Selling CC and CSP Strategy Lessons Learned

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Many of you are aware that I developed a strategy, tested it using a variety of methods, and finally decided to "take the plunge" with real money around December 11, 2017, almost 19 months ago.  Lots of water has flowed under the bridge since then, and while there have been a few rocky points due to my own trial/error, the underlying mechanics of the strategy have proven themselves and are sound.

In the event you have no idea what I'm talking about, I sell options on quality stocks, with the intent that the options expire worthless.  Doing so allows me to pocket the premium received for selling the option, and it simply becomes a rinse/repeat sequence.  There is a high expectation of profitability if the stocks are "quality" and if I do not try to get "cute" and squeeze out every last nickel of a trade.  I've settled into a normal routine and it appears that I should be able to continue this effort independent of what the markets do (although gains slow or go slightly negative in a down market).

Net Performance (Your Actual Performance May Vary)

Most of you want to know the information in the following figures:

First, a monthly performance graph.  Green means I made money in the period, and red means I lost money in the period:

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Next, same net data, but with WEEKLY resolution (instead of monthly):

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Obviously, the lower-left / upper-right (LLUR) direction of the equity graphs are the direction that I want to go, so I'm happy with this.  Starting capital was around $71,000, and despite some bumpy roads in January 2018 as well as January 2019, my net return is north of 15% CAGR, with all expenses, platform fees, commissions, etc. included.  Solid revenue.

What Causes Losses (for me)?

I log EVERY trade.  Every one.  I've made a total of 586 round-trip trades, and 12 of them were BUYING protective puts.  You lose money on a protective put if the stock continues higher.  I'm am not using protective puts right now, but they are useful in my arsenal should I need them.  Overall, the markets are moving higher, so buying puts is not a key component of my strategy.

The losses in January 2018 -- nearly 17 months ago -- were due to just getting started and being careless.  These losses, which resulted in ($2,339) of losses on a $71,000 portfolio forced me to develop key position sizing rules.   Here is the fundamental of that rule:  with little exception, no position should occupy more than 14% of your portfolio.  I usually start in the 2-5% range, and if the trade works out, I'll add to it by selling another put and/or selling a call to straddle an assigned position.  It is rare that I sell an initial position that is 14% of my portfolio, but I've done it.  I generally attempt to sell a 1/4 or 1/2 position first, then work from there if assigned.

The following chart will highlight something I'm REALLY weak at:  Rolling for profit:

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The chart shows that my losses are predominantly from rolling options (79 positions rolled for an average loss of ($114.01) per roll.  This has accounted for over $9,007 in portfolio losses.  My other loss mechanism is the "sell if the stock hit hits -3% below my entry strike", but you can see that has only occurred 3 times out of all of my trades.

To address this I have greatly curtailed my roll operations.  With little exception, I have decided NOT to roll, rather just let the stock get called away and be done with it.  I'll still retain discretion to use a roll when it makes sense, but the premise of a roll operation when holding the call is simply not a good one.

This position is further supported in other data that I have.  Despite the roll operations being a big negative influence on my performance, positions that I DID roll into have been profitable, but not nearly to the extent necessary to make up for the difference.  In fact, I've only recovered $24.65 on average out of the lost ($114.01) due to the roll, so rolling is not a long-term viable strategy.

Key takeaway:  minimize rolling positions.

Other Nuances of My Strategy and Trading Performance

The following graph shows which months have been profitable and which have not been so profitable:

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The December-June period has had 2 years of data rolled into the chart, whereas July - November still only have one year of data (July 2018 - November 2018).  I know what caused issues for both January months, and looking at trades from September and October 2018, I can see that rolling heavily offset some of my gains.  A few positions were put and/or called against my desires, and there is nothing that you can do about early assignment except manage the position.  Whatever you do, DON'T PANIC.  If your position size is correct, you'll take a hit, but you will not lose your portfolio.

An important graph is this:

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This is a graph of drawdown, which is the amount the portfolio dropped once it hit an equity high.  You can see that for the PORTFOLIO, although some positions fell enough to cause heartache, the impact on the PORTFOLIO over the last 19 months has only been a -3% (less than) drop in overall value. 

Think about that from a risk management point of view.

Currently, the portfolio is making new highs, as exemplified by the green dots in the equity line:

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The next few graphs help answer whether selling a cash-secured put (CSP, or Sput in the graph), a covered call (CC), or rolling the position  (Roll) has resulted in greater gains:

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It's pretty clear that the Ccall graph -- the middle one -- has spent the majority of the time above it's 20d MA.  This suggests that CC's have a definite place in my strategy.

It's also pretty clear that the Sput graph -- the top one -- has also spent most of its time in an uptrend.  Same comment as CC.

Finally, rolling positions suck, or at least, I'm bad at it.  In my defense I think I'm not too bad at it, but rolling the position when it is already moving towards being in-the-money means that you are losing value on the call option -- rolling it just locks in that loss with the "hope" of recovering it later, either through stock appreciation or through collection of higher premium.  I'm obviously minimizing my roll activity.

Take away:  selling BOTH puts and calls is a good business.

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That's all for now.  If you have questions -- ask.

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As with all my ramblings, you are responsible for your own actions and I am not.  Nothing I've written here is advice to buy or sell any security, so don't do it unless you absolutely take ownership for your actions.

Regards,

Paul