Covered calls to pay for car purchase?

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Paradise
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Covered calls to pay for car purchase?

Post by Paradise »

Hello, we need to buy a 2nd car.. targeting a slightly used minivan for roughly 35k. We have about 350k in our taxable account, and so I was planning on selling enough to pay cash for the car, but wondering if it’s always better to just sell covered calls against our long VTI position instead. I’ve Never done it before so wanting to ensure I don’t do something dumb.

My logic is to set the strike price at let’s say 215 and sell enough shares so that if it executes it will cover the purchase. 210 seems to be a pretty difficult bar to pass post Russian invasion. If it executes and I make $20 extra per share than I would for selling it now, best case it doesn’t execute and I repeat. I guess there is a worst case where it goes down so far that I would have been better off selling it outright today.

Anyone ever done this? Any other downsides? Just use my regular brokerage account?
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simplextableau
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Re: Covered calls to pay for car purchase?

Post by simplextableau »

Suggest you read "Options as a Strategic Investment" before proceeding. The gist is that a covered call strategy is its own strategy, not something you want to add onto stock ownership. Covered calls are aimed at achieving greater returns than bonds but with less volatility than stocks. A key part of the strategy is that you don't care about owning the underlying stock or having it sold and you purchase it as part of the strategy.

Every time someone tries to add covered calls onto stock they already own, you really are just executing poorly, taking extra risks without compensation.
Minderbinder
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Re: Covered calls to pay for car purchase?

Post by Minderbinder »

Personally I use options all the time which is not exactly kosher with most BH.

That said, your post suggests that you are thinking about this as almost a revenue stream that you just have to tap into and that is what lands most people in trouble, either because they get greedy and start creating huge positions or don't fully understand what is happening.

You are being paid the premium in order that you will wear all of the possible downside but only receive a limited amount of upside. If the market rallies 50% you will end up capping your gains materially, and if the market falls you will own all of those losses (less the option premium).

Something else to watch for is the impact of implied volatility. If you sell options a few months out and the market enters a period of high volatility, (perhaps due to a bank failure or a pandemic), the options price is going to be so high that you will be unable to close out of the position except at a huge loss, irrespective of where the actual price of VTI is at. It becomes a bit of "sell the ticket, take the ride to expiry" issue.

Good luck!
the_wiki
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Re: Covered calls to pay for car purchase?

Post by the_wiki »

This sounds like someone trying to get greedy instead of just paying for something they need with money they have.
Topic Author
Paradise
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Re: Covered calls to pay for car purchase?

Post by Paradise »

But if I’m otherwise going to sell today, I’ve already forfeited potential increases, no? How does it going up ever hurt me?

Also whats the difference between having already owned the stock or buying it today?

For the volatility portion, maybe I’m not understanding it correctly. In selling my covered call option at 215, the buyer has to execute at 215 or higher. How does that impact me during volatility? If the person executes it at 215, how do I go wrong? Are you saying it gets executed at 215 and then somehow goes to 190 before I close the position?
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LFKB
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Re: Covered calls to pay for car purchase?

Post by LFKB »

You don’t have enough shares to do this for the full purchase of the car

The 9/15/23 $215 VTI calls are $4
100 shares each = $400 per contract
You’d have to sell 88 contracts to pay for the car

Which means you’d have exposure on 8,800 VTI shares, which would be a $1.7 million position based on current share price of $197 per share

If you sold those same calls against your full position of $350k you could sell about 18 contracts and net $7,200

You could always use longer dates calls or continue selling shorter term calls, but you’re taking a bet that may or may not work out
Minderbinder
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Re: Covered calls to pay for car purchase?

Post by Minderbinder »

Paradise wrote: Mon Mar 27, 2023 8:51 pm But if I’m otherwise going to sell today, I’ve already forfeited potential increases, no? How does it going up ever hurt me?


Because while you have the short option position, the market might crash. You are being paid today in order to wear that downside risk for someone else. In effect you are selling insurance.

If the market rallies strongly, the seller's remorse is also a real thing.
Paradise wrote: Mon Mar 27, 2023 8:51 pm For the volatility portion, maybe I’m not understanding it correctly. In selling my covered call option at 215, the buyer has to execute at 215 or higher. How does that impact me during volatility? If the person executes it at 215, how do I go wrong? Are you saying it gets executed at 215 and then somehow goes to 190 before I close the position?
It's again an issue of timing. You are thinking only of the value at expiration. Options have value due to their time component, however.

So, for example, suppose you sell a $210 VTI call and you collect $5, with a June expiration.

Then the volatility soars because there is a banking crisis. VTI doesn't change price but suddenly your short option is worth $50.

Yes, you can hold it to expiration where it decays, but if you need to close the option (say maybe you need the money for something else), you are going to incur a $45 loss merely to get control of your portfolio back.

Generally you are correct in the way you view it....but the time component of options generally can cause heart burn when the market doesn't cooperate with the way you think it should.
the_wiki
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Re: Covered calls to pay for car purchase?

Post by the_wiki »

Paradise wrote: Mon Mar 27, 2023 8:51 pm But if I’m otherwise going to sell today, I’ve already forfeited potential increases, no? How does it going up ever hurt me?

Also whats the difference between having already owned the stock or buying it today?

For the volatility portion, maybe I’m not understanding it correctly. In selling my covered call option at 215, the buyer has to execute at 215 or higher. How does that impact me during volatility? If the person executes it at 215, how do I go wrong? Are you saying it gets executed at 215 and then somehow goes to 190 before I close the position?
What if the market drops 10% (back to last October's bottom) while you are playing around trying to make free money? now you lost the $35,000 you needed to buy the car and you only made a couple thousand or so in options premiums.
bmcgin
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Re: Covered calls to pay for car purchase?

Post by bmcgin »

Many people have a limited understanding of options. Selling covered calls is one of the safest and most predictable things. You will always make money in the transaction if the strike price is above your cost basis. The risk is, you could have made more or after the transaction or you might be in a place do not want to be.

Selling the call, you get a premium. That's your's to keep no matter what happens next. And there are only two outcomes:

1. The price exceeds your strike price -- you sell your shares at the strike price and keep the premium.
or
2. The price is below your strike price -- keep your shares and keep the premium.

In either case, you keep the premium. If the stock shoots up 20% above the strike price, you may feel like you missed an opportunity because you sold at your strike price. You still made a profit, just not as much as everyone else.

While holding the option, you have the option to "buy to close it" and then "sell to open" another option (that's why they call em options--there are lots of choices).

All in all, if you should do it depends on your cost basis, your timeframe, how many shares you have, how much premium you can get and a host of things I can't think of at the moment.

It's great to be thinking about it.
Last edited by bmcgin on Mon Mar 27, 2023 9:24 pm, edited 2 times in total.
aristotelian
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Re: Covered calls to pay for car purchase?

Post by aristotelian »

In addition to what others have said, I would just add that whether you need a car should be irrelevant. If it is a good strategy to earn income then you should do it. What you do with the income is a separate question. If you are pursuing this strategy because you are stressed about a big purchased that's not a good reason.
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Paradise
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Re: Covered calls to pay for car purchase?

Post by Paradise »

LFKB wrote: Mon Mar 27, 2023 8:56 pm You don’t have enough shares to do this for the full purchase of the car

The 9/15/23 $215 VTI calls are $4
100 shares each = $400 per contract
You’d have to sell 88 contracts to pay for the car

Which means you’d have exposure on 8,800 VTI shares, which would be a $1.7 million position based on current share price of $197 per share

If you sold those same calls against your full position of $350k you could sell about 18 contracts and net $7,200

You could always use longer dates calls or continue selling shorter term calls, but you’re taking a bet that may or may not work out

Correct, apologies I forgot to mention that this would be in conjunction with an auto loan. Would need to ensure the payout is higher than interest until it triggers at the higher price and I pay it off in full.

It’s likely not worth the hassle in this particular use case after investing the car payments principal portion of the loan and taxes on gains, but I’m more interested in the theory if you’re of the opinion that the market will be in a more favorable position within a year.
Last edited by Paradise on Mon Mar 27, 2023 9:25 pm, edited 1 time in total.
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the_wiki
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Re: Covered calls to pay for car purchase?

Post by the_wiki »

bmcgin wrote: Mon Mar 27, 2023 9:16 pm Many people have a limited understanding of options. Selling covered calls is one of the safest and most predictable things. You will always make money in the transaction if the strike price is above your cost basis. The risk is, you could have made more or after the transaction or you might be will be at a place do not want to be.

Selling the call, you get a premium. That's your's to keep no matter what happens next. And there are only two outcomes:

1. The price exceeds your strike price -- you sell the shares at the strike price and keep the premium.
or
2. The price is below your strike price -- keep your shares and keep the premium.

In either case, you keep the premium. If the stock shoots up 20% above the strike price, you may feel like you missed an opportunity because you sold at your strike price. You still made a profit, just not as much as everyone else.

While holding the option, you have the option to "buy to close it" and then "sell to open" another option (that's why they call them options--there are lots of choices).

All in all, if you should do it depends on your cost basis, your timeframe, how many shares you have, how much premium you can get and a host of things I can't think of at the moment.

It's great to be thinking about it.
I have a hard time calling them "the safest and most predictable" when you still have unlimited downside, but capped upside. They really only make sense if you think the stock will stay relatively flat while you extract your premiums.
bmcgin
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Re: Covered calls to pay for car purchase?

Post by bmcgin »

the_wiki wrote: Mon Mar 27, 2023 9:25 pm
I have a hard time calling them "the safest and most predictable" when you still have unlimited downside, but capped upside. They really only make sense if you think the stock will stay relatively flat while you extract your premiums.
So long as the strike price is below the cost basis, there is zero downside. For example, sell the call -- the market drops. Just buy to close it -- it will be profitable -- and then you're out of the option and can do whatever with your shares that you would normally do.

The upside is capped. You are under contract to sell your shares at the strike price. The thing is, you knew that before you sold the option. You still make money.

And do not confuse "Selling Calls" vs "Buying Calls" -- big difference. Buying calls, you pay premium and can lose it.
bmcgin
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Re: Covered calls to pay for car purchase?

Post by bmcgin »

The first time I did it, I was unsure if I understood the process. I did not paper trade, I bought YouTube Premium so I would not have to watch commercials, watched hours of videos, bought a subscription to https://optionstrat.com and took a plunge.

I sell puts and calls. My first option was selling a put. I got assigned and thought I was a major loser. Then I sold calls on them and made money the next week.

If you want to try, start with one contract. Learn what happens and learn how to roll out of it. Paper trade if you like. Learn the wheel strategy. Do not expect to make a lot. Aim for $200 every few weeks until you get the hang of it.

Also, I do this with a small portion of my overall account, keeping long-term investments separate.
DurangoWino
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Re: Covered calls to pay for car purchase?

Post by DurangoWino »

I sell covered calls quite often and it has been a great way to add more stock from the proceeds. Based on your holdings in VTI you have somewhere around 1800-2000 shares depending on when you bought. If so , that allows you to sell 18-20 calls. Based on the recent chart it had high’s recently between $210-215. I feel like there could be a run up in the S&P so I would be wanting to sell above that area. It looks like the $210 strike price for May is around 1.45 so that would bring in around $2600-2800 over the two month period. If you did that six times in a year you could enough money to cover your payments during that period.

Now can you pull that off six times in a row without getting your stock called away? Maybe, maybe not. So you have to be comfortable losing your stock at the strike price you sold your calls. Also you never want to sell calls at a strike price below your average cost and incur a loss.

Good luck.
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Paradise
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Re: Covered calls to pay for car purchase?

Post by Paradise »

Ah I see the point about not selling options on your own stock as the downside of the above strategy for me is a lot of taxes. You’re playing with big stacks and trying to make it into a full investment strategy. To back up a bit, I’m down to my highest gain shares in taxable (all 45%+). That’s somewhat prompting me to evaluate all options including taking out a 5-5.5% loan :shock:

I was just sniffing out a free lunch and hopefully learn something new. Aside from the downside risks (as I don’t want to sell these tax lots, especially during a downturn) and my own time investment, it should be profitable, no? Couldn’t I just keep selling the calls at enough to outpace the interest at a very likely profit while learning something ?

Like how does it all go terribly wrong is my question I guess?
Last edited by Paradise on Mon Mar 27, 2023 11:33 pm, edited 1 time in total.
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exodusNH
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Re: Covered calls to pay for car purchase?

Post by exodusNH »

Paradise wrote: Mon Mar 27, 2023 11:26 pm Ah I see the point about not selling options on your own stock as the downside of the above strategy for me is a lot of taxes. You’re playing with big stacks and trying to make it into a full investment strategy. To back up a bit, I’m down to my highest gain shares in taxable (all 45%+). That’s somewhat prompting me to evaluate all options including taking out a 5-5.5% loan :shock:

I was just sniffing out a free lunch. Aside from the downside risks (as I don’t want to sell these tax lots, especially during a downturn) and my own time investment, it should be profitable, no?
It sounds like if the strike price is above your average cost - premium, you'd not lose money. However, if the options are assigned, you will no longer own the shares. You'd need to go out and buy them again, now at a higher cost.
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Paradise
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Re: Covered calls to pay for car purchase?

Post by Paradise »

exodusNH wrote: Mon Mar 27, 2023 11:33 pm
Paradise wrote: Mon Mar 27, 2023 11:26 pm Ah I see the point about not selling options on your own stock as the downside of the above strategy for me is a lot of taxes. You’re playing with big stacks and trying to make it into a full investment strategy. To back up a bit, I’m down to my highest gain shares in taxable (all 45%+). That’s somewhat prompting me to evaluate all options including taking out a 5-5.5% loan :shock:

I was just sniffing out a free lunch. Aside from the downside risks (as I don’t want to sell these tax lots, especially during a downturn) and my own time investment, it should be profitable, no?
It sounds like if the strike price is above your average cost - premium, you'd not lose money. However, if the options are assigned, you will no longer own the shares. You'd need to go out and buy them again, now at a higher cost.

The cost on these shares are $127. These are very old shares. We spent the last handful of years prioritizing retirement accounts after joining the site.
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Fat Tails
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Re: Covered calls to pay for car purchase?

Post by Fat Tails »

Paradise wrote: Mon Mar 27, 2023 11:37 pm
exodusNH wrote: Mon Mar 27, 2023 11:33 pm
Paradise wrote: Mon Mar 27, 2023 11:26 pm Ah I see the point about not selling options on your own stock as the downside of the above strategy for me is a lot of taxes. You’re playing with big stacks and trying to make it into a full investment strategy. To back up a bit, I’m down to my highest gain shares in taxable (all 45%+). That’s somewhat prompting me to evaluate all options including taking out a 5-5.5% loan :shock:

I was just sniffing out a free lunch. Aside from the downside risks (as I don’t want to sell these tax lots, especially during a downturn) and my own time investment, it should be profitable, no?
It sounds like if the strike price is above your average cost - premium, you'd not lose money. However, if the options are assigned, you will no longer own the shares. You'd need to go out and buy them again, now at a higher cost.

The cost on these shares are $127. These are very old shares. We spent the last handful of years prioritizing retirement accounts after joining the site.
In a taxable account if the shares get called away you will have capital gains possibly incurring a tax bill.
“Doing well with money has little to do with how smart you are and a lot to do with how you behave.” - Morgan Housel
Topic Author
Paradise
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Re: Covered calls to pay for car purchase?

Post by Paradise »

Sure but isn’t that still a win as I’m selling for 10% higher than I would by just selling 35k worth today?
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squirrellyman
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Re: Covered calls to pay for car purchase?

Post by squirrellyman »

I have used the covered call tactic when I’ve decided to sell something, but don’t need to sell it immediately. Most recently, I am using this on a bunch of stocks I had from my ex-investment advisor’s overly complex (IMHO) allocation. (I’m a new Boglehead…)

To me, a covered call on something I’ve already decided to sell is like getting paid to do a GTC sell limit.

The one issue I have noticed with myself is behavioral… I found myself holding a poorly performing stock (price going down) longer than I otherwise would. For example, if it is at 10, I’ll do a covered call at 11. If it gets called, I’m happy to make $11 plus the premium. If it stays around $10, I’ll roll the option and happily take another premium. But if it drops to 8, I find I want to hold it instead of closing the option (paying a portion of the original premium) and selling.

That’s my own psychological issue, but mentioning it as a mild warning to others.
Minderbinder
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Re: Covered calls to pay for car purchase?

Post by Minderbinder »

A covered call consisting of a short call and long underlying position is the same as a short put.

So the equivalent way to think of it is, if you weren't currently in the market, are you willing to insure the downside of the market to someone in exchange for cash right now by writing a short put?

It's important to understand that there are no free lunches anywhere in financial markets and writing options is not "free money". They are fairly priced assets which give the buyer protection from a risk they do not want for a certain amount of time in exchange for a premium. For options, they are pricing in the current value of equities, the expected volatility, interest rates, and time. Accordingly you are now taking a view not only on the direction of the market (that it won't fall too much) but also on volatility (that it won't rise too much) and interest rates (that they will fall).

They are no more "free money" than it would be for an insurance company to regard life insurance premiums as "free money" when each policy has a small probability of having to pay out many times the premium.

In your case you receive money now. In exchange you agree you will wear all of the downside of the market and surrender most of the upside and you will have to basically hold that position for the duration of the option. Should vix spike sharply due to market worries, the Vega impact of your short option will basically make it financially so expensive to close that it may be nearly impossible should you need to get out of that position for any reason. This definitely isn't just theoretical, it happened to me by being short puts in spring 2020 as covid was occurring.

I continue to use options to express my levels where my portfolio goals tell me to add exposure, but I do not at all view them as a permanent source of interest-like income and it's dangerous to do so, imo.

In practical terms, are you fine making $3 with your call option but losing possibly $50 on VTI?

Not trying to dissuade you but that's probably the right question to answer for yourself before you write the options. Good luck!
alex_686
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Re: Covered calls to pay for car purchase?

Post by alex_686 »

I work with this stuff. I would not due it.

I suspect you want to sell covered calls because you want the cash now but you don’t want to sell now. i.e., the motivation is psychological and behavioral, not rationally economic. This tends to lead to a host of cognitive errors.

Lets ask the question differently. Let’s ignore the need for a new car because that is a separate issue. Why are you choosing at this time to leverage up your portfolio and increase the riskiness of your portfolio? Why not last year? Why not next year?

Delaying the pain now can tends to snowball into larger issues later. I would just sell.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Minderbinder
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Re: Covered calls to pay for car purchase?

Post by Minderbinder »

alex_686 wrote: Tue Mar 28, 2023 11:21 am I work with this stuff. I would not due it.

I suspect you want to sell covered calls because you want the cash now but you don’t want to sell now. i.e., the motivation is psychological and behavioral, not rationally economic. This tends to lead to a host of cognitive errors.

Lets ask the question differently. Let’s ignore the need for a new car because that is a separate issue. Why are you choosing at this time to leverage up your portfolio and increase the riskiness of your portfolio? Why not last year? Why not next year?

Delaying the pain now can tends to snowball into larger issues later. I would just sell.
Good post. You put the finger on it. Options should not be viewed as income generation for a specific purpose.
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jjunk
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Re: Covered calls to pay for car purchase?

Post by jjunk »

Another thing to consider is that VTI doesnt really have a ton of volume and has fairly wide spreads. So, you might not be able to make the trades you think you can. Something else to consider. IMO if you wouldnt want to sell the shares, you shouldnt trade covered calls.
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8foot7
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Re: Covered calls to pay for car purchase?

Post by 8foot7 »

If you're going to sell the shares to pay for the car anyway, I don't see a downside on this as long as your strike price is above your cost basis. You are already taking the downside risk by having the shares in the first place. If it's VTI, a move south I'd bet will eventually come back, a bet I might not be willing to make on an individual company ticker; holding onto those shares and using the premium income instead seems logical.
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Re: Covered calls to pay for car purchase?

Post by Marseille07 »

Paradise wrote: Mon Mar 27, 2023 8:18 pm My logic is to set the strike price at let’s say 215 and sell enough shares so that if it executes it will cover the purchase. 210 seems to be a pretty difficult bar to pass post Russian invasion. If it executes and I make $20 extra per share than I would for selling it now, best case it doesn’t execute and I repeat. I guess there is a worst case where it goes down so far that I would have been better off selling it outright today.

Anyone ever done this? Any other downsides? Just use my regular brokerage account?
The downside is that VTI keeps going and you'd end up losing $. Selling calls is a limited-upside unlimited-downside play.
Last edited by Marseille07 on Tue Mar 28, 2023 1:55 pm, edited 3 times in total.
investorpeter
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Re: Covered calls to pay for car purchase?

Post by investorpeter »

The current bid on a VTI call option with 215 strike price expiring on May 19, 2023 is $0.35. So you would collect $35 in premium per contract if you sold the calls today. Since you are only considering selling enough VTI to purchase a $35k car, the equivalent thing to do would be to only sell call options that cover the same number of shares (ie, $35k worth of shares) which is about 178 shares. Round that up to 200 shares, and you have enough to sell 2 call options for a total premium of $70. So for all of your effort, you would make a $70 dent in your $35k car invoice. And even the $70 is not a free lunch.

If you sold calls on your entire $350k portfolio, then it is no longer equivalent to selling just enough shares to purchase a $35k car. You are risking the possibility that you may have to sell all of your shares (and pay taxes on the gains), or buy back the option at a significant cash loss. You are also risking the possibility that the shares of VTI that you would have sold already, will drop in price.

I've sold cash-secured puts under similar circumstances (ie, I had cash that I was intending to use to purchase a stock). I never found it worth my time and stress to sell puts on VTI because the premiums were so low. It was only worth it for volatile single stocks like Tesla. And that was when interest rates were miniscule. With 4-5% interest rates, I would rather just let the cash collect interest than sell calls or puts.

So if it were me, I would sell the shares today and let the cash collect interest at 4-5% instead of putzing around with options. The only exception would be if you wanted to do this as an educational exercise but then I would only do it for the nominal amount of $35k, not your entire portfolio.
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9-5 Suited
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Re: Covered calls to pay for car purchase?

Post by 9-5 Suited »

8foot7 wrote: Tue Mar 28, 2023 1:29 pm If you're going to sell the shares to pay for the car anyway, I don't see a downside on this as long as your strike price is above your cost basis. You are already taking the downside risk by having the shares in the first place. If it's VTI, a move south I'd bet will eventually come back, a bet I might not be willing to make on an individual company ticker; holding onto those shares and using the premium income instead seems logical.
When you say “I don’t see a downside” what do you mean? It seems like there’s an obvious scenario where just paying cash and eating the tax bill could come out ahead of selling covered calls (specifically if the market faces further lengthy declines). And there’s another scenario where just taking a loan and paying interest would come out ahead, specifically if the stock skyrockets in value well beyond the strike.
20cm
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Re: Covered calls to pay for car purchase?

Post by 20cm »

investorpeter wrote: Tue Mar 28, 2023 1:43 pm With 4-5% interest rates, I would rather just let the cash collect interest than sell calls or puts.
The put premium and the interest on cash stack at competent brokerages. Selling 20% out of the money VTI puts for September yields over 2% annualized on top of the cash interest right now. Stacked with Fidelity's MM sweep options that's around 6.5%. Moreover you can TLH against the put premium while you can't against interest.
ee_guy
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Re: Covered calls to pay for car purchase?

Post by ee_guy »

If a covered call is assigned and the owner has multiple lots of stock, how is the lot to be sold specified?
20cm
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Re: Covered calls to pay for car purchase?

Post by 20cm »

ee_guy wrote: Tue Mar 28, 2023 2:03 pm If a covered call is assigned and the owner has multiple lots of stock, how is the lot to be sold specified?
At Fidelity it follows the default disposal method for the account, and then you have a 2 day window starting the day after the assignment to reassign the lots if desired.
investorpeter
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Re: Covered calls to pay for car purchase?

Post by investorpeter »

20cm wrote: Tue Mar 28, 2023 1:54 pm
investorpeter wrote: Tue Mar 28, 2023 1:43 pm With 4-5% interest rates, I would rather just let the cash collect interest than sell calls or puts.
The put premium and the interest on cash stack at competent brokerages. Selling 20% out of the money VTI puts for September yields over 2% annualized on top of the cash interest right now. Stacked with Fidelity's MM sweep options that's around 6.5%. Moreover you can TLH against the put premium while you can't against interest.
Fair enough. 2% was not enough for me to spend the effort to monitor, but I was just learning about options and also I never had a large VTI position.

Incidentally, does Fidelity allow the cash for a secured put to be held in short-term US Treasuries instead of a money-market fund?
20cm
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Re: Covered calls to pay for car purchase?

Post by 20cm »

investorpeter wrote: Tue Mar 28, 2023 2:13 pm Incidentally, does Fidelity allow the cash for a secured put to be held in short-term US Treasuries instead of a money-market fund?
They don't, but they do allow it to be held in non-core MM funds. There are some quirks with the setup however in that they seem to tag each specific CSP reserve dollar to a specific MMF position. So if you have CSPs allocated to your entire core position and you make a buy transaction or withdrawal, they will auto-liquidate out of your other MMFs back to core to maintain the previously-assigned CSP reserve there instead of funding the transaction/withdrawal out of your core position and reassigning the CSP reserve dollars to other available MMF dollars. However you can write new puts backed by the non-core MMFs without triggering auto-liquidation. It's bizarre and seems like it would be harder for them to track than just considering all auto-liquidate-able funds as a single pool.
evancox10
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Re: Covered calls to pay for car purchase?

Post by evancox10 »

8foot7 wrote: Tue Mar 28, 2023 1:29 pm If you're going to sell the shares to pay for the car anyway, I don't see a downside on this as long as your strike price is above your cost basis. You are already taking the downside risk by having the shares in the first place. If it's VTI, a move south I'd bet will eventually come back, a bet I might not be willing to make on an individual company ticker; holding onto those shares and using the premium income instead seems logical.
I'm sorry, but the downside risk is right there in your post: what if VTI goes down but doesn't come back (edit: within the relevant time frame)?

Compared to selling the stock now, if VTI goes down significantly, you lose a lot more money in that case. And if you were needing those shares to cover some expense, well now they are worth a lot less and you will have to sell a lot more to get the same amount.

Alternatively, compared to holding the stock without writing the call, you are giving up upside in exchange for some additional value if the stock is ~flat or down.

In both comparisons, there are some scenarios where you win and some where you lose. As others have mentioned, there is no such thing as a free lunch, and this is no exception.

And unless you are talking about specific effects on your tax bill, then all this talk of cost basis is just a red herring. Assume you were doing this in an IRA: economically, would you ever come out any different if you did this strategy with tax lot ABC vs tax lot XYZ? The cost basis is just a number in your brokers computer system that affects how much you will owe in taxes. It is not some magic method to avoid losing money.
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Re: Covered calls to pay for car purchase?

Post by Yarlonkol12 »

I've always avoided covered calls because they seemed to have the potential to create significant tax complexity:

https://www.fidelity.com/learning-cente ... ered-calls

I feel like cash secured puts keep things more simple, some brokerages will allow the cash allocated to cover the sold put to be invested in cash equivalents yield products too. What's the reason to use VTI, do you have unrealized gains with your existing VTI holdings?

I don't think VTI would be a great candidate for options, the options volume is too thin and the spread would be huge. Compare the volume and bid ask spread (after around 10am) for options on SPY vs VTI
My posts are for entertainment purposes only.
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Re: Covered calls to pay for car purchase?

Post by Marseille07 »

evancox10 wrote: Tue Mar 28, 2023 2:38 pm I'm sorry, but the downside risk is right there in your post: what if VTI goes down but doesn't come back (edit: within the relevant time frame)?
But that's not the downside risk of writing covered calls. If you write covered calls and VTI goes down, you pocket the premium. And that's inherently better than not writing covered calls.
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9-5 Suited
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Re: Covered calls to pay for car purchase?

Post by 9-5 Suited »

Marseille07 wrote: Tue Mar 28, 2023 7:47 pm
evancox10 wrote: Tue Mar 28, 2023 2:38 pm I'm sorry, but the downside risk is right there in your post: what if VTI goes down but doesn't come back (edit: within the relevant time frame)?
But that's not the downside risk of writing covered calls. If you write covered calls and VTI goes down, you pocket the premium. And that's inherently better than not writing covered calls.
You’re right in isolation, but I think the previous user is saying compared to the primary alternative of just selling the stock and paying the taxes to buy the car, this is a risk of the covered call approach. It would also be a risk of the loan approach, too.
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Re: Covered calls to pay for car purchase?

Post by Marseille07 »

9-5 Suited wrote: Tue Mar 28, 2023 8:31 pm You’re right in isolation, but I think the previous user is saying compared to the primary alternative of just selling the stock and paying the taxes to buy the car, this is a risk of the covered call approach. It would also be a risk of the loan approach, too.
Their response is loaded because this thread is supposed to be about writing covered calls, but they're responding to the idea of holding VTI until a lumpy purchase. Personally I'd set aside cash for planned lumpy purchases.
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Re: Covered calls to pay for car purchase?

Post by Weathering »

Question: You sell a SPY covered call with a strike price 4% above the current market price and expiration 3 months in the future. One month passes and the price of SPY has risen to the strike price of your covered call (still 2 months until expiration of the call). In some ways, your plan has worked but in others, it hasn't (still a risk of SPY downside and unable to lock in the current gain because the covered call price is higher now). What do you do?
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Re: Covered calls to pay for car purchase?

Post by 9-5 Suited »

Marseille07 wrote: Tue Mar 28, 2023 8:33 pm
9-5 Suited wrote: Tue Mar 28, 2023 8:31 pm You’re right in isolation, but I think the previous user is saying compared to the primary alternative of just selling the stock and paying the taxes to buy the car, this is a risk of the covered call approach. It would also be a risk of the loan approach, too.
Their response is loaded because this thread is supposed to be about writing covered calls, but they're responding to the idea of holding VTI until a lumpy purchase. Personally I'd set aside cash for planned lumpy purchases.
Most definitely - setting aside cash and pre-planning big purchases is the optimal default. Life doesn't need to be this complicated, bending over to pick up every dollar. Holding volatile long duration assets like VTI for short-term purchases is usually a poor strategy.
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Re: Covered calls to pay for car purchase?

Post by 20cm »

Weathering wrote: Wed Mar 29, 2023 11:00 am Question: You sell a SPY covered call with a strike price 4% above the current market price and expiration 3 months in the future. One month passes and the price of SPY has risen to the strike price of your covered call (still 2 months until expiration of the call). In some ways, your plan has worked but in others, it hasn't (still a risk of SPY downside and unable to lock in the current gain because the covered call price is higher now). What do you do?
If your plan was to get out of SPY at the strike price, unless volatility at the current moment has driven premiums up significantly higher than when you shorted the call, you can probably close the call and sell the stock and come out even or very slightly ahead of having sold SPY 4% lower last month.
Last edited by 20cm on Wed Mar 29, 2023 11:19 am, edited 1 time in total.
kchico
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Re: Covered calls to pay for car purchase?

Post by kchico »

Minderbinder wrote: Mon Mar 27, 2023 8:31 pm Personally I use options all the time which is not exactly kosher with most BH.

That said, your post suggests that you are thinking about this as almost a revenue stream that you just have to tap into and that is what lands most people in trouble, either because they get greedy and start creating huge positions or don't fully understand what is happening.

You are being paid the premium in order that you will wear all of the possible downside but only receive a limited amount of upside. If the market rallies 50% you will end up capping your gains materially, and if the market falls you will own all of those losses (less the option premium).

Something else to watch for is the impact of implied volatility. If you sell options a few months out and the market enters a period of high volatility, (perhaps due to a bank failure or a pandemic), the options price is going to be so high that you will be unable to close out of the position except at a huge loss, irrespective of where the actual price of VTI is at. It becomes a bit of "sell the ticket, take the ride to expiry" issue.

Good luck!
what does your portfolio looks like? are you selling covered calls on ETF's?
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Re: Covered calls to pay for car purchase?

Post by arcticpineapplecorp. »

9-5 Suited wrote: Wed Mar 29, 2023 11:04 am
Marseille07 wrote: Tue Mar 28, 2023 8:33 pm
9-5 Suited wrote: Tue Mar 28, 2023 8:31 pm You’re right in isolation, but I think the previous user is saying compared to the primary alternative of just selling the stock and paying the taxes to buy the car, this is a risk of the covered call approach. It would also be a risk of the loan approach, too.
Their response is loaded because this thread is supposed to be about writing covered calls, but they're responding to the idea of holding VTI until a lumpy purchase. Personally I'd set aside cash for planned lumpy purchases.
Most definitely - setting aside cash and pre-planning big purchases is the optimal default. Life doesn't need to be this complicated, bending over to pick up every dollar. Holding volatile long duration assets like VTI for short-term purchases is usually a poor strategy.
yes, whenever i see posts like this i always think about addition by subtraction. or Leidy Klotz's book "Subtraction" or Eric Balchunus' keynote address at Bogleheads conference 2022 in which he talked about Jack Bogle (and the Ramone's) who gave us so much more by stripping away everything that was extraneous:

https://www.youtube.com/watch?v=-WWLfZl ... =emb_title

the one thing i continually see is how complicated people like to make things assuming complexity is better than simplicity. "Simplicity is the ultimate sophistication" -- Leonardo DaVinci
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
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Re: Covered calls to pay for car purchase?

Post by 9-5 Suited »

arcticpineapplecorp. wrote: Wed Mar 29, 2023 11:13 am yes, whenever i see posts like this i always think about addition by subtraction. or Leidy Klotz's book "Subtraction" or Eric Balchunus' keynote address at Bogleheads conference 2022 in which he talked about Jack Bogle (and the Ramone's) who gave us so much more by stripping away everything that was extraneous:

https://www.youtube.com/watch?v=-WWLfZl ... =emb_title

the one thing i continually see is how complicated people like to make things assuming complexity is better than simplicity. "Simplicity is the ultimate sophistication" -- Leonardo DaVinci
Agreed. There's a never-ending desire to try to outsmart the system. And one thing I often notice with option strategies specifically is that because the topic has its own lexicon/jargon that looks and sounds sophisticated to someone who hasn't bothered learning about it, it gives this false impression that someone must be missing something because these "smart" people using this language I don't understand are doing it and seem so self-assured. The same thing happens in cryptocurrency - it's like a foreign language trying to follow the techno-babble which counter-intuitevely draws people in.

Basic options strategies have good use cases in specific circumstances, but the old "no free lunch adage" applies very well, and probably if we're being honest the lunch is worse than not free, as options end up costing the typical retail investor in the long-run. The house isn't losing with options pricing.
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arcticpineapplecorp.
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Re: Covered calls to pay for car purchase?

Post by arcticpineapplecorp. »

9-5 Suited wrote: Wed Mar 29, 2023 11:19 am
arcticpineapplecorp. wrote: Wed Mar 29, 2023 11:13 am yes, whenever i see posts like this i always think about addition by subtraction. or Leidy Klotz's book "Subtraction" or Eric Balchunus' keynote address at Bogleheads conference 2022 in which he talked about Jack Bogle (and the Ramone's) who gave us so much more by stripping away everything that was extraneous:

https://www.youtube.com/watch?v=-WWLfZl ... =emb_title

the one thing i continually see is how complicated people like to make things assuming complexity is better than simplicity. "Simplicity is the ultimate sophistication" -- Leonardo DaVinci
Agreed. There's a never-ending desire to try to outsmart the system. And one thing I often notice with option strategies specifically is that because the topic has its own lexicon/jargon that looks and sounds sophisticated to someone who hasn't bothered learning about it, it gives this false impression that someone must be missing something because these "smart" people using this language I don't understand are doing it and seem so self-assured. The same thing happens in cryptocurrency - it's like a foreign language trying to follow the techno-babble which counter-intuitevely draws people in.

Basic options strategies have good use cases in specific circumstances, but the old "no free lunch adage" applies very well, and probably if we're being honest the lunch is worse than not free, as options end up costing the typical retail investor in the long-run. The house isn't losing with options pricing.
100%. very well said.
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Minderbinder
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Re: Covered calls to pay for car purchase?

Post by Minderbinder »

kchico wrote: Wed Mar 29, 2023 11:10 am
Minderbinder wrote: Mon Mar 27, 2023 8:31 pm Personally I use options all the time which is not exactly kosher with most BH.

That said, your post suggests that you are thinking about this as almost a revenue stream that you just have to tap into and that is what lands most people in trouble, either because they get greedy and start creating huge positions or don't fully understand what is happening.

You are being paid the premium in order that you will wear all of the possible downside but only receive a limited amount of upside. If the market rallies 50% you will end up capping your gains materially, and if the market falls you will own all of those losses (less the option premium).

Something else to watch for is the impact of implied volatility. If you sell options a few months out and the market enters a period of high volatility, (perhaps due to a bank failure or a pandemic), the options price is going to be so high that you will be unable to close out of the position except at a huge loss, irrespective of where the actual price of VTI is at. It becomes a bit of "sell the ticket, take the ride to expiry" issue.

Good luck!
what does your portfolio looks like? are you selling covered calls on ETF's?
I'm 57% equity (all VTI and VXUS) and the balance in munis and bond etfs.

My own personal investment strategy that I've committed to (even wrote it all down as my investment purpose in a document) is to float my equity allocation between 50 and 75% depending on where we are at in relation to all time highs. The basic gist being I want to be 50/50 in "normal mode" but increase allocation once we're in a bear market and add the lower it goes. The max being 75% at 40% off highs.

Not exactly kosher with BH principles but one that works for me.

I'm writing cash secured puts once we get close to my target add levels. In this case I use the puts to commit me to execute the purchases and take the emotion out of it. With the acknowledgement that it exposes me to the time component of options where I might have preferred to buy if the market hit my level before expiry..... But I find it on balance mentally easier to be "locked in" to making a purchase when markets are falling.

Edit: I'm writing puts on SPY and then I'll close it out and buy equivalent $ quantity of VTI at expiry to answer your question. Spy liquidity is much easier to transact than VTI options. No options currently open.
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