My favorite options strategy

My first options trade was selling a put; since then I’ve experimented with other strategies. Reflecting on the trades over the past year, I noticed when selling puts shined, and when it did not.

How I started trading options

April 2020 was a great time for options traders: quality companies were on a Covid-induced selloff, and volatility was high so puts were highly-priced. Selling a put is similar to selling insurance; you get paid for potentially buying the stock at the strike price.

One of my trades was Simon Property Group (SPG) back in May 2020. I wrote how I chose SPG here; it was a quality stock I wanted to own. I received a $5 monthly premium at the $60 strike price, to potentially buy shares at $60. Annualized returns for the monthly contract was 84%¹, much more attractive than the <2% in a savings account. I sold puts on SPG multiple times to generate income.

Almost a year later I sold puts on GameStop to profit from high volatility. I did not want to own GameStop so the trade was more unnerving.

While collecting premium is nice, selling puts can also be used to acquire stocks at a discount.

Is selling puts the best way to acquire stock?

Conventional wisdom says selling puts on stocks you want to own is a good way to acquire them. My experience was the opposite; in a bull market, selling puts underperformed both holding the stock and buying calls. I know because I tried all three tactics; as the stock market rebounded in 2020 after the march selloff, getting assigned (ie. buy the stock on options expiry) was a challenge.

Buying the stock outright uses less money than selling puts, since cash-secured puts use 120% of the stock price. For example, I bought a mutual fund similar to QQQ instead of selling puts on QQQ, and the mutual fund performed +60% in one year. It’s proof that in trading, simple techniques can beat complicated setups.

Instead of buy-and-hold, for Nordstrom (JWN) in October 2020 I bought a call expiring in January 2021. I expected the stock to rise above the $13 strike price. It was my first time buying a call so I bought one contract to wait three months. The benefit was clear; for $2.5 premium I controlled 100 shares and used $250 instead of $1100².

It could have been my most profitable trade: during January 2021 JWN’s price rose to $38 and each contract was worth 100 x ($38 - $13)= $2,600, over 10 times the premium. Too bad I already closed the trade at 100% profit. I wish I bought more contracts and waited more, but hindsight is 20/20.

Summary

I started trading options by selling puts. Selling puts is best for generating income during high volatility, however during bull markets it’s best to buy-and-hold or buy calls.

2020 was a bullish year. I look forward to learn more about options in 2021.

¹ 365 / 30 * 5 / ( 60 * 1.2) = 84%

² $11 was Nordstrom’s stock price in October 2020