Options are a greatly misunderstood tool by the general investing public. Most people think buying options is the only way to trade options. However, odds are much more in your favor if you are an option seller.
I trade out of many accounts – each has a different risk profile and different types of trades involving option selling.
Today I am going to share with you option selling in a regular IRA/RothIRA account. One can employ a basic option selling strategy: cash secured puts in their IRA accounts. In an IRA account – unlike a margin account – you can only trade with the money you have in it and no leverage (margin) is allowed. So cash secured puts would be a perfect strategy for this kind of account.
Cash secured puts definition:
I have employed this strategy in my wife’s IRA account, since it was opened at TD on 7/1/2012. Over 18%+ return in four and a half months (from 7/1-11/14). People think option selling is boring and not exciting as option buying. But there is nothing boring about +18% return in 4.5 months!
When option selling I have a little cheat sheet which is use to determine trades I want to make. Here’s the criteria I look for:
– Stock I want to own outright
– Great fundamentals and/or a great story like Amazon or Facebook
– Right at 200 day support and at a price I am comfortable purchasing if I was buying the stock outright
– Potential 2%+ return in a month
– No short term headline risks such as earnings. (this rule is not a must in my book since I trade FB a lot and believe in the stock long term and may initiate a trade before earnings if I have a significant margin of error and I believe the risk reward is worth it – see one of my previous posts on this topic!)
There is currently one trade that meets all of my criteria and here’s how it does: AT&T (sticker symbol T)
Stock near (little below) 200 day support on the daily chart
Great fundamentals. AT&T has raised its dividends for 50+ years and currently sports a 5%+ yield and has solid cash flow.
This is a stock I would love to own at this price regardless if I was buying it outright
No headline risk in terms of earnings coming up in a few days or weeks
It will have a return of +2% in a month
The trade would be to sell -4 of the Dec $33 put @ .72
I would need $13,200 cash in the IRA to secure the -4 puts I sold. $3300 * 4 = $13,200. If AT&T closes below $33 on the option’s 12/21/2012 expiration (options always expire on the 3rd Friday each month) I would need to have the cash to buy 400 shares since I sold -4 puts and I will get to keep the premium I received from selling -4 puts. I receive the premium instantly once I make the trade and get to keep it regardless of whether it expires worthless or I get put the shares.
If it expires worthless, T stays above $33, my gross return would be: $288 ($72 * 4) / $13200 = 2.18% in one month!
Please reply with any questions regarding this trade or strategy! Happy trading to everyone!