Could this work as an income stream?
Select an ETF, such as SPY, IWM, or QQQ
(1) buy an ATM LEAP put (1yr+)
(2) sell a 1DTE OTM put just outside of the expected move at end of market
(3) adjust ATM long put according to expected move
Variant to replace (2) above:
(2a) sell a 0DTE OTM put just outside of the expected move right after the opening range breakout; let expire worthless or close acertain profit target (50%, 80%, etc.)
(2b) sell a 1DTE OTM put just outside of the expected move at end of market
If price moves down to OTM 0DTE/1DTE short puts and assigned, then adjust ATM long LEAP put for a profit to offset loss of short put breach.
If assigned, sell shares.
ATM Long LEAP caps loss as insurance against crashes and keeps buying power reasonable (much less than purchasing shares and selling covered calls or selling cash secure puts neither of which have down move insurance projection in the event of a major correction).
Example with IWM:
(1) buy an ATM LEAP put, e.g., 19SEP25 (382) @ 220 strike for $14.42 ($1442); uses $982 BP
(2) sell a 1DTE OTM put just outside of the expected move (+-2) at end of market, e.g., 3SEP24 @ 217 strike for around $.2 ($20)
OPTIONALLY sell a 0DTE OTM put after opening range breakout for around another $.2 ($20)
When IWM stays above short puts we collect $20-40 daily per contract per day.
NOTE: selling 2 CSP daily (0DTE and 1DTE) without the long ATM LEAP would consume $5482 of BP. With the long ATM LEAP in place the BP is reduced to $3838.
While these ETFs provide less premium than selecting high IV stocks, they are diversified and don’t have issues to contend with such as earnings, etc.
Viable income strategy? Buy ATM LEAP put and sell OTM leap puts
byu/Mr_Peripatetic inoptions
Posted by Mr_Peripatetic
4 Comments
the atm long put leaps will have a wide bid ask spread and huge extrinsic. making adjustments to it will be very costly. i would rather buy a deep itm put like 90 delta, which has much less extrinsic value, and just leave it be.
also, using an etf means you can get assigned on the short if it goes itm or it has an upcoming dividend. using SPX would be better but would require more margin.
You can look up the risks of poor man’s covered put or diagonal put spread.
But off the bat, I would say your plans risk on the spread for LEAP,s. The spread is something like 300 bucks, so every time you want to adjust by quickly selling and buying a new leap, you will likely take a minimum of a 150 loss(provided someone accepted your offer at mid). As such, it would be hard for you to adjust the leap appropriately.
Other issues I can think of are the normal risks of a pmcc/pmcp.
This strategy would have gotten murdered over the past decade. What happens when you buy the leap and the market is up 1% 3 days straight and you’ve collected $20 in premium daily but your atm leap has lost $400 of value? And then you sell your 0 dte but all of the sudden the strike is higher than your long put. And then the market retracts a bit and that 0 dte is in the money and oh shit, now you’ve locked in that loss and have no position on anymore.
Selling these daily as 0DTE and 1DTE outside of the expected move, since the time decay is so quick relative to a 120DTE ATM long put you can really clean up for very little buying power and extraordinarily low risk since you own an ATM long put to protect you against any downward move. Seems like a single contract of this using the 120DTE ATM long variation could bring in around $300 a month for three months with a single contract using almost a few thousand dollars buying power. Obviously one big negative is the daily trades in daily management, which many people don’t want to do. They want to put on a trade and have it work for them for days weeks or months. So there’s a lot more management, though it doesn’t seem terrible. One could have much less management, and could still do pretty well, though not quite as good if one were to sell weekly puts against the ATM long put rather than daily.