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So, I have this idea, and I'm curious if I'm on the right track.
I've generally avoided stock options, because the only thing I know about them is that's how you lose all your money. They expire worthless all the damned time. However, selling covered calls seems like a good way to be on the right side of that, and the only risk is you miss out on potential gains. You are literally selling contracts to people you are betting will be worthless by expiration, and pocketing the cash, and even when you are wrong, you still get the full value of the stocks you sold them at the price you agreed on in the contract.
I'm sitting on a shit ton of COIN, and I'm planning on selling half when it doubles. This actually coincides wonderfully with the size of an option contract (100 shares). So I'm thinking, every week I sell an option contract at my price target, pocket some extra cash I wouldn't have otherwise, and it eventually sells at that price just like I had pre-committed to do anyways.
It's win/win/win right?
What if those contracts are not worthless by expiration? Indeed what if they are worth more than what you sold them for? Do you think this possibility is not taken into account while pricing them?
I work at a small options trading firm at a non trading role. I interact with the guys working on modelling and pricing options every day. One thing I know is that these guys are really fucking smart and spend most of their day and night hours thinking about how to very efficiently take your money and getting very well compensated for this. I would advise anyone away from competing with these guys unless you really know what you are doing. Derivative trading is meant for institutional investors to hedge certain risks. Options are to be bought as well calculated insurance policies and not as a way to gamble with leverage. It’s a pity that they became a very efficient tool in the crypto world to part fools with their money.
Let me put it like this. The alternative to me selling these covered calls is to just set a limit order to sell 100 shares at my price target. One way or another they are getting sold, I'd rather sell the covered calls in the meantime. None of this is on leverage. I don't care if someone else makes more money if I still get my 100%+ return on holding them for 1-2 years.
When my NVDA 10x'ed I sold 20% to take out 200% of my initial investment. The other 80% that I let ride has gone up another 100%. I regret nothing. I plan on selling 10% more soon and taking out another 200% of my initial investment. I'm not trying to time the top perfectly, or make more money than everyone else, I'm trying to end up with more money than I put in. Preferably beating a benchmark of 10% annual returns. Worst case beating a benchmark of HYSA returns.
I can't believe that when Wall Street Bets posters were getting rich off of NVDA back in 2017 I thought I had missed the boat.
Are you managing all of your savings yourself or are these stock picks some small portion of your total assets? I'm just curious—I'm not going to tell you to stop or buy index ETFs.
Well, these stocks were a small portion of my total savings. I used to have 3x as much in a nice conservative 401k. And they were also a small portion of my overall non 401k brokerage portfolio. But their growth has so outpaced everything else, its gotten a bit lopsided.
Edit: Wrote that up on mobile, and realize it might be unclear. My 401k was 3x the size of my regular brokerage account. In my brokerage account, COIN and NVDA were about 1/4.
Then there's my BTC which was about 1/5th the size of my brokerage account.
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Selling covered calls is a great way to reduce your position size in a stock you also don’t mind holding for at least the time it takes for the option to expire. So, sounds perfect for your plan to scale down. Just remember if your strike price is high enough to present little risk of having your shares called away, your counterparty is wise to this and will bid accordingly. You’re only compensated for the risk you accept.
Two possibilities you may be discounting:
You sell a call, make your $500 or whatever, and COIN tanks sharply. Sure the option expires worthless and you keep your $500, but you may lose multiples of this in forfeited capital gains by not just exiting, and who knows when it could recover. Also your target price is now even further out of the money and will sell for that much less going forward.
The opposite happens, you lose your shares at your target price, and sure you’re fine with the possibility now, but it’s a different story when you watch your underlying double, triple within a year or two and you gave it all up for a few hundred bucks in premium.
These things will happen to you if you use this strategy enough. If you’re okay with all that I say go for it.
RE 1. I am not an extremely sophisticated investor. I generally buy and hold for 5+ years. Unless I have something I'd rather invest in, or the gains just get too rich (10x or so), I let things ride. I also tend to do this with my losses, since I know I'm not fast enough, or have enough inside information, to dip before things go south. So once I'm at the bottom, I figure I might as well ride it out, or save the losses for tax season to offset gains. Maybe this means I shouldn't have a self directed brokerage account at all, and if I ever dip below my 10% APY threshold I may consider that, but so far so good.
RE 2. You may be right about this one. I sold the first covered call, and my heart dipped when COIN went up enormously Friday evening and Monday morning. Turns out I might not have been as emotionally prepared to part with COIN @ 340 if it happened this early after all. Of course the price came back down, the call I sold is rapidly approaching worthlessness, down 85% from when I sold it, and it looks like I will escape the week a few hundred richer and with all my holdings in tact.
My whole reasoning behind attempting this is to keep it up with some regularity week to week, getting $100-200 here or there with some consistency. Sell calls that are at or above my strike price and only 4-5 days out, and just settle for whatever I can get for them. Paying for private school has been expensive and my monthly contributions to my brokerage account have dwindled precipitously. Selling covered calls seemed like a not terrible way to effectively goose my "contributions". But I may not have the emotional fortitude or sophistication for it after all.
We shall see what this Friday brings, and if I feel like repeating my efforts come Monday.
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First of all, congrats. You've been the recipient of incredible luck. The market gods have smiled on COIN and bestowed upon it a share price far outstripping any reasonable valuation.
If it were me, I'd sell the entire lot at market open on Monday. I can't guarantee that today was the top, but the supply of greater fools is limited. Coinbase may not be the stupidest bubble stock (that would be CVNA), but is not far behind. Despite everything, Coinbase still doesn't make money. And the share count only goes up.
In a sense, it's a good thing to sell covered calls because this reduces your overall exposure to COIN.
But overall, the Buy-Write strategy hasn't performed well in recent decades. For a long time it was considered a way to generate great risk-adjusted returns. Things have changed in the post-Bernake era of easy money. For example, QYLD has returned 42% in the last 5 years vs. 159% for QQQ, and with higher taxes too.
Yeah, I have a significantly different thesis for Coinbase. Crypto isn't going anywhere, they are the custodian for Blackrock's ETF, along with all but 2 of the others. Pretty sure they will execute a regulatory monopoly. Also you may have missed their last earnings. Reducing operating cost and making institutional clients 50% of the revenue got them pretty solidly in the black. Plus they are sitting on a mountain of cash. The stock has at least 6 months to stretch it's legs as the bitcoin bull market runs a bit further. I mean, anything can happen, but I'm putting my money where my mouth is for at least that long.
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I'm not super aware of finance, but my impression was that in general, you can't get higher returns in an efficient market without insider knowledge or higher risk. This would make me think that there's some type of drawback to your win-win-win (at least, in general, that wouldn't mean that it's not the best for you personally)?
Secondly, I think I heard that any financial instrument can be simulated using options.
I could be totally off base on either of those, so if people can correct me or confirm, that would we appreciated.
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