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I've not updated performance in a while so I thought I would take the time to document the selling cash-secured-put (CSP) and covered call (CC) strategy that I've had in play since December 2017. For those of you who have written and I've not responded, I've been crazy-busy in my professional life so it's been a bit of a challenge to find time to do more than just the minimums of day-to-day portfolio management.
It is my intent to use this entry to give a high-level update of the strategy.
Strategy Overview
I sell premium on options. I generally start with the put option ("cash secured put", or CSP), as this has lower market exposure risk than starting with a covered call (CC), but if I see a CC that I like I will also buy the stock and sell the appropriate call in the same transaction.
My timeframe is generally on the order of a week out to about 5 weeks out. I sell both weekly options (my preference) as well as monthlies. When I see an alert form on my weeklies I almost always take it -- monthlies, not so much. Simply personal preference.
Alerts are automatically formed by some software that I wrote that runs within the TradeStation platform. The alerts are echo'd in real time to Twitter, and you can follow them for free simply by going to https://twitter.com/GreekGodTrading and following my account. All my trades are echo'd there too, so nothing is hidden. You get to see the good, (rarely) bad, and (never) ugly of my actual performance.
The alerts have a number of criteria but one of the important ones is that I selected a minimum threshold of Annualized Return on Option (AROO) before the alert will fire. Hence, if I sell the premium and hold it to the expiration, I'm guaranteed to get at least that AROO on the position. Right now that number is 18%, and this provides a solid, relatively straight-line performance. More on that later.
Once I've sold the position, I generally attempt to buy it back at $0.05. Not only does this accelerate the annualization calculations (instead of 100% profit over 4 weeks perhaps I get 95% of the profit in 2 weeks), it also returns the money to my account and lets me adapt to market changing conditions. This is why I like weekly options over monthly options.
Stock selection is important. I use my "Greenfield Stocks" selection criteria, which I've written about extensively in this blog and you can go find past references for yourself. It has been a staple of my investing for well over a decade and I'm a firm believer that it all starts with proper stock selection.
I trade in three accounts: a Traditional IRA, a SEP-IRA, and a margin account. I use the funds of the tax-sheltered accounts first, then generally only trade monthlies in the margin account. I try not to use margin for this strategy, although there is no reason why it would not work. I just don't want the headache of accounting.
I keep perfect logs of my trades. Every trade is logged, and every expired worthless trade is also logged. You'll see some of the graphs below. If you don't measure it, you can't fix it, and that will be evident in my pictures.
Strategy Performance
Let's start with the monthly net performance chart:
The "red" probably catches your eye first; these are the January months, and they are associated with market pullbacks and me rolling positions, mostly call positions. Each January has been a loss, so I am watching carefully as we approach December of 2019 to not have a repeat. Here's TradeStation's reporting of the same time period:
TradeStation has an error in how it reports some trades, so this is only approximate in numbers, but you see that the trend is there and intact.
Here's what happens when I bucket by month. Again, all that matters is the relative shape in each month; the overall values are less in TradeStation because they do not log profits due to expired (worthless) contracts or called positions:
So, October could present a challenge (historically), as may January. I'm on the watch.
On a weekly basis, here's what it looks like:
You can see some weeks with really thin trades -- if the market is acting poorly, my system keeps me out of the market (but there is a lag -- it is not predictive).
All of this suggests just north of 30% annual performance, net of all fees, commissions, kitchen sink charges, etc.
.... and I don't do a lot of work to get that 30%. It's largely on autopilot.
This figure provides the view of history -- it really gives me a view of how TradeStation is records transactions. Note, these are round-trip, closed transactions -- those that expired worthless (which is an ideal situation) are ignored by the TradeStation platform. Note that the 19.57% gain over 589 significantly under represents the actual IRR performance of 32.2%.
The last line in the figure is the historical performance, to the beginning of September 2019. Basically, for every dollar that I trade, I make back $2.55. This is based on 589 round-trip trades, with 83% of them profitable. Expectation of profit on each trade is currently about $49, net.
This last picture shows the drawdown the account has experienced, which is an indicator of how well risk is managed in the strategy:
Worse-case, I've lived through 3% drawdown from the previous equity high, since December 2017. I can live with that.
Summary
Using the "Rule of 72", I'm basically on track to double the account in 2.5 years, using historical performance.
I'm not inclined to "tweak" the strategy at this point -- it works well enough, and my time per day to service the strategy is less than 15-minutes or so. If I miss a day due to travel no big deal -- I simply use the previous day's stock list and most likely no new trades (on the sell premium side) are executed. Trades related to buy-to-close at the $0.05 are GTC orders and will execute at any time, up to options expiration.
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
edit: updated the actual performance using the daily account balance and presuming that I "cash out" account value on 9/21/2019. IRR updates to 32.2%, net of everything: all fees, all commissions, subscriptions for data feeds, platform fees, etc.
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