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A Letter To Loyal Readers On Using Options For Investing

investing-2-1239031-639x1034Dear reader . . . (if that isn’t cheesy enough for you, nothing is)

As many long time readers know, I’m a big picture guy and we’ve had a wide range of discussions here on the Theta Trend site.  I suppose the nature of writing for an extended period of time is that the conversation can wander, go in new directions, come back, change again, and move along.  Those of you who follow me on Twitter probably wondered why I recently sold a naked put in McDonald’s ($MCD) and this post should shed some light on that.

When Theta Trend started, our discussion was largely focused on positive theta trend following and trend following in general.  From there we moved on to both non-directional options trading and investing.  After that, we went more heavily in the direction of non-directional options trading, which is where we live right now.  The content you read is generally centered on what I’m researching at any given time.  I’ve always enjoyed learning about markets and, consequently, I spend a significant amount of time researching, reading, and exploring new ideas.

In the past few weeks I’ve been thinking about the discussions we’ve had on the blog and trying to decide if we should shift our focus a little bit to include some new content.  More specifically, I’ve been researching ideas that combine options selling and investing.  This isn’t a completely  new topic for the site (see the list of related posts at the bottom of this post), but it’s something we haven’t talked about in a little while.

As we move forward, I’m going to continue updating the results spreadsheet with active trades.  At the same time, we’ll dive into other less active strategies involving systematic options selling and investing.  As a bonus, we’ll set up a new account to track the strategies.

Practical (live) testing . . .

I recently finished the process of transferring a small IRA to thinkorswim and getting it approved for spread margin.  The benefit of a separate account is that it makes tracking positions/performance much easier and I spent a good amount of time (as in several months) trying to decide what to do with the account.  Since we’re going to talk about investing with options, I’ve decided that using it as an options investing account is the ideal purpose.  The small IRA has around 13k in it and going forward we’ll just call it the small IRA or options investing account.

The main purpose of the investing account is to segregate options investing strategies from the active trading account.  You can visit the Results spreadsheet to see the new tab on the spreadsheet.

Strategies and Markets:

I’m shooting for a post sometime this week that will discuss the specific strategies we’ll be looking at in more detail.  In general, we’ll look at selling cash secured puts, covered calls, and potentially trade some LEAPS calendars (still testing these).  We’ll also revisit some of our discussions on the Put Write Index and talk about the newer Russell 2000 Put Write Index.

Conceptually the idea is to generate additional yield on “safe” dividend stocks and some ETF’s.  The universe of stocks we’ll be looking at is going to be limited to the Dividend Aristocrats, which tracks stocks that have a 20+ year history of increasing their dividends.  I’m a conservative guy and my objective is to look at established companies with a lower chance of going to zero.  For those of you who are interested in an ETF, check out the ProShares $NOBL ETF for the Aristocrats.

Due to the size of the investing account (~13k at inception) and margin, we’ll only be able to sell cash secured puts on lower priced stocks and ETF’s.  Normally I’d prefer to limit exposure to a single stock to only 5-10% of capital, but that won’t be practical in the investing account.  Right now there are a few open positions and the Results spreadsheet has been updated with a new tab to include the investing account.

Why Investing?

One of the obvious questions about shifting the discussion is why.  I know, I know, it’s always why.  The main reason I want to dive into the investing discussion again is that I’m not satisfied with the amount of attention we’ve given it.  There are some really interesting ideas for using options in an investing context to generate additional yield and, if anything, we’ve barely introduced some of the ideas.

Another related desire I have is to do more company specific research and potentially use my Accounting background somehow.  Will it help?  Who knows, but, hey, we can try.

Related Posts:

There’s already some good information out there on strategies like selling puts and covered calls.  My friend Gav over at Options Trading IQ had this post talking about a strategy he calls “The Wheel” and another blogger (and fellow Accountant) Ben has this post about putting The Wheel into action.  The links below are also related to what we’ll be discussing.

In Case You Don’t Know, You Don’t Need To Sell Puts

Writing Naked Puts, The Unspoken Challenger To Buy and Hold

Building Your Own Put Write Index and the Search For Yield

Understanding Yield and the Pursuit of Income

Investing – Here’s a Plan to Stop Doing It Wrong

Complete Guide to Tax Efficient Investing With An ETF Rotation System

What do you think?

I’m always interested in hearing your thoughts so let me know what you think and/or what you’d like to see covered in the comments below.

  • Bud Adams

    I think its a great idea! I look forward to reading more!

    • Dan

      Awesome, thanks Bud!

  • Michael

    Dan, I think this is good idea to explore more techniques. I too have tried various techniques over the years with varied success. I started reading your site last summer. I successfully did 10 CIB trades and 1 with a loss. (I used my own entry and exit criteria). My portfolio has never been large enough to trade naked puts, but I recently transferred my company stock to my trading account and I can now trade naked puts. I trade only large, dividend paying companies as well. I now prefer naked puts almost exclusively. I think they can be safer than many other techniques as they are easier to adjust and in the worst case (outside the company going bankrupt) I end up owning the stock and I sell covered calls until the stock recovers (this has not happened yet). I buy back the option when it is 1/2 the price I received for it (if I received $.50 when I sold it, I buy it back when it’s around $.25). Over the last two months, I have closed 28 naked put positions. I held them an average of 9 calendar days and have had no losses (yet). Good Luck!

    • Dan

      Interesting stuff Michael. Since I’ll be using a smaller account, I’ll mainly be looking at lower priced stocks (sub $40-50). Your strategy is something that I’ve definitely seen people use successfully. I don’t think there’s any one magic bullet, but I’m always interested in exploring new ideas. One of the things I’m excited about is having a slightly lower maintenance strategy with a longer time horizon. Thanks and we’ll see how it goes . . .

  • I love it man. I have also thought about doing the same strategy in my personal accounts. I think it is great that you are expanding into this area. I can’t wait to see your new trades.

    • Dan

      Thanks Jonathan! Yeah, it’s something I definitely want to explore and I think a lot of people find the idea interesting. I’ve been tossing the idea around for a while so it’s cool to get to dive in! If you have any thoughts, feedback, etc, I’m always happy to hear them. Feel free to shoot me an email.