No. of Recommendations: 6
Selling puts for income is the worst strategy ever
This is absolutely true. And selling [covered] calls for income is similar. That's mainly because options are a zero sum game, and in order to believe that you can gain regular income from options literally means that you believe there is a sufficient supply of people out there willing to give you "free money". In reality, when you sell an option, you are selling a form of insurance, and like most insurance, it is only used rarely. But like most insurance, it is used at times of the highest stress. So by selling options, you are taking on the liability of that extreme stress.
Now, I regularly sell put options, but not for income. I use them as a tool to accumulate stocks that I like at slightly lower prices than currently available. I learned that technique from Apple when, a number of years ago, they used that technique for one of their share buybacks. For example, a number of times in 2023, I sold BRKB puts in an attempt to add to my position. For a few months, my puts were not exercised and the puts expired worthless, and I didn't get to buy those shares, but once, in March I think, my 305 puts were exercised and I got to buy shares at 305. And that was delightful, I still hold all those shares today.
Now back to the "sufficient supply" of less informed people out there. It has been shown that less sophisticated option traders almost always BUY options, while more sophisticated option traders will both buy and sell options. Therefore, I try to position myself on the selling side whenever possible because the odds are higher that I will be trading against someone less sophisticated. And in fact, a couple of months ago, I got really lucky and was assigned an exercise by someone unsophisticated. They exercised an option that would have been better, financially better, to simply be sold, and by doing that, they transferred all the remaining time premium to me instead of to their own brokerage account. But that is pure luck, it doesn't happen often at all. What does happen more often is option exercises across an ex-dividend day to "capture" the dividend, that's happened to me a number of times on the higher strike option of a bull call spread.
And that brings me to spreads. Option spreads are a wonderful way to trade. That's because you can choose LITERALLY any level of risk you please, with the commensurate return for that risk. For example, you can enter into various bull call spreads on Berkshire (B). You might choose a 350/400 June '25 spread which is very likely to expire at full value, but because it is so likely, you will only make a buck or two (on that $48-49 investment). But you can choose a 400/450 spread which is somewhat riskier, and you have the potential of making 4 or 5 bucks. Or you choose something much more risky, and you can buy a 450/500 spread with the potential of making 30 bucks if the stock is at or over 500 by the third Friday in June. And you can choose ANY range, and ANY level of risk, it's a nice tool to use.
Finally, the last part of my story. I started trading options in the 80s. Back then it was a huge pain to trade them, and it was VERY expensive. You had to call the broker on the phone, and you paid HUGE commissions to trade them, and the spreads were usually very wide. I was very long NYA (one of the popular NYSE indexes back then) options and my options portfolio got wiped out on Black Monday in October of 1987. That's when I learned the lessons I mentioned above. Luckily, I was still young at the time, so I was trading with relatively low amounts of money while learning that lesson.
