THE SHORT PUT-ACQUIRE/KEEP PREMIUM-COVERED CALL CYCLE
I have touched on this topic before in separate posts, but thought I'd refresh the notion of what I like to call "strategic acquisition" here, since I get repeatedly asked about how I go about acquiring shares in an underlying I actually really do want to buy and hold, usually for an indefinite period of time (we're talking years here). The focus of these acquisitions is not on growth (although that's sure always swell), but on the dividends owning the shares provide plus any premium I collect that reduces my cost basis. This may seem "radical" ("What?! You're not acquiring the shares for growth potential! Ridiculous!"), but the fact is that you cannot count on growth ad infinitum, and if you're going to bail on your dividend earning positions "intermittently" as they appear to run out of steam to the upside, then the whole purpose for owning the shares in the first place -- dividends plus cost basis reducing short call premium -- is somewhat out the window.
All that being said, here's the basic cycle:
1. Sell 30 delta puts.* Depending on your account size, how aggressive you want to be, and how patient you are, you can sell one contract, 45 days-'til-expiry or ladder these out in time (e.g., one at the November expiry 30 delta; one in the December at the 30; one in January at the 30).
2. Allow the short put(s) to go to expiry.
(a) If price is above the short put at expiry, the short put expires worthless, and you keep the premium you received for selling it. You can then re-up the position in the next monthly at the 30 delta, and then lather, rinse, repeat the process. If you've laddered out; you can re-up in the back month at its 30 delta.
(b) If price is below the short put strike at expiry, you are assigned shares, after which you proceed to sell call(s) against them to reduce your cost basis over time. I generally sell the 20-30 delta short call against, and then roll the short call for duration when it has decreased significantly in value or-- if it has been broken -- to keep it clear of current price (because I want to hold on to the shares; I don't want them called away).** You can naturally continue to sell short puts if you want to continue acquiring additional shares at lower prices.
* -- Naturally, selling a given 30 delta may not be where you would want to ideally acquire, so having a fairly long list of underlyings with "ideal" buy points is a good idea. While you're waiting for some, others may be "ripe." For me personally, I generally stick to a small number of comparatively high yield exchange-traded funds -- e.g., EFA, TLT, IYR, SPY, but I'm fine with waiting months for potential buy points and/or am willing to sell 30 deltas on a quarterly basis as compared to forty-five days out in time to get strikes more distant from current price than a 45 day 30 delta would be (compare SPY November 17th 244 short put (28 delta) with, for example, the March 29th (Quarterly) 237 (29 delta)).
** -- When rolling a short call out for duration, you always want to roll for a credit. If you want to attempt to improve the strike, you generally have to roll out further in time to do this, which is naturally okay in this case, since you want to hold onto the shares for the dividends. However, you don't want to roll out further in time than you absolutely have to, and you may have to consider improving strikes a bit more incrementally than you'd like. I mean, who wants to roll out a year to get their calls clear of current price? (Extreme example, but you get the idea).
All that being said, here's the basic cycle:
1. Sell 30 delta puts.* Depending on your account size, how aggressive you want to be, and how patient you are, you can sell one contract, 45 days-'til-expiry or ladder these out in time (e.g., one at the November expiry 30 delta; one in the December at the 30; one in January at the 30).
2. Allow the short put(s) to go to expiry.
(a) If price is above the short put at expiry, the short put expires worthless, and you keep the premium you received for selling it. You can then re-up the position in the next monthly at the 30 delta, and then lather, rinse, repeat the process. If you've laddered out; you can re-up in the back month at its 30 delta.
(b) If price is below the short put strike at expiry, you are assigned shares, after which you proceed to sell call(s) against them to reduce your cost basis over time. I generally sell the 20-30 delta short call against, and then roll the short call for duration when it has decreased significantly in value or-- if it has been broken -- to keep it clear of current price (because I want to hold on to the shares; I don't want them called away).** You can naturally continue to sell short puts if you want to continue acquiring additional shares at lower prices.
* -- Naturally, selling a given 30 delta may not be where you would want to ideally acquire, so having a fairly long list of underlyings with "ideal" buy points is a good idea. While you're waiting for some, others may be "ripe." For me personally, I generally stick to a small number of comparatively high yield exchange-traded funds -- e.g., EFA, TLT, IYR, SPY, but I'm fine with waiting months for potential buy points and/or am willing to sell 30 deltas on a quarterly basis as compared to forty-five days out in time to get strikes more distant from current price than a 45 day 30 delta would be (compare SPY November 17th 244 short put (28 delta) with, for example, the March 29th (Quarterly) 237 (29 delta)).
** -- When rolling a short call out for duration, you always want to roll for a credit. If you want to attempt to improve the strike, you generally have to roll out further in time to do this, which is naturally okay in this case, since you want to hold onto the shares for the dividends. However, you don't want to roll out further in time than you absolutely have to, and you may have to consider improving strikes a bit more incrementally than you'd like. I mean, who wants to roll out a year to get their calls clear of current price? (Extreme example, but you get the idea).
Comment:
For my retirement account, I generally avoid single name risk. Companies, on occasion, do go bankrupt, undergo merger and acquisition, and/or reduce or eliminate divvies for whatever reason. All of these circumstances can jack up a perfectly good divvy position, and, well, I'd just rather not. Naturally, this dramatically decreases your choices, since the number of exchange traded funds with decent yield and decent options liquidity is somewhat small.