Selling SPY options, gains seem too good? Do I misundertand

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
TikiMan
Posts: 18
Joined: Sat Dec 07, 2019 8:22 pm

Selling SPY options, gains seem too good? Do I misundertand

Post by TikiMan »

Hello,

I want to understand selling put options better as it seems like a great way to get returns right now. I have
heard SPY is a good fund to work with due to high volume. https://finance.yahoo.com/quote/SPY/options/

SPY closed at 345.39. I see a contract with a strike price of 190. This means if the price goes from 345 to 190(or below) I am obligated to buy at 190? If the price is between 191 and 345 I keep all the gains from the transaction and do not end up owning SPY? The bid is 155.78. This means I would make 155.78 x 100 So 15,578. Assuming I cover it which I would the capital needed would be 190 x 100 Or 19,000.

So basically I can either buy SPY for 345.39 x 100 shares at 34,539 and hope it appreciates or I can get a guaranteed 15,578 return as long as I am willing to buy SPY if it drops at a price of 190? I am 100% stocks and intend to stay 100 percent stocks for life outside of emergency fund. Therefore the return seems huge on just selling a SPY put. I understand if SPY goes up I will miss out on the gains but seeing as we are near a market top it seems unlikely I will make 15,578 on 100 SPY shares. Am I missing something? I understand this is not very boglehead and I would not normally do it. But right now it seems like the numbers work assuming I am not worried about losing out on upside potential temporarily. The expiration date is 9/4/20. Thank you!!!
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Steve Reading »

TikiMan wrote: Thu Sep 03, 2020 5:15 pm Hello,

I want to understand selling put options better as it seems like a great way to get returns right now. I have
heard SPY is a good fund to work with due to high volume. https://finance.yahoo.com/quote/SPY/options/

SPY closed at 345.39. I see a contract with a strike price of 190. This means if the price goes from 345 to 190(or below) I am obligated to buy at 190? If the price is between 191 and 345 I keep all the gains from the transaction and do not end up owning SPY? The bid is 155.78. This means I would make 155.78 x 100 So 15,578. Assuming I cover it which I would the capital needed would be 190 x 100 Or 19,000.

So basically I can either buy SPY for 345.39 x 100 shares at 34,539 and hope it appreciates or I can get a guaranteed 15,578 return as long as I am willing to buy SPY if it drops at a price of 190? I am 100% stocks and intend to stay 100 percent stocks for life outside of emergency fund. Therefore the return seems huge on just selling a SPY put. I understand if SPY goes up I will miss out on the gains but seeing as we are near a market top it seems unlikely I will make 15,578 on 100 SPY shares. Am I missing something? I understand this is not very boglehead and I would not normally do it. But right now it seems like the numbers work assuming I am not worried about losing out on upside potential temporarily. The expiration date is 9/4/20. Thank you!!!
The bid on a put @ 190 is $0.00. Maybe you'd get paid like a buck for selling that put.

Did you get confused and looked at selling the call @190?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
EverydayWallSt
Posts: 14
Joined: Thu Jun 18, 2020 2:29 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by EverydayWallSt »

You’re looking at the Call. The Put expiring tomorrow will be basically worthless.
7eight9
Posts: 1450
Joined: Fri May 17, 2019 7:11 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by 7eight9 »

Are you sure you are looking at a put option and not a call option?
I guess it all could be much worse. | They could be warming up my hearse.
jfmiii
Posts: 73
Joined: Fri Apr 25, 2014 1:36 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by jfmiii »

The fact you thought a 190 put, in any tenor, was 155 bid shows you have no business being anywhere near options. Save your money and go to Las Vegas.
Topic Author
TikiMan
Posts: 18
Joined: Sat Dec 07, 2019 8:22 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by TikiMan »

I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!


I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
Rat_Race
Posts: 49
Joined: Sun Jan 13, 2008 10:02 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Rat_Race »

Beginner traders shouldn't be trading options at all. There are dedicated courses for people interested in this type of trading. You might learn a thing or two from Peter Reznicek's channel on Youtube: https://www.youtube.com/user/shadowtrader01/videos but real courses and trading strategies typically aren't free. I like his weekly market update videos for general market perspectives, but I don't trade options.
Tipro
Posts: 15
Joined: Sun Jul 14, 2013 8:22 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Tipro »

TikiMan wrote: Thu Sep 03, 2020 5:37 pm I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!


I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
https://www.optionsprofitcalculator.com/
langlands
Posts: 572
Joined: Wed Apr 03, 2019 10:05 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by langlands »

jfmiii wrote: Thu Sep 03, 2020 5:33 pm The fact you thought a 190 put, in any tenor, was 155 bid shows you have no business being anywhere near options. Save your money and go to Las Vegas.
No one is born knowing what options are. This kind of snarky response gets annoying. OP had the intuition to know it was too good to be true. Hence why the thread was created.
User avatar
arcticpineapplecorp.
Posts: 6212
Joined: Tue Mar 06, 2012 9:22 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by arcticpineapplecorp. »

TikiMan wrote: Thu Sep 03, 2020 5:37 pm I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!


I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
Are you on Robinhood?

The reason I ask is because it seems Robinhood is pushing their customers to engage in options trading so they can make their money mostly that way (since commissions on stocks are "free", not really, they're not executing the best price for you).

If so, don't take the Robinhood bait. Stick to owning the market and buy and hold for the long term.

you should read this about options to see how it could be hazardous to your wealth:
https://www.fool.com/investing/general/ ... s-you.aspx

by the way last year you asked about adding small cap value to your 5 year old portfolio:
viewtopic.php?f=10&t=296951&p=4878619#p4878619

how's that going so far?

trying different strategies is usually a sign of either boredom or greed (or both). Usually buying and holding the market is the simplest, most straightforward path to wealth. Too bad so many people can't just do it.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Steve Reading »

TikiMan wrote: Thu Sep 03, 2020 5:37 pm I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!

I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
Yeah sure. You were on the right place in terms of the Bid (that's about what you'll get for selling it). But you'll want to make sure you scroll down to the section titled "Puts".

If you had sold the 190 call, you would have received the money you said, that's right. But the obligation is now "you will have to sell your SPY at $190".
jfmiii wrote: Thu Sep 03, 2020 5:33 pm The fact you thought a 190 put, in any tenor, was 155 bid shows you have no business being anywhere near options. Save your money and go to Las Vegas.
We're all here to learn. How about we don't put each other down in the process huh?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Topic Author
TikiMan
Posts: 18
Joined: Sat Dec 07, 2019 8:22 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by TikiMan »

arcticpineapplecorp. wrote: Thu Sep 03, 2020 5:58 pm
TikiMan wrote: Thu Sep 03, 2020 5:37 pm I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!


I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
Are you on Robinhood?

The reason I ask is because it seems Robinhood is pushing their customers to engage in options trading so they can make their money mostly that way (since commissions on stocks are "free", not really, they're not executing the best price for you).

If so, don't take the Robinhood bait. Stick to owning the market and buy and hold for the long term.

you should read this about options to see how it could be hazardous to your wealth:
https://www.fool.com/investing/general/ ... s-you.aspx

by the way last year you asked about adding small cap value to your 5 year old portfolio:
viewtopic.php?f=10&t=296951&p=4878619#p4878619

how's that going so far?

trying different strategies is usually a sign of either boredom or greed (or both). Usually buying and holding the market is the simplest, most straightforward path to wealth. Too bad so many people can't just do it.
I only trade at vanguard.

I decided to stick with global market weight in stocks instead of adding small value. I have been a true boglehead for a few years (in terms of what I did with my portfolio) until earlier this year. I had a bit of a wild ride. I work in the healthcare sector and felt that I understood covid better than others at the time. I sold 100 percent out of stocks 5 percent from the top. I was feeling really smart having beaten the market by 25 plus percent. I was at times 100% aaau, 20% aaau, and 100% cash. The market headed straight up. It eventually hit the point where it matched where I exited and I jumped back in 100% stocks. I think I am just going to stay 100% stocks for life (unless bonds eventually seem to pay a reasonable yield) as my market timing shows even if you have the foresight to exit the market at the right time the market can completely surprise you by coming right back even if it seems irrational. However, I wondered if at a market top where you think downside risk is bigger than upside if selling puts might be a good strategy as you want to own the market anyways. If I knew I could make 8% guaranteed over a year I would probably do it.
User avatar
CardinalRule
Posts: 475
Joined: Sun Jan 15, 2017 11:01 am
Location: United States

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by CardinalRule »

TikiMan wrote: Thu Sep 03, 2020 5:37 pm I am completely new to this and am looking at the wrong part as you have stated. Can someone explain how to understand what you would make on selling puts of SPY? What columns do you look at and the math? I tried using Google to educate myself but clearly have failed!


I understand why you say I have no business it it but to learn you have to start from somewhere and admittedly my current knowledge on the subject is near zero but I would like to understand if someone is willing to teach.
viewtopic.php?f=10&t=320432&p=5378437#p5378437

I posted about some selling SPY puts in an earlier thread. I have not done any recently.
Valueinvestor2
Posts: 44
Joined: Sun Dec 01, 2019 6:25 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Valueinvestor2 »

TikiMan wrote: Thu Sep 03, 2020 5:15 pm Hello,

I want to understand selling put options better as it seems like a great way to get returns right now. I have
heard SPY is a good fund to work with due to high volume. https://finance.yahoo.com/quote/SPY/options/

SPY closed at 345.39. I see a contract with a strike price of 190. This means if the price goes from 345 to 190(or below) I am obligated to buy at 190? If the price is between 191 and 345 I keep all the gains from the transaction and do not end up owning SPY? The bid is 155.78. This means I would make 155.78 x 100 So 15,578. Assuming I cover it which I would the capital needed would be 190 x 100 Or 19,000.

So basically I can either buy SPY for 345.39 x 100 shares at 34,539 and hope it appreciates or I can get a guaranteed 15,578 return as long as I am willing to buy SPY if it drops at a price of 190? I am 100% stocks and intend to stay 100 percent stocks for life outside of emergency fund. Therefore the return seems huge on just selling a SPY put. I understand if SPY goes up I will miss out on the gains but seeing as we are near a market top it seems unlikely I will make 15,578 on 100 SPY shares. Am I missing something? I understand this is not very boglehead and I would not normally do it. But right now it seems like the numbers work assuming I am not worried about losing out on upside potential temporarily. The expiration date is 9/4/20. Thank you!!!
OP,

Ignore the snarky comments. Many bogleheads are so indoctrinated that they have difficulty wrapping their heads around any concept that isn’t Jack Bogle endorsed.

Now here are a few things to consider.

1) options can be very risky and if you don’t know what you are doing that risk can be amplified - so good that you are asking questions

2) options can also be completely risk less if you do know what you are doing and use them in a responsible manner.

Jack Bogle would endorse having monies in a stock / bond mix, one that each investor is comfortable with. Unfortunately now and for the foreseeable future bonds are not worth investing in since rates are so low. Your strategy is an excellent one to replace “fixed income” investing. You will be almost guaranteed higher returns selling puts on spy than having bonds.

Now, to the mechanics of options. Options have a few characteristics. They have a strike price, and expiration date, and a premium. Let’s run through a real world example.

You decide to sell puts on spy for nov (third Friday of the month is standard) at strike 200. You write that today and collect .90 x 100 = $90.

You now are in a contract that says If On nov 20th at close spy is less than 200 you will have to buy 100 shares at $200 ($20,000). You of course keep the $90 premium. Your break even is $199.10 ($200-$0.90).

Let’s calculate the return. $90/$20,000 = .45% You can obviously figure out the annualized return with this approach.

Here’s the beautiful part. Let’s say the market dump to $220 by nov 20. You don’t have to buy any shares, you keep the premium, and your capital is available to either 1) sell more puts even lower - say $150 strike or 2) buy shares of spy at current price.

In general the farther the strike price is from current price the less premium and the closer the expiration date to current state the less premium. So you can be very strategic about your contracts.

Overall in today’s environment where you can’t make any money in bonds or fixed income, this is a great strategy. If you want to be a true boglehead you could write multiple put contracts at different strikes and write down that if you have to purchase the shares you will gladly do so. This is a great way to commit to buying shares via a written plan as the market moves down.

Let me know if you have any other questions. I personally use this strategy. It will guarantee higher returns than a traditional fixed income allocation in today’s environment.
jello_nailer
Posts: 271
Joined: Sun Apr 07, 2019 10:20 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by jello_nailer »

Nice post Valueinvestor. Well done.
Cash secured puts are indeed a nice tool.
ChrisBenn
Posts: 441
Joined: Mon Aug 05, 2019 7:56 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by ChrisBenn »

Note that if this is in taxable you will pay short term capital gains selling put options (unless the option is exercised and you hold the assigned stocks at least a year)
User avatar
CardinalRule
Posts: 475
Joined: Sun Jan 15, 2017 11:01 am
Location: United States

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by CardinalRule »

ChrisBenn wrote: Thu Sep 03, 2020 9:45 pm Note that if this is in taxable you will pay short term capital gains selling put options (unless the option is exercised and you hold the assigned stocks at least a year)
True, but this is the same rate that your interest in a HYSA would be taxed at. I think that people are mostly looking for yield.
flyingcows
Posts: 148
Joined: Sat Apr 20, 2019 8:13 am

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by flyingcows »

There is a book called:

Options as a Strategic Investment
By: Lawrence Mcmillian

If you only read one book on options, it should be that one. Just get a new copy as it has had multiple updates to keep up with changes.

If you just want to learn more about what is possible, there are a few people on YouTube who create good educational content that is freely available. Checkout these YouTube channels:

Project Option
Option Alpha
Tasty Trade

Before you trade with real money spend a few months with a paper trading account. Thinkorswim (TD Ameritrade) offers paper trading, and they have a good trading platform.

I have been a net seller of options since 2015 and will continue to be in the future.
Nate7out
Posts: 111
Joined: Wed Jan 16, 2008 2:06 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by Nate7out »

https://spintwig.com/how-to-trade-options-efficiently/

You'll have to scroll past a list of stocks to see the rest of the article.
perfectuncertainty
Posts: 129
Joined: Sun Feb 04, 2018 7:44 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by perfectuncertainty »

langlands wrote: Thu Sep 03, 2020 5:54 pm
jfmiii wrote: Thu Sep 03, 2020 5:33 pm The fact you thought a 190 put, in any tenor, was 155 bid shows you have no business being anywhere near options. Save your money and go to Las Vegas.
No one is born knowing what options are. This kind of snarky response gets annoying. OP had the intuition to know it was too good to be true. Hence why the thread was created.
+100
User avatar
arcticpineapplecorp.
Posts: 6212
Joined: Tue Mar 06, 2012 9:22 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by arcticpineapplecorp. »

TikiMan wrote: Thu Sep 03, 2020 7:14 pm I only trade at vanguard.

I decided to stick with global market weight in stocks instead of adding small value. I have been a true boglehead for a few years (in terms of what I did with my portfolio) until earlier this year. I had a bit of a wild ride. I work in the healthcare sector and felt that I understood covid better than others at the time.
you shouldn't trade at all. that's the problem. you should buy and hold, for decades, not years.

hopefully you see now that you don't know anything anyone else doesn't already know.

can't tell you the number of people who think they'll do better because they're in a certain industry and think they know it better than anyone else.
TikiMan wrote: Thu Sep 03, 2020 7:14 pm I sold 100 percent out of stocks 5 percent from the top. I was feeling really smart having beaten the market by 25 plus percent. I was at times 100% aaau, 20% aaau, and 100% cash. The market headed straight up. It eventually hit the point where it matched where I exited and I jumped back in 100% stocks. I think I am just going to stay 100% stocks for life (unless bonds eventually seem to pay a reasonable yield) as my market timing shows even if you have the foresight to exit the market at the right time the market can completely surprise you by coming right back even if it seems irrational.
so hopefully you realized it's not smart to try to outsmart the market.

there's a good lesson in playing this game (link below) without real money first and then understanding that if you can't beat the market with known, past data, what makes anyone think they can do so with unknown, future data:
https://www.prudential.com/cdn/tools/ou ... oolcta=OFF

part of being a good investor is being a market historian. understanding things like the market can bounce back quickly or that some of the best days in the market can follow some of the worse days of the market:

Image

and being out of the market while those best days happen can cause you to lose significantly than if you just stayed the course:

Image
TikiMan wrote: Thu Sep 03, 2020 7:14 pm However, I wondered if at a market top where you think downside risk is bigger than upside if selling puts might be a good strategy as you want to own the market anyways. If I knew I could make 8% guaranteed over a year I would probably do it.
if something was guaranteed, you wouldn't make 8%. You'd make what a risk free asset (t-bill) makes, not more. The reason assets pay more than a risk free rate is because they involve risk, not guarantees. do you understand that difference? There is no low risk product that offers high return. wanting it doesn't make it so.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
bondsr4me
Posts: 1525
Joined: Fri Oct 18, 2013 7:08 am

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by bondsr4me »

jello_nailer wrote: Thu Sep 03, 2020 9:35 pm Nice post Valueinvestor. Well done.
Cash secured puts are indeed a nice tool.
+1
User avatar
firebirdparts
Posts: 1801
Joined: Thu Jun 13, 2019 4:21 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by firebirdparts »

TikiMan wrote: Thu Sep 03, 2020 5:15 pm So basically I can either buy SPY for 345.39 x 100 shares at 34,539 and hope it appreciates or I can get a guaranteed 15,578 return as long as I am willing to buy SPY if it drops at a price of 190?
Dude, take a step back. Holy cow. There's no free money. There is, however, risk and choice.

If you buy options, you must pay for the right to gamble on the risk. So, if you buy a put with a strike of $190 it will be very cheap, and it will also be worthless. The price matches the worth just fine. If you buy a call with a strike of 190, it is already worth $15,000 right now, and guess what - it costs $15,000 right now.

You just mixed up puts and calls.
Last edited by firebirdparts on Fri Sep 04, 2020 8:14 am, edited 2 times in total.
A fool and your money are soon partners
User avatar
firebirdparts
Posts: 1801
Joined: Thu Jun 13, 2019 4:21 pm

Re: Selling SPY options, gains seem too good? Do I misundertand

Post by firebirdparts »

jfmiii wrote: Thu Sep 03, 2020 5:33 pm The fact you thought a 190 put, in any tenor, was 155 bid shows you have no business being anywhere near options. Save your money and go to Las Vegas.
FWIW, you can use them as part of a diagonal spread. It wouldn't be dumb at all to buy a Spy LEAP $150 in the money. But I realize the OP wasn't trying to do that.
A fool and your money are soon partners
Post Reply