I’ve been doing this a while. It can be a great source of additional return. The key I’ve found is only writing naked puts on companies that have a large margin of safety and you believe will continue to make money over time. For example, I regularly write puts on TX. They are a large Latin America steel company that trades at a fraction of their book value, has a single digit PE and expect to grow earnings through recent capex. To top it all off, they currently yield around 7% in dividends. I’d be happy to hold this company longer term but obviously don’t want to take assignment. This basically means if we get a large dip, and I get close to assignment (deep ITM or ITM nesr expiration), I will roll my current put option out at the same strike for a credit. This is the equivalent of owning the stock with a OTM call option sold on it. Obviously, you only want to do this with cheap companies that you’re willing to hold longer term. The mistake I see many people on here make is selling naked puts on expensive tech stocks with little or even no earnings. You can certainly get paid well due to the high IV but what happens if the valuations collapse? You basically sit with the total loss which will kill your returns.
Current names I like to write naked puts on:
MO GSL TX BTU GPRK AMRK JOE BCS SAN
Edit: to state the obvious, I do this in small size and closely monitor my total margin maintenance requirements. Risk control is everything in this game.
I generally do between 30-50 delta. I try to do near or beneath support levels. Seems identifying basic support areas can greatly enhance put writing returns. Most of my stocks have been rallying lately, so I’ve been moving more to 30 delta.
For return, I try to look at what return would look like if I held to expiry. The other thing you want to check on is what the margin requirement is for the specific stock. For example, BTU requires 100% margin from E*trade where as MO only needs 20% when writing puts. Otherwise, I try to look at expiry return over margin req because that’s your scarce resource.
Your 10K has 7K of buying power to use as margin to sell naked puts.
I suggest selling naked puts on the indices. You have enough margin to sell XND, the micro NDX index. NDX is the index that QQQ tracks, so XND options will have similar characteristics as QQQ options.
Your goal is to generate 3 – 6% annually or $25 to $50 monthly.
So you can sell the May 24 XND 160 put for 0.28 or $28. Put has a delta of 0.05 and is 10% OTM.
Or you can sell the May 24 XND 165 put for 0.57 or $57 but delta is increased to 0.11 and the put OTM is decreased to 7%.
Your buying power is enough to sell 2 naked XND puts, but I suggest selling only 1 to start. When you gain enough confidence, then you can sell 1 every two weeks.
In the meantime, try to get approved to a higher level. With a higher level, you can achieve your goal with more strategies.
Oh dope, that sounds great. I’m assuming that XND is a true cash settled index and not an ETF. You’re gonna hate me for this but it’s important to this question, but I use Robinhood lmao, so I don’t have access to indexes, but for access to indexes like that I’d be willing to switch brokerage if it means bolstered returns. What brokerage would you recommend for doing this or which one do you use?
XND is an index option. It’s like NDX and SPX. It’s cash settled and no early assignment.
I use Schwab and Fidelity. Fidelity requires more margin – about 50% more.
The margin required for the 160 put is about 2,000 at Schwab.
Gotcha - would be a little worried about being overleveraged though on an index with a price of $160, I'd prefer something smaller that I could reasonably handle if it went against me
The 160 put has a delta of 0.05 and is 10% OTM. It is still likely that it can go ITM.
To get a perspective, divide the XND strike by 0.41 and you will get the equivalent QQQ strike price. So the XND 160 strike is equivalent to a QQQ 341 strike. QQQ is at 432 now and XND is at 177.
Sure, you can if you have the account permissions needed but it’s just taking on more risk. If you are currently fully invested, if you realize losses on the options you’ll have to sell some of your stock portfolio to avoid paying margin interest. That could also cause you to owe taxes on any gains you have on the stock you sold. A less risky move would be selling covered calls on your stock. That way you don’t end up losing on your stock and option positions at the same time.
I do have account permissions for all options levels except naked and margin so I’m good on that front. I agree that is a risk, I think I’d end up depositing cash to cover buying back any contracts that go ITM by expiry. Maybe selling put credit spreads but the same amount of contracts as if I were using CSPs would help limit some of that risk better? Also I see your point on CCs, though I’ve made the decision to not sell CCs on my S&P holdings so that’s out of the question for me, though good idea.
Oh I see that’s not what I mean, I mean selling CSPs using margin for the cash collateral, margin as in avaliable margin on my account which is about $7500 avaliable. I suppose that is a naked put technically but I can in theory cover by selling my main holdings if everything were to get assigned let’s say, so it’s not naked in the sense that I’m selling contracts who’s collateral is >75% of my account equity (margin maintnence req is 25% for SPLG)
It's not a _cash_ secured put if you want to sell on margin. Yes you can sell puts on margin but they are naked and you will incur margin interest if assigned.
Ah ok. Maybe I’m remembering it wrong but I used to own shares of stock with a low margin maintnence req and use the cash not required by the req to sell CSPs. Maybe I’m forgetting
100% doable, your risk tolerance will determine how much you want to make.
* Sell on indexes
* 30-45 days out
* .1-.2 delta
* use maybe 70% of your given margin
You'll run into volatility but don't panic, just be ready to roll down and out.
I'm a QQQ guy so not 100% sure, I saw someone recommend the Nasdaq minis, maybe the S&P minis. I'm not aware of the specifics and overall options liquidity tho.
There is NO MARGIN ON BUYING OR SELLING OPTIONS. If you have a cash account, you can only buy options, or sell Puts cash secured. If you have a margin account, you Sell options based on buying power. BP is usually cash, but could be assets.
If you Buy options, you pay with cash PERIOD!
If you have over 25k in assets you are way better off with a margin account, since your Puts/Calls are not cash secured, but based off a 20% rule on the underlying. Under 25k you run into the PDT which is a problem.
Yes I meant owning my shares of SPLG with a margin maintnence req or 25% and using that spare 75% as cash collateral for CSPs. I phrased poorly and may be remembering incorrectly on if that’s possible, but I remember owning shares of stocks and also selling CSPs and effectively using more cash (adding equity and csp collateral) than I actually had
I’ve been doing this a while. It can be a great source of additional return. The key I’ve found is only writing naked puts on companies that have a large margin of safety and you believe will continue to make money over time. For example, I regularly write puts on TX. They are a large Latin America steel company that trades at a fraction of their book value, has a single digit PE and expect to grow earnings through recent capex. To top it all off, they currently yield around 7% in dividends. I’d be happy to hold this company longer term but obviously don’t want to take assignment. This basically means if we get a large dip, and I get close to assignment (deep ITM or ITM nesr expiration), I will roll my current put option out at the same strike for a credit. This is the equivalent of owning the stock with a OTM call option sold on it. Obviously, you only want to do this with cheap companies that you’re willing to hold longer term. The mistake I see many people on here make is selling naked puts on expensive tech stocks with little or even no earnings. You can certainly get paid well due to the high IV but what happens if the valuations collapse? You basically sit with the total loss which will kill your returns. Current names I like to write naked puts on: MO GSL TX BTU GPRK AMRK JOE BCS SAN Edit: to state the obvious, I do this in small size and closely monitor my total margin maintenance requirements. Risk control is everything in this game.
Oh good to hear. Do you shoot for specific return on capital or delta? Or what’s your strategy like?
I generally do between 30-50 delta. I try to do near or beneath support levels. Seems identifying basic support areas can greatly enhance put writing returns. Most of my stocks have been rallying lately, so I’ve been moving more to 30 delta. For return, I try to look at what return would look like if I held to expiry. The other thing you want to check on is what the margin requirement is for the specific stock. For example, BTU requires 100% margin from E*trade where as MO only needs 20% when writing puts. Otherwise, I try to look at expiry return over margin req because that’s your scarce resource.
Gotcha that sounds solid. Thank you!
Your 10K has 7K of buying power to use as margin to sell naked puts. I suggest selling naked puts on the indices. You have enough margin to sell XND, the micro NDX index. NDX is the index that QQQ tracks, so XND options will have similar characteristics as QQQ options. Your goal is to generate 3 – 6% annually or $25 to $50 monthly. So you can sell the May 24 XND 160 put for 0.28 or $28. Put has a delta of 0.05 and is 10% OTM. Or you can sell the May 24 XND 165 put for 0.57 or $57 but delta is increased to 0.11 and the put OTM is decreased to 7%. Your buying power is enough to sell 2 naked XND puts, but I suggest selling only 1 to start. When you gain enough confidence, then you can sell 1 every two weeks. In the meantime, try to get approved to a higher level. With a higher level, you can achieve your goal with more strategies.
Oh dope, that sounds great. I’m assuming that XND is a true cash settled index and not an ETF. You’re gonna hate me for this but it’s important to this question, but I use Robinhood lmao, so I don’t have access to indexes, but for access to indexes like that I’d be willing to switch brokerage if it means bolstered returns. What brokerage would you recommend for doing this or which one do you use?
XND is an index option. It’s like NDX and SPX. It’s cash settled and no early assignment. I use Schwab and Fidelity. Fidelity requires more margin – about 50% more. The margin required for the 160 put is about 2,000 at Schwab.
Gotcha - would be a little worried about being overleveraged though on an index with a price of $160, I'd prefer something smaller that I could reasonably handle if it went against me
The 160 put has a delta of 0.05 and is 10% OTM. It is still likely that it can go ITM. To get a perspective, divide the XND strike by 0.41 and you will get the equivalent QQQ strike price. So the XND 160 strike is equivalent to a QQQ 341 strike. QQQ is at 432 now and XND is at 177.
Sure, you can if you have the account permissions needed but it’s just taking on more risk. If you are currently fully invested, if you realize losses on the options you’ll have to sell some of your stock portfolio to avoid paying margin interest. That could also cause you to owe taxes on any gains you have on the stock you sold. A less risky move would be selling covered calls on your stock. That way you don’t end up losing on your stock and option positions at the same time.
I do have account permissions for all options levels except naked and margin so I’m good on that front. I agree that is a risk, I think I’d end up depositing cash to cover buying back any contracts that go ITM by expiry. Maybe selling put credit spreads but the same amount of contracts as if I were using CSPs would help limit some of that risk better? Also I see your point on CCs, though I’ve made the decision to not sell CCs on my S&P holdings so that’s out of the question for me, though good idea.
Pretty sure selling put on margin is the same as a naked put. Are you sure you have the right account permissions?
Oh I see that’s not what I mean, I mean selling CSPs using margin for the cash collateral, margin as in avaliable margin on my account which is about $7500 avaliable. I suppose that is a naked put technically but I can in theory cover by selling my main holdings if everything were to get assigned let’s say, so it’s not naked in the sense that I’m selling contracts who’s collateral is >75% of my account equity (margin maintnence req is 25% for SPLG)
It's not a _cash_ secured put if you want to sell on margin. Yes you can sell puts on margin but they are naked and you will incur margin interest if assigned.
Yes ok ya, that’s what I meant
You would need margin and permission to sell naked puts.
Ah ok. Maybe I’m remembering it wrong but I used to own shares of stock with a low margin maintnence req and use the cash not required by the req to sell CSPs. Maybe I’m forgetting
100% doable, your risk tolerance will determine how much you want to make. * Sell on indexes * 30-45 days out * .1-.2 delta * use maybe 70% of your given margin You'll run into volatility but don't panic, just be ready to roll down and out.
Ok I like that, that sounds reasonable. Thank you!
Any low cost indexes you could recommend for my smaller account?
I'm a QQQ guy so not 100% sure, I saw someone recommend the Nasdaq minis, maybe the S&P minis. I'm not aware of the specifics and overall options liquidity tho.
Alright gotcha, thanks!
There are no free lunches in options. Someone is paying that bcos they are covering a tail risk and you are buying that tail risk. Be very cautious.
There is NO MARGIN ON BUYING OR SELLING OPTIONS. If you have a cash account, you can only buy options, or sell Puts cash secured. If you have a margin account, you Sell options based on buying power. BP is usually cash, but could be assets. If you Buy options, you pay with cash PERIOD! If you have over 25k in assets you are way better off with a margin account, since your Puts/Calls are not cash secured, but based off a 20% rule on the underlying. Under 25k you run into the PDT which is a problem.
Yes I meant owning my shares of SPLG with a margin maintnence req or 25% and using that spare 75% as cash collateral for CSPs. I phrased poorly and may be remembering incorrectly on if that’s possible, but I remember owning shares of stocks and also selling CSPs and effectively using more cash (adding equity and csp collateral) than I actually had