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Can you trade options super-safe?

Recently, a fellow investor and trader asked me the following question:

Warren Buffett“I don’t want to trade any longer. It’s not that I don’t have time as I am retired and have all the time in the world. But just lately, I have been giving up everything that I am making, and sometimes more. I understand why this is happening and its all due to the volatility. I have a plan and that plan is based on Tasty trade style of trading but doesn’t seem to work right now and so I am fed up. I want to make 1.5% per month, or about 18% per annum. Is that too much to ask for? I think I can get by with 1% per month (12% per annum) as all it will mean is that I inject more capital in my account. With this modified requirement, I think I can get away by looking at the screen less frequently than I am doing now, what do you think? I am thinking of spending few hours a week, if that’s going to enough but it would have to be a strategy that does not require me to “trade”.”

Here is what I think can be a great strategy for this investor and everyone who wants to boost their income but not to trade:


It will be difficult to achieve 12% or 18% annually from passive investing only. For this reason, you should not give up on trading but adjust it to make it super safe during this market.

But, to provide a meaningful advice I would need to know your situation and goals or plans such as:

1) How much money you have?

2) How long can you have them invested?

3) Do you need them in any short term period of time?

4) What do you plan to achieve with that investment – stream of income, accumulate more, preserve capital, etc.?

5) What are your trading expenses (commissions and fees)?

Also, I am not an investment adviser so take this for educational purposes and you still need to do your own work and decision and take responsibility for those decisions.

Let’s assume that you have enough money to invest (for example $50,000) and you want to accumulate, preserve capital, and after 10 years of accumulating, use income stream from dividends and options only while leaving your accumulated principal untouched. Let’s also assume you have an account with TastyWorks so your commission is $1.50 for options and $5 for stocks. Of course, this assumption can be shaped based on your needs and real account trading power but let’s use these assumptions for the sake of example only.

This assumption is pretty much inline with my own goals and although I have aggressive trades, you can omit them and use a super safe trading only.

I still would recommend basing your trading on dividend stocks. They are huge companies, lazy in volatile market (usually), they pay dividends, and if you get assigned, you will be OK holding them for some time because you will get paid to do so.

To choose the dividend stocks, you can use my watch list on my blog or create your own.

Then pick only stocks which are highlighted in green and trade them.

Dividend stocks Watch list

I recommend picking and trading options, as described below, only against the stocks highlighted in green as these are trading under my calculated fair value. If the stock price goes lower and you get assigned, you are guaranteed buying for a good price and recovery will be faster and most likely happen (there is at least >50% chance) so you will not end up holding the proverbial bag.

If your account is only $50,000 as in our example, be slow and conservative. Pick less priced stocks such as ABBV, AWK, BAC, BMY, CAH, etc.


 · Simple put selling – picking up crumbs


Once you pick a stock, sell a naked (or cash secured) put option against that stock. Choose 20 to 45 DTE and find a bid price at 0.10 per contract or less. Most of the time you will be able to sell the put for 0.10 or 0.15 credit. You can go as low as 0.05 credit (this however works best for large accounts).

But here comes an important thing: You do this (sell naked puts) only against stocks you want to buy! You must look at selling the put as that you are buying the stock.

This is an absolute MUST! If you are going to sell a put against a stock you in fact do not want or even do not have money to purchase, then DO NOT SELL THAT PUT!

Once you sell the put, sit on it and do nothing.

If the stock goes down, let it assign. Do not worry about the assignment. Take the stock. That’s why you chose dividend stocks in the first place. I got assigned many times in the past and my average holding time in these good quality stocks was 6 months. After that the stock was back up and above the original assignment price.

Do not sell covered calls when the strike would have to be below your assignment break even price, for example, you sell against Kellogg’s (K) 52.50 strike and collect 0.15 premium and you sell 2 contracts. Your break even price will be $52.35 per share. If the stock drops to $48 a share, let it assigned. Start selling covered calls only if you can pick $52.50 or $55 strikes (above your assigned break even price of $52.32 a share). If these strikes carry no premium you sit tight and wait. And while waiting, collect dividends. And again, when selling covered calls, choose 20 – 45 DTE.

Here is an example:

Dividend stocks Watch list

Dividend stocks Watch list

You may hear people bashing this strategy, telling you that you are leaving money on the table and that it is generally a bad strategy which brings a little income for a large risk.

It is all humbug.

People generally fail to recognize that it is about a safe trade and not maximizing income. I do not care collecting $5 per trade if I am almost 100% guaranteed to collect this premium forever and not to worry about rolling, assignments, losses, etc. Of course, I personally do that (roll, worry, get assigned, etc.) because I First – like it, Second – want to accumulate money faster, and Thirdly – know what I am doing and do it.

As I will age and get closer to my retirement, I will be doing the exact same thing I just described above. No other risky or too aggressive trades. The farther away from the market mess I get, the better no matter what cost.

I recommend you to read an excellent book by Jerry Lee: Selling puts my way.

He describes a strategy he calls “collecting crumbs” or what others leave on the table. He only sells puts and collects 0.05 credit. But he sells large amounts of contracts but as he says, he is pretty much never assigned. And the mess and selloff in the markets are far away from him so he doesn’t have to worry about the market craziness at all.

With this strategy, you can use larger portion of your buying power but never go below 50% of the used BP. But here is another thing to be alerted about – do not use margin! Even if you are in a margin account, for example, sell as many put contracts as you can cover by a stock purchase. You can be a bit more aggressive on a margin account, but I would still do the math:

Let’s say you take into account a Kellog’s assignment at 52.50, that is 5,250 cash or 1,050 when trading on margin (this is what it will cost you to buy the stock if assigned and on margin).

Then double the margin requirement to $2,100 and use only 50% of your account available buying power: $50,000 / 2 = $25,000 / $2,100 = 11.90 = you can trade up to 11 contracts and still stay safe.

If we sell 11 put contracts collecting 0.15 or $15 per contract, you pocket total $165 dollars for the next 20 – 45 days.

Then, sit on your hands and do nothing until the contracts expire or get assigned.

If it expire, great, repeat. If you get assigned, great, do the math and start selling covered calls, and collect dividends. If calls cannot be used do nothing. This strategy will unglue you from the screen and gives you a peace of mind because no matter of what trade outcome, you will be fine with any of it.

You do not have to worry if the market goes temporarily down even if there is a crisis and a huge sell off (of course, this means that you look at investing as Buffett does and during crisis and selloff panics do not sell your stocks but sit tight and possibly even buy more shares; this is a whole premise of investing, you invest for a long haul and ignore a short-sight of Wall Street, like many long haul investors who are long haul only until the next bear market).

When assigned and in an accumulation phase, you can elect to keep some shares for dividend income. For example, you choose to sell 2 Kellog’s, 2 KO, 2 BMY and 2 ABBV (if on a margin account) and your BMY and Kellog’s get assigned, you may elect to keep Kellog’s so you start selling covered calls against BMY only. I myself am buying dividend stocks for dividend income which I do not intend to sell and I will not be selling covered calls on those stocks (for example, I have a few positions with way over 100% of capital appreciation, so why selling those positions? I want them and let them appreciate over the next 20 or more years!).


 · Buy-write covered call triple income strategy


Another strategy you may investigate is a buy-write triple income. I do not do that as I do not feel comfortable with that strategy but pretty much you buy a stock while sell ATM or slightly ITM covered call a day before ex-dividend to capture the dividend and get assigned to sell the stock and have a gain on the option and the stock. For example: Kellog’s have an ex-dividend on Friday. The Friday is also an expiration day. So on Thursday before market close you buy a stock for $60.30 and sell $60 strike covered call at the same time. You will collect $50.00 options premium (intrinsic value + remaining time value per contract).

The best case scenario is that the very next day, your contract expires in the money, you get assigned and sell the stock, and keep the premium and collect the dividend ($50 premium + $50 dividend – $3 stock loss) * number of contracts.

Bad scenario is that you get assigned on Thursday, which sells the stock, so you only realize gain on the premium, no dividend, and a small loss on the stock.

Ugly scenario (sort of) the stock gets down, your option expires worthless, you still get a dividend, but you may get stuck in a stock position in a lot higher price then when selling puts for example. In the example above we sold put at 52.50 and I would like to see Kellog’s drop to $52.50 to buy more shares. With a buy-write strategy, you will be buying at $60.30, it is still a good price, but not as good as 52.50. This is a reason I do not like the buy-write strategy much.


 · Jade Lizard strategy


One more strategy you can employ is a Jade Lizard strategy I once explained a bit more in my older post “What is a rationale behind trading Jade Lizards and trade management“.

With this strategy, you would still treat the put trade the same way as I described above but add a call spread to your naked (or cash secured) put.

When opening a call spread you need to choose your call strikes in such a manner that when the stock shoots up above the call spread, the loss on the call spread will be smaller than a premium collected when selling puts.

For example, you find a stock where you sell the following:

-1 single put strike at 60 per contract
-1 call spread with strikes 65 / 67.50 per contract
collected premium 2.80

In the example above your potential loss on the call side is 2.50 per contract but you collected 2.80 premium.

In the best case scenario, all options expire worthless and you keep 2.80 per contract premium (or $280 total per one contract).

If the stock goes lower, your call spread will become worthless and your put will be in the money. You will get assigned to the stock, keep the stock, collect dividends, and proceed as described above in this post.

If the stock goes up and above both of your call spread strikes you close the spread (or let it expire in the money in which case both legs offset each other) and you realize 2.50 loss per contract. But because you originally collected 2.80 premium per contract, you will be left with 0.30 premium profit per contract.

If the stock lands in between the call strikes, you must close the spread manually at expiration for lesser than full loss. It still will be offset by your original premium.

With this strategy you will need a bit pricier stocks. It will be difficult these days to find a good Jade Trade but there are a few good stock candidates to trade. This will depend on your capital available though.

Hope this helps to find an option strategy I consider safe (in fact safer then buying and holding a single stock), let me know if you have more questions.

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