SELLING PUT OPTIONS - How I get Paid to Wait. Passive Income for Long Term Investors
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- เผยแพร่เมื่อ 16 ก.ย. 2024
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I am literally getting paid to wait for the prices that I want in the stock market.
And it’s not a small amount of money, on an annualised rate, it varies between 8-20% Return on my cash.
The name of this strategy is called, Selling Put Options.
So a big problem that I was facing was that there is nothing to buy. My cash pile has built up and is now close to 50% of my investment portfolio.
What is a stock option?
The lingo for These documents are named, Call options and Put Options.
For this strategy, What we really want to look at is the Put Options.
Put Options
A Put Option is a document that gives the owner of the document the right to sell their shares to the person who wrote the document, at a certain price within a certain timeframe.
This is the same strategy used by Warren Buffett, Phil Town and I am sure plenty of other investors as well.
Mindset and Risks
Well I was going to buy at about $220 regardless.
I would have then watched the stock price fall to $160.
Would I care? No, not at all.
Why?
Well because I am confident in my valuation of the company and I know that if I just wait, the price will be fine. It’s a good company, making lots of money.
Buying any stock is the exact same.
I decide on the price I want to pay. And then I buy when I get that price.
The price often goes lower anyway, but I don’t care.
I’m in it for the long term. The value of the company will be reflected in the share price eventually.
So your mindset is really critical with this strategy. If you are a truly long term investor who feels very confident in the company and your valuation.
Then this strategy will make you extra cash.
You will get paid to wait for the great companies that you want at the prices you want.
Literally the exact same thing you were doing anyway ,which was sitting in cash waiting for good prices.
My Strategy (at the moment)
Timeframe
My strategy at the moment, is to look at the option contracts that expire around 2-4 months in time as I think that is about the best ROI for the time frame.
Plus this means I can reassess the investment each quarter, listen to the company speak and look at the financials again.
So I think the sweet spot is about the 2-4 month time frame.
ROI Goal
I’m also wanting to get over 2% return as a minimum over this 2-4 month timeframe. So that is really only going to happen with companies that aren’t too far away from my buy prices.
That's a very smart strategy, the only downside that I can think of is that you may miss an opportunity because you tied your cash. Let's say that you sell a put option and you don't get the shares, you only get the premium but another company on your watchlist hits the buy price and you miss buying it with that cash because it was tied to the contract or 10 days after you make the contract you discover another investment that you don't get to buy. So you are paying in opportunity cost because the cash is not exactly liquid but from a risk/reward perspective, it's a great strategy.
You are right, so my plan isn't to tie up all my cash up in this, maybe 3/4 of it. Then I still have options
Awesome! Thank you for this clear explanation! 🤯
:) glad you liked this one as well
I believe "Ed" has to "execute the option." The option contract will not be automatically fulfilled. The other party has to execute it.
Yes he does, exactly right 👍
VERY INFORMATIVE AND SMART STRATEGY!!! Videos with potential candidates would be very useful, if you're agreeable.
Good idea 👍
Andrew; thanks for the video!!!!! Looking forward for the Interactive Brokers how to apply the strategy step by step...... cheers from Mexico!!!!!!
Glad it helped, I'll have that video out on Thursday. Thanks
Hey Andrew, just found your channel. I am extremely glad I did!
Woohoo, welcome :)
love this. complete!!!
Thanks 😊
Nice vid. They sure have a place in value investing. Same with selling covered calls and collar strategies. Forgot to talk about the short-term capital gain tax implications ;)
You are right, it is a capital gain. Hopefully people read this comment. Thanks
Hi Andrew, the reason the option wasn't exercised is because it's an American-style option (looks like you're using Saxo, and they provide American-style options). American-style options, which give the holder the right to exercise the option at any time before expiry, get executed before the expiration date (except in some very specific cases involving dividends). The American-style option is always worth more in the market than once it is exercised, so it won't get exercised until expiry. That is a counterintuitive result in contrast to European-style options, but that's the reality. Hope that helps, thanks for the video!
Great insight, thank you a lot. I didn't know this.
Really good video.
You are doing awesome bro
Thank you 🙌
Great video Andrew! You never disappoint!! Big fan here from Spain 🙌🏽
Thanks, glad it helped 🙂
Amazing! I was exactly in this same dilemma as I cant find an entry at present into most of the value stocks on my shortlist. You've just solved that concern in a great way. Thank you Andrew and looking forward to the next episode where you cover exactly how to do this in Saxo as that's the platform I can use for this!
Very glad it helped 🙂.thanks for the comment
Good day Andrew, thanks for the video. Was waiting for this since December 😄.
Glad it helped. It took me that long to put it together :)
Amazing video, I know nothing about options but was able to follow….
Great! glad it helped
Selling covered puts are a great way to get that extra cash. Something I am slowly learning
Glad you thought this was interesting. Thanks 😊
Thanks for your transparency! Interesting strategy, covered calls may be interesting too
Keep it up, man!
Thanks, glad you found it
This is a smart strategy ..Thanks for sharing ..I have thought about this and heard about this but never actually tried ..This makes sense and makes me open to trying it .
Happy it helped! It's worth trying. Start with just a test and give it a few months to see how it all unfolds
This video is super informative! I want to apply this to my Robinhood account but they make it a little confusing to the average investor. Would you be willing to make a video showing how to sell put options in Robinhood with the example being Sony or something? Thank you!
Thanks for the kind words. I'm glad it helped. But I don't have robinhood. And I can't get it either as I am not american. So unfortunately I can't show you. I'll have a video next week on saxo and interactive brokers which should help. Try figure out the same steps on robinhood.
@@AndrewBrownInvesting sounds good mate, I’ll be watching out for those
Great video.I don’t understand why don’t Ed just set a stop loss at 220 without having to pay a premium whatsoever?
I guess they want the choice? Or they are using the option in a more complicated hedging strategy
The price goes down the minute i buy something. I know how jou feel. I sometimes wonder if i should buy tesla just to see the bubble burst. Great video i have stayed away from options just because the name sounds scary. But this strategy makes good sense
I was exactly the same until I spent a little effort to understand them. It's not as hard as it seems. I'm not smart and I worked it out
Maybe you said this and i missed it but I believe you can only do this in taxable accounts like Margin accounts (No RothIRA, TFSA, RRSP, etc), something worth mentioning. Great videos, keep it up!
Good point, I didn't say this. I'm not american so I am unfamiliar with RothIRA's and stuff like that. Glad you commented, thanks
There is an opportunity cost to selling puts. If you sell the put you are committing to buying the stock and therefore those funds are frozen for the contract period unless you can buy the puts back at a lower price than you sold them for. Just a thought...
Agreed, but in my situation and I think many others, there isn't many stocks that I would buy in general. Unless I find something else during the lock up period (which has been hard). So I'm not locking up all my cash, just in case. You are exactly right though
Great channel! I just discovered it today but already like it a lot!
Amy plans to make a video about your decision and experience living in Ukraine?
For me, a Ukrainian living abroad, it's a very interesting topic!
Glad you found me, nice to have a Ukrainian here. I live Kyiv. I'm not planning on a video about living in Kiev. But it's great in my situation, I have friends here, cost of living is better than australia, and everyone is really accepting and friendly. Plus ukrainians don't care about quarantine, everything functions as normal.
What happens if the price goes down to your ideal price because something fundamentally changed in the company? Would you just sell as soon as those shares were assigned?
That would be a strange situation. I guess it would have to be pretty dramatic. I guess if I didn't want the stock because I was wrong with my thesis, than yes, I'd just close out if the position. I hope my thesis is solid before I'm selling a put in the first place. Good question
We need oil tanker update!
I agree, just waiting on the quarterly reports from all the companies
You may prefer to keep your emotions out of your trades but I have found out that my own emotions are a great indicator of market emotions. That fear I had during the Corona Crash only helped me to keep buying all the way down.
Smart. It takes a strong mind to do that. Well done
Ed sounds like a wise man , he got out on time
Ed is a smart guy ☺️
great video, love it.
Thanks, happy to hear
Great video, thank's.
Glad it helped 🙂
The major drawback to this strategy is that your money is locked for the time period and you can't use them to buy anything that actually reaches your price target unless you are willing to go on margin.
I agree, that is why I wouldn't have too much tied up. Maybe 50% of my cash position. Good comment, thanks
Great video and very timely. What are your thoughts on selling covered calls?
I don't think it is necessary, why do you think it is a good idea?
Currently, I'm significantly overweight Bank of America and it's something I'm considering doing with some of the shares.
this is great thanks
Thanks mate
hi Andrew, thanks for your videos,
two questions
1 - To execute de contract you need to wait until the ending date? or it can be executed in between if the price go below the strike in the meantime?
2 - Do you need to keap the cash in your account for all the period, until the end of the contract ? or you can use the cash for something else?
thanks
I was legit working on a script for this same exact video topic lol... great minds think alike 😜
You can do a better job at explaining than me 🙂
Hi
Please make a video on how we can use options as a insurance for our long portfolio.
Great question, So I don't need insurance for my portfolio because I'm not risking anything more than I can afford to lose. Plus if we are long term minded, options won't help us unless we get lucky. I don't think there is a good strategy except selling put options.
@@AndrewBrownInvesting thanks for the reply. Yeah true
I think it didn’t execute because it wasn’t the date of expiration. So Ed can just sell to close the put he bought at a lower price and keep his shares. If the stock price is to high like the Amazon example you used you can do a put spread and only tie up the cash you want to risk. For example I just sold BABA put at 250 and bought a put at 240 so I’m only using 1000 dollars of my cash for that trade. My max loss is 1000 if it goes below 240 at expiration but I made over 200 dollars in premium. I like to sell puts or calls 3 weeks out because that is the time when you have the fastest time decay which.
interesting strategy. It is far different to mine, i don't see the point in selling calls for me, but cool that you are doing it. :)
I started studying options this year so I converted half of my portfolio into LEAPs. Currently I’m buying long term calls 2 years out and selling shorter term calls for protection/income. If there is a crash my portfolio has more downside risk than just holding the stock so I try to offset that risk with selling calls. My goal is to eventually be able to own 100 shares of Berkshire to be able to sell covered calls on it instead of using LEAPs.
Very interesting, you are far more knowledgeable on this than me. You should make a video 👍
@@AndrewBrownInvesting I probably should! I’m thinking of starting a TH-cam channel. Thank you for the encouragement.
Definitely do it. It will make you a far better investor. Best way to learn is to teach
What do you think about selling deep out of money covered calls to reduce cost basis and increase margin of safety?
I don't understand. When I enter in a way in the money Put into Trader Work Station to sell the Put, it charges me? For example, any Put Sale below today's price of $142 costs me.
i seriously didnt know this was possible i thought the only option for me is to lose money
It took me a while to realise it as well, but it's a great strategy. And safe, if used the way I explain and you are a long term investor
B-R-I-L-L-I-A-N-T Video!!
too kind, thanks
Alibaba wasn't the best example in retrospect..
Haha well I still made the premium and had the shares assigned to me. Maybe in a few years it still is a good example 😂
Allow me to share with you what I think happened when you didn't get the shares. I did not do any option trades in my life but to my knowledge unlike futures the entity owning the shares is not obliged to actually sell them to you. So the guy owning the option just wasnt in time or choose not to exercise the option.
I think that's right. Thanks.
I know about this strategy for a while but I have a trouble with my broker. What European broker allows this? And please don't say Saxobank.
Interactive brokers definitely allow it
I understand that stocks do not only go up, but historically the S&P500 in the long term does.
So I was thinking, assuming that a crash might happen in the next couple of years or even months from now, would it be wise to sell VOO/SPY puts at a strike price 40-50% lower than the current price?
Worst case scenario, you end up buying an ETF that will eventually go up, at a huge discount.
Right? Am I missing something here?
PS: I have zero experience with option trading
Hi great question. Firstly, don't assume a crash might happen. We have no idea.
Selling puts on VOO at a strike 40% lower than current price sounds great but no one will buy those puts from you. So I don't think you will be able to do that. You can check, but I doubt it.
In theory your idea is very good, just unlikely to be possible because who will buy that contract from you. 🤷🏻♂️😅
do you have to have the cash currently in your account when you write the contract?
Technically no, but you should. Otherwise the risk and returns change dramatically. It also depends on the platform you are using and your account value
I like your video it is excellent but I have a question for you what's about stop loss?? It is required???
Stop loss is not required, ignore it. It is just a strategy some people like to use but not necessary. Thanks for the kind words 🙂
Can you sell the put option before the expiration date even though you pocketed the 400 before and get additional money from selling the option early?
You can, but it will cost you a piece of that $400. Because you will be buying a put to cover your own. Therefore you need to pay the premium this time
Why Ed don't add stop loss order?
good question, but Ed would like the option to sell. He doesn't have to. For example, if the price goes to $160 but our agreement was for $220. well he can sell his shares to me at $220.
@@AndrewBrownInvesting but if this happens (= the price goes below 220), it's very bad for you because u must buy something at 220 when u could have bought it at 160 in the open market, am I wrong? .. so in general, if the price goes below the strike is a big drawback, isn't it?
Are you also buying covered calls for your existing positions? (obviously with strike price of price you think will be overvalued)
No, naked puts. I want the stocks. So no need to cover
@@AndrewBrownInvesting Sorry, I meant "selling covered calls". What I meant is the situation when you hold the stock (let's say you bought BABA for 220 and you're holding it), and it goes to the moon (let's say BABA goes to $400, well above your FV). Are you willing to sell some covered calls with strike price at $410 or $420?
I don't think I need to worry about that 😃😂
@@AndrewBrownInvesting Gotcha, I just thought it's something you would do. Being paid to wait, till the stock is overpriced so that you can sell (good for recovery stocks I think)
@@wittttttt selling is far harder. I'll actually do a video explaining my strategy for selling sometime soon. Great question 😊
Hi Andrew hope your doing well,
Im new to selling put options, I tried to sell a put option on a stock that im interested, i received the premium but my P&L on that put option is negative, why is that ? Does that mean that i im losing money on the put, i dont understand it. Thank your for your help !
Great question. The answer is no, you are not losing money. For some reason, over the timeframe of your option, it starts as a negative and slowly works it way to 0. (If the price doesn't fall to your strike price). So by the end of the period, it will say 0. But you collected the premium. This is just how the reporting works. It's the same for me
@@AndrewBrownInvesting Yep i got it thanks for the answer 👍🏻
Interesting
Thanks 😊
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