Ok say you have a bunch of company stock and you want to retire in mid 50s. Say your portfolio looks as such. 400k 401k. 200k cash 300k brokerage. Let's say most of the 300k in brokerage is company stock in say Amazon or Microsoft. Say you spend 50k a year and you are 55.
Could you spend your cash on hand. Sell 3-4 months ootm calls curr price + 8-10% strike. Use the premium to refill cash bucket and rinse and repeat. If stocks get called away you wheel it and sell ccp.
Example you have 1500 shares of amazon. Current price is 187. You sell Sept 205 calls for $7 premium. That would be 10500 in premium. If you did that 4 times a year that's 42,000 in premiums or would replace 85% of your cash withdrawal without having to liquidate your portfolio in down or sideways market. Only down side is if stock sky rocket 15+% or more than your profit is capped at 10%+premiums which still is not a bad situation. I feel this could be a useful tool when thinking about income strategies as you are close to retirement. Could be perfect bridge strategy til 59.5 or SS age.
Anyone doing this or something similar?
Anyone using this strategy for income.
byu/clove75 inoptions
Posted by clove75
14 Comments
I am retired at 39, using my portfolio for income, and while my strategy is different it does rely on a lot of theta plays. Your idea is sound with a sideways and upward trending Amazon price, the problem is when the market trends down and you go to sell your next covered call, you will find that if you stick to the same strike as before, the premium will be a lot less. So now you are faced with either earning a lot less for your premium income, or selling a call with a strike which is below your cost basis, because now the calls that earned the premium you rely on are lower. Should that get assigned, you are reducing your portfolio.
I am curious on how you could sell 4 times a year ( eg once a quarter?) and get that kind of premium ?
I have not looked at AMZN option chains but I do sell otm CC on AAPL or MSFT ( obviously in smaller lots) but never found their bid price to be that high for 0.3+ <= delta OTM even for 90DTE.
No reason that I can see that it wouldn’t work. Only thing is to check your math and time things well enough based on the available strike. Also might want to check your math. It’s May right now, so the Sept calls are 4 months out, which means you’d only net 31500 not the 42,000 you posited given it’ll be 3x per year and not 4. To get close to your proposed number right now, you would have to move to the 200 September strike (though obv the market is closed right now).
I believe covered calls only work on certain stocks, but theoretically you’re not wrong. NVO, COF, and CROX are my favorites, but it won’t last forever. If the stocks fall, you might just break even for the year. If you pick right, you’ll do fine in the long run. The only thing I would change is your 4 month plan. It would pay a lot more selling every 2 weeks. I also think you’re forgetting about capital gains tax.
Isn’t this just half of The Wheel strategy? The other half selling cash secured puts to gain position.
Still gambling. If market acts irrational and you lose then plan b is back to work?
You have 1500 shares of AMZN valued at 280 K. You plan to sell 3-month covered calls 4 times a year and have 42K a year or 3500 a month.
Consider this alternative:
Sell 30 DTE NDX puts, for example, Jun 7 16925 put for 35. Your account has option buying power of 200K which is sufficient to cover the margin requirement for the put which is about 160 K.
The NDX put has a delta of 0.08 compared to the AMZN call’s 0.35.
You can also sell SPX puts. The Jun 7 5020 put is 12 and requires margin of 50 K so you can sell 3. Delta is 0.12.
With this strategy, your shares are not coupled with the options. You can buy or sell them anytime.
Here is the benefit of index options:
[https://www.cboe.com/tradable_products/sp_500/spx_options/](https://www.cboe.com/tradable_products/sp_500/spx_options/)
Why use options at all? You have enough buying power to purchase leveraged etfs or individual (not penny) stocks. Based on the trend, you can buy and sell them to make $10k per quarter. Of course you will need good risk management with entry and exit strategies ironed out.
CC is great but it doesn’t consistently work in you favor.
OP,
One more question:
Assuming those AMZN are rsus.
Say depending on how they vested over the years, you have average cost basis of $100.
So as long as they are not ‘called away’ , you are looking at a healthy long term gain of 87/share which hopefully will increase.
The moment they are called away and if you use the same money ( from assignment) to buy back AMZN, are not you starting from Zero capital gain ?
Asking: As for same reason I could never sell my RSUs and for one of the companies my average cost basis is $180 while current market price is 400+ 🥲
So what’s your thoughts on this ?
Why such long calls? Wouldn’t it make more sense to sell shorter term (< 30 days) with < 0.30 delta and take advantage of the theta decay. With the same ITM probability you’ll make more money by collecting lower premiums more often. Of course this requires paying attention so you can buy back or roll your CCs to prevent assignment should the price go up quickly. Pick a threshold of say 50% of your prophet and buyback or roll when it gets less than that.
I have some RSUs that vested and am planning to start selling CCs against them as you describe. The stock has low volatility and it’s a way to make some money on it until I get into a lower tax bracket and can sell.
My Strategy with a little more than 1m is like this.
Keep the majority of funds in a Mutual Fund that pays slightly over 5% a year (paid out monthly). This account allows me to use the same funds for Cash Secure Puts.
I trade FDA catalysts (PDUFA dates for approval or denial) on small cap bios.
The majority of these go up towards the FDA date (typically get out before the approval/denial).
So you’re making money every month off of your mutual fund. You are typically doing cash secure, puts 2 to 4 months on the FDA run-ups. There’s a lot of volatility which helps the premium be anywhere between 10% to 20% depending on your strike.
If you end up having to buy the shares, it’s typically within the margin of the premium given so you could sell immediately, Or hold going into the FDA but getting out before. Typically I’ll use the premium to buy more shares and do the covered calls on the same plays.
I don’t typically like holding these stocks after the FDA approvals were denials. But following the stocks for 2 to 4 months gives you a good insight on the true value and market cap of some of these plays. I sometimes will get back into one after FDA approval if the price and market cap seemed correct for the potential of the drug. These typically end up being my long holds, and can be very lucrative (But not falling in love and selling covered calls on se so that you eventually get your money back into the mutual fund and repeat).
I am only trading income strategies on SPX. Check SPX Best options strategy. It is delivering good results for the past 2 years!
The things you would have otherwise learned trading smaller will hand you your ass multiple times before you begin to win. Do not trade within your only tax deferred account. Withdraw 10% to an IRA and begin your trading there.
Let’s say trading gets real fast.
I think there’s another downside but not too sure. Something about if the stock plummets and you now hold $50k value instead of $500k.