Lifetime Income: S&P500 Plus Strangle Options

I’ve looked at several strategies that can be used to extract income from an investment in the S&P 500.  One strategy involved purchasing a small amount of call options on the S&P 500 in addition to investing in the index, and another strategy involved purchasing a small amount of put options on the S&P 500 in addition to investing in the index.

The strategy described this month is a combination of the above two, and this combination is called a strangle.  The basic idea is that the put option provides some amount of protection from the market falling, while the call option pays for the put option in the years the market rises.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Plus Protective Put Options

This month’s analysis is another twist on the constant payout strategy I covered earlier.  That strategy consisted of putting all capital in S&P500 ETF’s, and drawing out a constant amount each year.  This provides a fixed annual payout for as long as the capital lasts.

In this month’s strategy, all capital is again invested in S&P500 ETF’s, and a constant amount is withdrawn each year.  However, an additional amount is withdrawn and invested in 12-month put options on the S&P500 ETF.  If the market has a significant drop during the year the put options offset a portion of the decline, so that any subsequent market rise will boost capital from a higher base.  If the options are not in the money at the end of the year, the principle balance is lower than it would have been had the options not been purchased.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

 

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Plus Index Options

This month’s analysis is an interesting twist on the constant payout strategy I covered last month.  Last month’s strategy consisted of putting all capital in S&P500 ETF’s, and drawing out a constant amount each year.  This provides a fixed annual payout for as long as the capital lasts.

In this month’s strategy, all capital is again invested in S&P500 ETF’s, and a constant amount is withdrawn each year.  However, a portion of the withdrawn amount is invested in 12-month call options on the S&P500 ETF.  If these options are in the money at the end of the year, the value is available for additional spending.  If the options are not in the money at the end of the year, the amount available for spending is reduced by the amount that was spent on the options.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

 

joseph AT StockMarketMovement.com

Option Trading Strategy – QQQ Put Spreads

A ‘Put Spread‘ is when you buy a put and simultaneously sell a put on the same underlying security, with the same expiration date, but at different strike prices.  E.g., buy a put on QQQ for $100 per share 3 months out, and simultaneously sell a put on QQQ for $105 per share 3 months out.  As usual Investopedia has a good description of the basic idea.

Put spreads do best in markets that are rising, but not strongly.

The strategy I describe involves specifically 3-month put spreads.  Any term could be used, of course, and I’ve investigated several others.  I like the 3-month spreads because they don’t tie money up for a long time, even though longer term spreads are probably more consistent.  If there were 12-month QQQ options available every quarter I would probably switch to those to get long term capital gains tax (20%) instead of short term capital gains tax (39.6%), but QQQ currently only has 12-month options available in January.

I appreciate all the emails I receive to discuss investing, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

 

Option Trading Strategy – QQQ Diagonal Put Spreads

A ‘diagonal put spread’ is when puts are bought and sold on the same security, and both the strike price and expiration date are different on the two legs.

E.g., buy a 9 month put on QQQ at 135, and sell a 3 month put on QQQ at 145.  In the strategy analyzed this month, another 3 month put on QQQ is sold when the first 3 month put expires, and a third 3 month put on QQQ is sold when the second 3 month put expires.  In this way, the long put protects against arbitrarily large losses when the market drops (though money is lost when the market drops), and profit is made off of selling put option premium.

Take a look at my analysis of how QQQ diagonal put spreads have worked out over the past 10 years.  I’d especially like to hear from anyone who has been using this strategy on non-index options.

I appreciate all the emails I receive to discuss investing, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy QQQ Sell SPY

This month’s strategy is buying quarterly QQQ calls and selling quarterly SPY calls.  You can follow the link to see how this strategy has played out historically.

The idea behind this strategy is that the NASDAQ and SP500 tend to move together, but QQQ is more volatile and makes bigger moves.  Selling SPY partially offsets the cost of buying QQQ when the market is down, and QQQ outperforms SPY when the market is up.  At least that’s the theory, you can see how that compares to reality.

I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Yearly Index Long Call Options

This month’s strategy is buying yearly index long call options.  You can follow the link to see how this strategy has played out historically.

The idea behind this strategy is to buy an index option that’s a little more than 12 months out, so that any profits will be long term capital gains rather than short term.

Options in this strategy are purchased 5% In The Money.  This is a trade-off between purchasing the options At The Money, which has a higher time premium but doesn’t have exposure to intrinsic value loss, and buying options deeply In The Money, which have a lower time premium but do have exposure to substantial intrinsic value loss.  Options could also be purchased Out of The Money, lowering the option premium, but then profit is only made if the index rises by more than the sum of (percent Out of The Money + option premium).  I’ve found 5% In The Money to be a reasonable trade-off.

As always, I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Yearly Index Long Call Spreads

This month’s strategy is buying yearly index long call spreads.

In the variant of this strategy that I describe, profit is made primarily off of the difference between the option premium collected on the short end, minus the option premium paid on the long end.  The way it’s structured means profit is made even in a relatively flat market.

As always, I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Monthly QQQ Options

The most common questions I get are about options trading.  Usually it’s from people looking for something to do with their ‘fun money’ (or ‘Vegas money’), not for investing.  I’ve gotten enough feedback, in fact, that I’ve started a new section on the website so they’re easy to find (rather than looking through old posts).

This month’s strategy is fairly simple, buying monthly call options on QQQ (the NASDAQ ETF).

If you need a refresher on options, Investopedia has a good summary.

I do appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com