a consideration here....selling Covered Call or CSP have different uses. It depends who use these tools. Lot of income investors use CC and lot of serious investors use CSP. The most famous investor Warren Buffet uses CSP for example. It depends what you want to do and which are your purpose. I use CSP when I am ready to own a stock but I want to further down my entry price. And Covered call I use it at the same purpose, lower my cost basis. Here we have a different point of view. The different point of view come from our experience and from how we perceive this tools.


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## humble_pie (Jun 7, 2009)

Valuex said:


> I use CSP when I am ready to own a stock but I want to further down my entry price.




so sorry here; but if you are merely wishing to acquire a stock at a discount by selling a put, your example doesn't make any sense to me. In fact, imho it's self-defeating.

your example is a $108 short put on a stock that closed the day of your put sale at 112.53. Your put sell price was only 49 pennies. Today same stock closed 115.93. You say you desire to acquire Pepsi as a long-term hold, but your lost opportunity cost over 6 days is already $3.40. Compare that to your 49 penny put gain & your strategy does not appear to make any sense.

any long-term buyer of PEP can easily shave 49 pennies off a median daily or weekly price range, without having to go through w the options bother & the option commish.

an investor who sincerely wishes to obtain a significant discount on Pepsi market price by selling puts should go much farther out in time, in order to capture much bigger premiums. For example, he could sell jan 2020 $110 puts for well north of $5.00, an amount that would give him a yield considerably better than the Pepsi dividend.

your 49 cent weekly put sell appears to belong more to the world of day-trading/flipping puts & calls than to the world of long-term buy & hold of a very mature - some would say geriatric - blue chip stock. The fact that your short put is a weekly option is another telltale sign of ultra short-term option speculation.


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## Valuex (Feb 16, 2019)

Humble, Investors have different strategies. You have your I have mine and so on. It's quite limiting to reduce ourselves to just one strategy. Remember what I said : "when market condition permit it" and "flexibility". An investor look at every solution possible before place his own strategy.
And especially have a look at his AROI (annual return on investment). In my case AROI is 20% in your case is 4-5%. 
When you use options , you have to consider the possibility of not assignation. In your case you risk to keep your capital tied-up for at least one year with a 4-5% of gain. So I have to maximise my AROI first. Do not worry, if I found a Leap give me a 12-15% AROI surely I subscribe it .

Remember the world of investors is various . Thanks God the single thought doesn't exist.

Take care and good luck.


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## lonewolf :) (Sep 13, 2016)

Valuex said:


> Humble, Investors have different strategies. You have your I have mine and so on. It's quite limiting to reduce ourselves to just one strategy. Remember what I said : "when market condition permit it" and "flexibility". An investor look at every solution possible before place his own strategy.
> And especially have a look at his AROI (annual return on investment). In my case AROI is 20% in your case is 4-5%.
> When you use options , you have to consider the possibility of not assignation. In your case you risk to keep your capital tied-up for at least one year with a 4-5% of gain. So I have to maximise my AROI first. Do not worry, if I found a Leap give me a 12-15% AROI surely I subscribe it .
> 
> ...


 If you want to only play once or twice in a lifetime investments it is often best just to buy & sell when your parameters are met. Trying to make a few extra percent could cause you to miss the best entry & exit point.


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## Valuex (Feb 16, 2019)

General Dynamics: Sold Cash Secured Puts. Here the operation https://www.notonlyequity.com/general-dynamics-7-cash-secured-puts/


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## Valuex (Feb 16, 2019)

Berkshire Hathaway : Sold Cash Secured Puts https://www.notonlyequity.com/berkshire-hathaway-4-cash-secured-puts/


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## Valuex (Feb 16, 2019)

General Dynamics : Sold Cash Secured Puts http://https://www.notonlyequity.com/general-dynamics-8-cash-secured-puts/


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## humble_pie (Jun 7, 2009)

interesting strategy. The probability of assignment is greatly reduced by the fact that your time frame is so short, being a weekly or at most a 9 or 10 day position. Since your puts are OTM the probability is high that you'll squeak thru the week without the underlying suddenly falling into the dustbin.

plus - to improve probabilities even further - you're choosing quiet docile tabbycat stocks with relatively low volatility. Makes the dustbin even less likely.

still i'm wondering what's all this about one contract. One contact for .63, for a grand total take of $63 less commission?

aww say it ain't so! all that work for so little! could you not at least do 10 contracts? that would be $630 per week, now that's a revenue worth bestirring oneself for


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## 30seconds (Jan 11, 2014)

humble_pie said:


> interesting strategy. The probability of assignment is greatly reduced by the fact that your time frame is so short, being a weekly or at most a 9 or 10 day position. Since your puts are OTM the probability is high that you'll squeak thru the week without the underlying suddenly falling into the dustbin.
> 
> plus - to improve probabilities even further - you're choosing quiet docile tabbycat stocks with relatively low volatility. Makes the dustbin even less likely.
> 
> ...


Humble you seem to be fairly well versed on this. I am interested in selling CSP but trying to find a balance between making it worth it while managing risk. Do you use this strategy and can you provide examples of more worth while trades.

Thanks!


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## Spudd (Oct 11, 2011)

30seconds said:


> Humble you seem to be fairly well versed on this. I am interested in selling CSP but trying to find a balance between making it worth it while managing risk. Do you use this strategy and can you provide examples of more worth while trades.
> 
> Thanks!


Humble doesn't seem to come here anymore.


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## Rusty O'Toole (Feb 1, 2012)

That's right haven't seen her around in a long time. We had some great discussions about option strategy. I think she got fed up when the site turned political and everyone lost their minds over Trump.


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## Retired Peasant (Apr 22, 2013)

There is a big Options thread where HP participated. You'll likely learn everything you want to know reading that thread.
Options
I recall her often recommending the reading material at
Guides and Strategies


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## 30seconds (Jan 11, 2014)

Oh darn . Thanks everyone!


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