Mike Larson describes the benefits of a premium collection options strategy.
My Recent Investments are Almost Worthless, and I couldn’t be happier.
In just a couple of days, a batch of investments I recently targeted will probably be worth nothing. Have I lost my mind?
Not at all. And I’m not alone: My subscribers will be happy if they turn out to be worthless, too.
Let me start by backing up a bit. If you’re like many of the investors I talk to, you’re starving for income and yield. U.S. Treasuries are paying next to nothing. Ditto for municipal bonds.
Yields in the corporate bond market are circling the drain because the Federal Reserve pulled the bathtub plug. At around 1.8%, the S&P 500’s dividend yield is also nearing an all-time low.
But there are ways to fight back.
Selling cash-secured puts on high-quality stocks, or selling covered call options against stocks you own, are two such techniques. They bolster your portfolio income — and when practiced wisely, they can be among the least-risky options strategies around.
Many market participants are familiar with buying options for investment, speculation or protection. And plenty of people are doing it these days. Total options trading volume has soared 43% from 2019 levels in the year through July, according to CBOE Global Markets (CBOE).
But I’m talking about taking the other side of an options transaction. Where there is a buyer, there must be a seller. Taking that seller position (writing options) allows you to generate income. As long as you have the financial wherewithal and experience to do so — or are willing to learn — it’s a strategy well worth considering in this ultra-low-yield environment.
When you are on the sell side of an option, you’re essentially selling (writing) insurance to the contract buyer. That insurance “policy” has a finite period of time to it — the option’s expiration date. You collect “premium” income up front in exchange for assuming the risk an underlying stock will rise or fall.
And that brings me back to my original point. As an options seller, you benefit when the contracts you target expire worthless, most options do. Just as your insurance company benefits when you don’t have any claims over the contract period.
You get to keep all the upfront premium income you collected, with no obligation when the expiration date rolls around.
Compare the annualized yields you can obtain from selling options to something like a U.S. 10-year Treasury note, and the numbers can look solid.
No, it’s not for everybody. Options writing can be extremely risky and requires a strong understanding on how to manage that risk. But again, it’s something worth looking into that can be a lucrative strategy.
Some people refer to selling options as picking up nickels in front of a steamroller, especially when selling naked options. You can mitigate risk by not being “naked” or by rolling to a different strike if you get too near in-the-money. It is solid strategy but can appear to-good-to-be true at first. A spike in volatility can be a problem, so it is important to study the various risk management tools that go along with this strategy.
You can find valuable educational resources from sources like the Options Industry Council or CBOE. And then you too will understand why sometimes, the best investment to target is one that ends up “worthless.”
My Safe Money Report focuses on these kinds of stocks, which include names in the consumer staples, food and beverage, retail, and health care sectors. Subscribe to Safe Money Report here…