My Option Odyssey: Personal Experiences, Numbers, and the Path Forward after Year One

My first year of option writing began on 7 February 2023 when I sold a cash-secured put for a premium of USD 100 (IWM 24FEB23 183 P).

At that time, I started off with a deposit of around USD 47,100. Over the course of a year, I managed to collect USD 9,700 in premiums and capital gains and USD 400 in interest on the cash balance for a combined total of USD 10,100.

I follow a very simple strategy, called the „wheel“, which means I sell a cash-secured put (and I really mean cash-secured, so no leverage or margin used). I usually aim for a premium of 0.5% of the strike price in the hope of not getting assigned the stock (average premium was 0.62% with an average strike price of USD 225). However, if I am assigned, I start writing covered calls. I usually enter trades on Mondays with an expiration date two weeks in the future (Friday).

In total, I have entered 67 trades so far, only one of which ended in a loss (-2 SONY 15SEP23 85 C). 16 expired worthless and I bought back 35 contracts. I was assigned 8 times and was able to sell the stock quite quickly, sometimes with a capital gain, and once with a loss of USD 110 (the very same SONY).

The most traded (profitable) underlyings were in descending order: IWM, UNH, GOOG, MSFT and NVDA.

The lowest premium was USD 25 for -1 AZN 29SEP23 64 P, while the highest premium was USD 490 for -1 UNH 21JUL23 450 P (which I bought back for USD 49 four days later).

The best month was June 2023 with a net profit of USD 1,570; the worst month was November 2023 with a net profit of USD 510.

Fees charged by Interactive Brokers were 1.25% of net profits, with an average contract costing USD 1.05.

To sum up:

I am very satisfied with this experiment. A return of 21% is good (the return in Swiss francs was somewhat lower, 17.26% IRR according to Portfolio Performance). With a few hours of work per month I have been able to earn a nice extra income. However, I‘m aware of the risks, and would not put much more money on stake. In mid-January I transferred USD 7,200 back into my main portfolio to buy more ETFs. So I‘m starting my second year as an options seller with USD 50,000 in cash. Let‘s see what 2024 has in store for options writers.

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arent you afraid of being classified as a professional trader and having to pay capital gains tax?

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Contrasts with mine where almost all options were losses. Though to be fair, most of them were hedges.

Well done!

I sell CSPs as well.

I only sell them on companies that I want anyway. I use them to generate income, but I’ll keep the companies assigned to me at the strike price. I usually go out 6-12 months and sell them on “bad news” days with high implicit volatility at high deltas with strikes about 10-20% below the underlying depending on the “strength” of my desire to own the company.
My goal is for the premium to be significantly larger than the dividend yield of the underlying over the options time till expiry.

Sold 174 options so far (started in mid 2020), got assigned maybe 3 or 4 so far, bought back (with profit) about half of the rest (the remainder expired worthless). Sold fewer Puts in the past year or so since volatility was mostly low for the companies I am interested in.
Collected a total premium of $25.5k.

Anecdotes:

  • My (on an annualized view) best performing CSP was a recent accident: thought I’d sold a Dec 24 95P on ARE for $528.06 (specialty office REIT) on January 3rd this year, realized on January 4th that I had sold the Put on ARES, bought it back for $461.94, resulting in a realized annualized return of 254.04%. :joy:

  • My most expensive strike was in a Dec 22 LMT 330P sold on July 5 2022 for a nice $767.21 premium. Expired worthless, resulted in a realized annualized return of 5.17%.

  • Currently open:

    • CSCO 42.5P expiring in June 2024, sold for $132.07 on Nov 16 2023
    • CVS 65P expiring in January 2025, sold for $297.06 on Jan 12 2024.

@Tony1337 : I try to clear out my option positions towards year end and only hold a couple or so to fly under the radar of the tax clerk looking at my year end brokerage statements. Worked fine so far (for my 22 returns I was even audited and the tax auditor had no complaints). There’s a recent thread on this by the way.

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As well as a dozen of older ones. It is a recurring topic where nothing have being really concluded.

So I suggest to keep that topic away from this thread.

Wheel is something I also tried to do. It works great until it doesn‘t.

Started during meme stock era with the meme stocks self but became a bag holder. Luckily I cut my losses early enough but kept doing it with SPY. What can be the worse? It’s SPY. Then when the index went down, I was already in high, when the index rocketed, I was out early…

The problem with the wheel, or CSP&CC, is that you are always capped with your gains. And the risk is huge :arrow_right: opportunity cost.

You spend a few hours, took huge risks and got %21 with playing GOOG, MSFT and NVDIA. This is great for someone who just started with options but it is nothing next to what you would gain if you’ve just invested in these and forget about it. My two cents.

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Since 7 Feb 2023 these stocks have returned 34%, 47% and 157% respectively.

I haven’t thought this through fully but isn’t selling fully cash-secured puts always going to be inefficient in comparison to owning the share outright? You get almost the same downside risk (depending on the strike price) and no dividends. The upside is capped to the premium

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After writing Covered Calls for a couple of years following coveredcallsadvisor.blogspot.com, I see things the same as Barto. Selling CSPs can be nice to generate additional income, but one rarely outperforms the market unless highly disciplined and investing quite some time to find the “right” ones.

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Not always.
In a strongly increasing market, you’re right. But in a slightly decreasing, flat or slightly increasing market, cash-secured puts (and covered calls) can bring additional return.
Obviously you cannot know that in advance, but I think that they are useful tools in a toolbox.

Another use case is with stocks showing generally small movements.
I have sold covered calls on Swiss blue chips; they generally expired worthless; in a few cases I rolled them to a later date and higher strike price, to avoid being assigned. Generally I sell covered calls on a fraction of my position, not the full number of shares; like this, even if assigned, I still enjoy the stock price increase on the rest of the position.

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Hello. I also started with Option selling in 2023, and until now it is working very well. Mostly I sell Puts on companies I would really like to own at prices that are close to the Intrinsic Value. Not too strictly, as some companies I do consciously ride a bit the momentum. Time to expiration normally around 30-40 days to profit from the highest rate of decay. I use a margin account and do let the theoretical potential capital, if assigned all options opened, go over my cash position (would like to know your opinion on that actually).
Still, I also didn’t beat the huge gains the underlying companies had this year, but, I disagree that on a black & white preference for plain long stocks. Thing is, with Options, one has a lot of knobs to turn where one can adjust the risk taken in a way that effectively, I believe, slides the balance on favor of the option seller. E.g., you sell a put of Googl with 0.3 delta, the probability it will drop 2 or 3 std’s is super small. Any value in between, out of the money, you’ve won. Additionally, one can roll the option almost limitless lower and into the future as to virtually never be assigned or loose money…

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Well, if you sell the put at a premium that exceeds the dividend paid out by the underlying/share, your cash flow is larger than if you bought / held the share. I only sell puts that satisfy this requirement.

E.g. I sold a Lockheed Martin (LMT) June 22 300 Put on October 26 2021 for $1327 when LMT tanked for whatever reason. Their closing price on the day sold was around $326 and their dividend yield was perhaps 3% or a little less.
Had I held on to that sold Put till expiry, my annualized return would have been 6.9%, more than twice the dividend that I would receive over the option’s lifetime.
I bought that Put back two months before expiry in April 2022 for $48 which results in a realized annualized return of 9.3%, more than three times the dividend yield (over the option’s lifetime) than if I had bought the share outright.

But, I think I see where you (and others in this thread) are going with this: total return might be better in the long run if you just buy the shares and be done with it.

Possibly true.*

However, I think you can’t answer the question of whether options make sense for you in a binary either / or way.

If you’re a long term holder not interested in cash flow or any significant cash holding right now, maybe it’s best to just buy the company and be done with it.
If you’re a partial consumer of any cash flow generated by your portfolio and you also need a cash pile to draw from, writing options can generate additional cash flow (above the dividend) and helps you to avoid selling positions (to generate the cash flow necessary for consumption).
Finally …
Why Not Have Both GIFs | Tenor
… you can also mix the two approaches. Which is what I do, currently.


* I still feel the Put option seller has a slight edge: they sell insurance to those who need it (instituional investors) and to those who are fearful or panic on red days for a given company (or even index).
A fair share of these insurances sold expire worthless, though, and a bigger portion is bought back by the insurance seller when things look less dire and the price for that insurance is now significantly lower (as illustrated with the LMT example above).
For Call option selling I’m less experienced and I’m more doubtful of having an edge. As the seller you’re taking advantage of FOMO (at least that’s how I would approach this and sell those calls on green days), but personally, I don’t want my holdings called away even if the chance is contained. I’ve only used covered calls for companies that I actually want called away.

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I see the benefit of selling covered puts to open a position in a stock that you are bullish on and would by happy to own.

My doubt is the “fully-cash secured” part combined with the approach to write covered calls to exit the stock once a put is assigned.

If you are fully cash secured capital invested is high. It means cash is tied up to cover the cost of buying the stock. This cash can’t be counted as an emergency fund

If you are bullish on the stock - which you should be if writing a put - why not let the stock run when you are assigned? If you write calls with an intent to exit, it would seem to be you have to be very skillful / lucky to beat the % return of owning the stock

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You can thought put that collateral cash to work still in a risk free asset, like T-Bills though :wink: e.g. SGOV.

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Or you could leave in cash at IBKR earning 4.83% interest in USD before tax - which should be added to the return you get from premiums

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Great points, thanks for your feedback.

I’ll try it the same way as @Your_Full_Name has described. I have less than 5% in my options depot and earnings from options are less than 5% of my income (full time job). How could I be considered a professional trader?

I don’t disagree with you. Maybe it’s not worth the hassle. But a) I was just curious how options writing really works (it’s easier than I thought) and b) my benchmark is not a portfolio full of overvalued tech stocks, but a standard mix of boring index funds that returned a mere 4% IRR in Swiss francs (17% for the options)

Let’s see what 2024 will bring…

Well, that would be too risky for my taste. If you happen to pick a really bad loser you’ll be forced to realise your loss.

Exactly, 95% index funds for the slow, boring accumulation and 5% options to satisfy your inner trader and boost returns, if you’re lucky :sunglasses:

All the best!

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@Your_Full_Name iirc you are FI and currently working part time. What are your plans once you will stop working, in order to avoid the risk being classified as a professional investor ?

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I plan to continue to sell cash secured puts occasionally for stuff that I don’t mind buying if the puts get exercised.

As for addressing the risk of being classified as a professional investor: see this post (TL;DR: you won’t be classified as a pro if you just sell a bunch of options).

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Yes, this is the usual advice while dealing with selling puts, however if you don’t also start to get rid of the assigned securities (by selling them directly or through covered calls) at a certain moment - especially if you are in the retirement stage - you will likely finish your “dry powder” and have to stop the option trading activity.

I’m thinking about a scenario where you try to earn income from options trading to complement the dividends from the securities (or the selling of shares) to cover your needs. In that case the risk is much higher - imo - and I’m trying to understand if there is a way to avoid it or if one simply has to accept it.

A “bunch of options” is a subjective criteria; the OP stated that he has entered 67 trades along the year. If I trade on a weekly basis this will make 52 trades / year for each security (and if I want to diversify the risk I might consider to choose 2-3 different securities at a time → we are already at 150+ trades / year).

Additionally, in ER the % of cash flow coming from this ‘business’ could make a non negligible portion of one’s monthly cash flow. Let’s assume I have 1 Mn in securities (from which I extract some 3% / year SWR - i.e. 36k / year) and 250k in cash - which I use to sell weekly cash-secured puts - and this activity provides me a 20% return (i.e. 50k / year). We are already in a situation where the cash flow from options selling is comparable or exceeds the remaining part of cashflow.

Finally: how do you deal with the current positive interest of USD cash (which we know is mainly offset by the USD loosing value against CHF) ? You’ll be taxed on this interest but have to swallow yourself the loss of purchasing power of the USD vs. CHF ? Is there any strategy to counterbalance this ?

Actually I’m thinking about the possibility to prepone my ER date by relying on this strategy but I’m also trying to look at the issue from different angles, in order to see whether this is really feasible or not…

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TL;DR: It depends … there’s probably not a general answer to this.
I feel in my case my option selling strategy might work out, in your case it might be different.

Once I consume all the income generated in my portfolio, I would either stop writing puts or manage risk even more conservatively* if I still had to generate additional income.

Currently, my active and passive income leave me with enough dry powder, though. I still do not always wish to purchase the underlying outright (mainly for valuation reasons).
Writing options in volatile overreaction situations (5-10% corrections that lower the price, but often still not at the “right” valuation for me) seems like a fine alternative in generating returns at or in excess of the dividends that I aim to collect from the underlying if I had just bought it.

Turns out profits from option selling are capital gains, i.e. technically not income, but I see your point.

My counter-argument would be that the tax authorities won’t see you making those capital gains unless they ask to see your full trading journal throughout the entire year.

Standard procedure is for them to see your year end holdings statement** and if that doesn’t list dozens and dozens of derivatives, you’re probably fine. I was fine with holding 7 options at year end 2022 even after getting audited and being corrected penny-wise on a bunch of things - the tax auditor never even asked about me about my options.

For me “a bunch of options” is holding ideally just a couple (0-5) at year end, listed on the year end statement that I include in my tax returns.** I could have traded 50 or 100 or 200 during the year (expired worthless, bought back with profit or loss before year end).

So, yes, it’s a subjective criterion, but so is the judgement of the tax clerk or auditor on whether they think you’re a pro. As described in the linked post above, my second hand account of how you’ll be judged by the tax authorities is the overall collective impression they have on your investment behavior based on the snapshot they see at year end.

Yeah, in your example, I would probably feel a little uncomforable as well and would cross my fingers that the tax clerk (or worse, auditor) won’t start wondering how I finance my living expenses …

In my actual case, dividends (that I pay income tax on) generate probably way more than 90% of my passive income*** and the option premiums account for a few extra bucks only (low to mid single digits thousand CHF per year).
As mentioned, the option premiums are capital gains and the ones visible to the tax authorities at year end show up as a few hundred francs or so (it’s not even clear from the year end statement whether I’m ITM or OTM).
I’m in a situation where the cash flow from dividends (did I mention that I pay tax on those?) far exceed any cash flow (which could also be negative …) from option selling. :slight_smile:

Oh, lastly on your option return goals, before we move on: your goal of making a 20% return on your cash with selling cash secured puts (CSPs) is way above - like more than twice - what I try to accomplish: I aim at making at least the dividend return of the underlying for the holding period, ideally more. This can be as low as making low single digit % points for “stable” low dividend paying stocks (think $ANTM, $JNJ, $LMT) to high single digit or low double digit returns on higher dividend and higher volatility stocks (think $OZK, $SFL, $UGI).**** Occasionally, I’ll make high double digit annualized returns on these CSPs, but that’s more the exception than the norm.

The “current positive interest of USD cash”? Surely, you’re joking, Mr. weirded …

@Your_Full_Name checks notes on Swissquote’s interest paid on USD trading accounts

(insert insane laugh here screamed by @Your_Full_Name)

– fin –

Um, yeah. I’m not worried about USD income interest while I’m still at Swissquote with most of my portfolio, sadly.

Ok, ok, it’s my own fault that I’m with Swissquote (and in fact, I’ve started dipping my toes with IBKR for recent excess dry powder as we speak).

On your CHF/USD outlook: I like your currency FX prediction for CHF/USD (mainly for my pillar 2 and 3a positions in mostly CHF). I have a bunch of (mostly personal) beliefs that I believe will compensate for your prediction, but they’re just beliefs.***** Your macro FX bet is of course as good as mine or as anyone’s.

But more generally, as mentioned initially, whether an option selling strategy makes sense - independent of your broker - probably depends heavily on your very own plans on generating income and whether significant option premium income will raise the tax man’s eyebrows.
In my case, I feel comfortable doing it (famous last words?).
In your (contrived?) example of generating a large portion of your income with selling CSPs maybe not.

Be well and invest well!******


* E.g. write LEAPS with a 1-2 year expiry 20-30% OTM. I currently write CSPs with about 6-9 months till expiry at a strike about 10-20% below the underlying, depending on how “badly” I want the company shares.

** In fact, that’s already overdoing it, I believe: all they want to see is your bank/broker’s statements where you ask for withholding tax etc to be reimbursed to you.
To be clear: you’re obliged to declare your full holdings so they can calculate the wealth tax you’re due, but I believe you don’t have to provide all the year end statements as a proof.
I do it anyways.

*** For completeness: no plans to extract from the nest egg, i.e. SWR ~0%.

**** My realized annualized rate of return from selling options is probably about 10% or so. Currently probably less, as volatility is low.

***** USD vs other currencies, my personal beliefs edition:

  1. Don’t bet against the U.S. (see also - again - Buffett’s latest letter to their shareholders).
  2. Most U.S. companies I invest in source profits globally in most currency markets.
  3. U.S. companies are shareholder friendly compared to probably any other country, including Switzerland.
    E.g. dividend payout is usually quarterly, investors demand shareholder return, people believe in capitalism, etc.
    Contrast this with asking for a 13th AHV payout, skepticism about success in general or successful companies, even in Switzerland … ok, I’ll stop: this is closing in on politics.
  4. Personal experience (of course anecdotal): my income in CHF from US dividends has risen about 6% annually if I historically backtest my current U.S. and global holdings for the past decade or so. While backtesting is only, well, looking into the past, directionally, that’s good enough indicator for me.

****** Blatantly stolen from Jason Zweig’s newsletter.

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Thank you for your thorough feedback! I agree that in your scenario, there’s no cause for concern since you’re aiming for a 0% SWR (congratulations on achieving that, by the way ! :slight_smile: :tada:) and your dividends substantially outweigh the income generated from options trading.

I’m curious to hear from @larix.aurea and other fellow members engaged in options trading if they are considering supplementing in a substantial manner their retirement cash flow with proceedings from option trading and their considerations regarding the issues we are discussing.

I concur with your assessment that if I have few or no open positions by year’s end, it’s unlikely anyone will delve further into the matter, unless I cease working. In that case, they may inquire into how I fund my lifestyle, provided they’re not convinced I can rely solely on dividends from my ETFs or occasional security sales :smiling_imp:. Time will tell…

Regarding USD cash (and my perspective on it): I don’t have a specific long-term outlook. What concerns me is that IBKR currently pays nearly 5% interest on USD cash (which the authorities will be happy to tax :money_with_wings: :money_with_wings:), yet concurrently, my idle USD funds are losing purchasing power against CHF, my primary currency for living expenses. I understand this is most likely the price to pay to play this game, but it’s a matter of concern, nonetheless.