Options trading, Cash Secured Puts etc

Another bull put trader! I recently started doing the same, so far on a smaller scale. Looks like we have the same strategy: cash secured puts. Since I’m still experimenting with this I’m using a cheaper stock to wheel on atm. Do you always do CSPs or have you considered vertical spreads too?

i always use cash secured puts so far … frankly i dont even know what vertical spreads are :slight_smile:

another side effect that i really like about put selling is that i have the cash immediately and that i will get to keep it even if i get assigned. lastly, buying spy doesnt feel like a bad thing versus some value play etc

aren’t you risking cgt with your option trading? or you never plan to sell?

Yes I understand completely. I only sell puts for stocks I don’t mind owning. If I get assigned, I might sell a covered call to generate more premium. This is known as The Wheel strategy.

I’m not sure what cgt means? Options will expire at some point so depending on the type one has to eventually sell or risk losing all. If you sell a put like we do, the sale happened already. :smirk:

Options are a complex topic which require a lot of studying to properly understand. I wouldn’t recommend them to anyone because people tend to take things casually. Without understanding all the mechanics there can be some surprising and large risks.

I got interested in the topic and studied a lot from various sources. Then I started small. So far my approach has worked but I haven’t done it long enough to pretend to be some kind of an expert. On the topic of experts, there are a lot of youtube videos which make options trading look easy but the people making them might have a conflict of interest. Caveat emptor.

In any case options are not really a mustachian instrument but a side hustle with leverage.

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I’m not sure what cgt means

capital gains tax

you violate one of safe harbor rules by trading options for profit (rather than hedging) and potentially liable to pay income tax + 2x ahv on the gain, potentially on all your trades, not just options

Ah, of course.

Someone with more experience could weigh more on this. I don’t think it’s likely with my paltry amounts. Also, I don’t day trade them and my activity/volume is low in general. I’m going to bring it up with my steuerberater anyway.

P.S. We have derailed this thread a bit so maybe a mod could move it into its own topic.

Yes let’s move this conversation to a new thread

I already discussed this topic with my tax advisor before doing any option trading. Short summary: depending on the canton, you’ll be qualified as a professional trader quite fast. Tax office in Schwyz is famous for qualifying someone as a professional trader, according to my tax advisor (owner/managing director of a tax advisor company with 50ppl).

Are you using leverage for your options as well (e.g. loan from the broker)? Or do I get this wrong? Using leverage is a red flag for tax authorities.

It would be great if you can share which sources you have used. You can also send a PN.
I’m also diving deeper into this topic, but a lot of stuff you can find is for beginners only. Topics like risk mgmt, VIX volatility etc are usually not discussed that much.

Just wondering when it comes to the tax authority how can they know that you trade options ? ^^ If you trade them on IB under the automatic exchange of information they only communicate the amount of sales you do in a year but not the type of product you traded and I’m quite confident that if the amount remains low you won’t raise any red flag, unless of course you send them a mail to ask whether trading options qualifies you to become a professional trader ^^.

I’m not using margin/borrowing. Options themselves provide leverage because they allow one to control a larger amount of shares with a lower initial capital. Therefore it creates a potential for higher profits with the same price movement of the underlying stock. The opposite is of course true as well and many people have been burnt by the quick losses.

I didn’t really keep a list because there was a lot. I took some notes and did simulated calculations with Excel. I can check what I can find in my history.

Some topics to start with

  • Understanding what buying/selling a call/put really means
  • The Greeks
  • Covered calls and cash secured puts
  • Spreads (and their risks)
  • Calculating the max profit and loss for a position
  • Logging your trades
  • Practice with the paper trading mode of IBKR

Reading is better than youtube. Question the motive of everyone who is providing info and then check the same topic from multiple sources. Then explicitly search for risks involved with that particular topic.

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For those interested on that tax topic I’ve confirmed with Interactive Brokers how our data are treated in the scope of the CRS standard for information exchange between tax authorities. Although I myself had to implement CRS for some banks in the past years I indeed had a doubt looking at the generated CRS report available in the interactive brokers account where all relevant trades for a given year are listed and I thought they were the zealous kind providing more data than what’s required by the OECD.

For instance when one sells an option (short or to close an option position it does not matter) this triggers a CRS relevant event and I was afraid that they did it in a way that the whole list of trades would be sent but they confirmed that they only send aggregated data without any trade details and for the case of interest here that they basically do the sum of all sales proceeds during a year (i.e. option / stocks / etc.) and transmit that number alone without detailing the securities / product involved. The list of trades is just provided as a helper for you to check that the maths check (lol).

To summarize as long as you keep the option activity to a relatively small amount relative to your overall wealth there’s no reason for the tax authority to audit your trading activities. On the other hand of course if they are receiving information that you sold for 100k or securities in a given year while you only declared 10k of taxable wealth then I guess that would be a problem ^^. To that respect I guess that the general rule saying that you have to trade more than 5 times the amount of your assets to be considered a professional trader holds in that case.

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Great contribution @HoiZame ! Thanks for looking so deep into it.

In the meanwhile I checked the guidance for my canton and found these guidelines from Kt Zug:

Gewerbsmässigkeit ist in der Regel im Kanton Zug auszuschliessen, wenn

  • der durchschnittliche Wertschriftenbestand gemäss Wertschriftenverzeichnis (ohne flüssige Mittel) weniger als Fr. 200’000.– beträgt
  • jährlich weniger als 100 Transaktionen (Käufe und Verkäufe) stattfinden. Falls kein Fremdkapital eingesetzt wird und keine derivate Geschäfte, die über die Absicherung von eigenen Wertschriftenpositionen hinausgehen, getätigt werden sind bis zu 200 Transaktionen zulässig

I remember seeing a similar guidance for BE too. I would be good even if the entire transaction history was provided to the tax man.

Very interesting topic, thank you and @LeStache for sharing your experience.
I am trying to approach this matter, with all the due caution due to the complexity of it.

However, I would like to follow a very similar strategy, i.e. selling cash secured puts or covered calls which, as far as I understand, only bring the risk to get to buy some securities at a predetermined, lower price (puts) or sell your assets at a predefined, higher price (call).

Still struggling with the following though:

  • I mainly invest in VT. When you say you operate on SPY can you please clarify what is the instrument? I thought this was not available for investors outside US…
  • how to figure out what price is convenient for the sale/when it is the right moment (I would sell puts when the sentiment is negative and calls when it is very positive to get a higher premium but not really sure how to identify when to get into the trade). Any suggestions?
  • long term expirations would keep that money uninvested - I guess you use the cash that you like to keep as liquidity fund?
  • tax issues but I have seen this has already been discussed further here

Thanks a lot!

Thanks for dropping by! I’ve put some answers below.

I personally don’t trade options for SPY but they are available just as for most other securities. Perhaps @IdleThought can tell more about SPY. Once you have the required experience and pass the knowledge test on IBKR, options trading will become available. I trade options for normal stocks under the $100 price. Remember that you need to have 100x the strike price in cash or margin to operate. $3000 for a strike price of $30 and so on.

Selling a put is (usually) a bullish position and selling a call is a bearish position. Therefore it’s the opposite to what you said - unless I misinterpret the part about market sentiment. I recommend to study on options basics some more if this is confusing. Personally I only trade options for stocks I would not mind owning if assigned. I really cannot advise on what the right price or time is, it depends heavily on the trading strategy and individual preferences.

What is long term for you? In any case you can always close the position earlier if the price of the option moves favourably. When you trade options (especially cash secured), the money is not uninvested. For example, if I have $1000 and sell a put for $1, that’s a max profit of 10% if it expires worthless. I could also buy it back for $0.50 at some point if the underlying moved up (or theta ate half of its value), and still make 5% on the collateral. If there are only 30-45 days (not really that long) to expiration this translates to an attractive annualized return.

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Many thanks for taking the time to answer my doubts, @LeStache.

I personally don’t trade options for SPY but they are available just as for most other securities. Perhaps @IdleThought can tell more about SPY. Once you have the required experience and pass the knowledge test on IBKR, options trading will become available. I trade options for normal stocks under the $100 price. Remember that you need to have 100x the strike price in cash or margin to operate. $3000 for a strike price of $30 and so on.

Thank you, I will check IB for further details.

Selling a put is (usually) a bullish position and selling a call is a bearish position. Therefore it’s the opposite to what you said - unless I misinterpret the part about market sentiment. I recommend to study on options basics some more if this is confusing. Personally I only trade options for stocks I would not mind owning if assigned. I really cannot advise on what the right price or time is, it depends heavily on the trading strategy and individual preferences.

Here I meant that, for my understanding, the price of the put would be higher when the underlying stock is red as well as the call would generate more income when the underlying is going up. Does it make sense?
On the bearish/bullish stance of selling puts/calls I fully agree with you.

What is long term for you? In any case you can always close the position earlier if the price of the option moves favourably. When you trade options (especially cash secured), the money is not uninvested. For example, if I have $1000 and sell a put for $1, that’s a max profit of 10% if it expires worthless. I could also buy it back for $0.50 at some point if the underlying moved up (or theta ate half of its value), and still make 5% on the collateral. If there are only 30-45 days (not really that long) to expiration this translates to an attractive annualized return.

As long term I referred to the fact that @IdleThought mentioned 12 mo expiry date and I considered it as uninvested (i.e. not invested in VT in my case) as that cash needs to be set aside as collateral but I see your point. It is actually generating a very nice return with the “only” downside of having to own a security that you would feel comfortable to own anyway at the strike price picked when selling the put. Of course, the price could go much lower than that and you would end up with a stock that you have somehow overpaid but done on the right stocks it should be manageable.

I will study the topics you mentioned in another post in this thread and give it a try.

Oh I see, thanks for clarifying. According to my limited experience the price of an option contract depends mainly on three things: days to expiration, implied volatility, and how close to being in the money the strike price is. It’s possible that if there is a clear downtrend, then the price of a put might go up. Some of them will really go up. Sometimes contracts further out of the money have more open interest and volume than ones closer to being ITM and therefore the price will also change more.

The question is kind of paradoxical because the IMHO the easiest way to start is selling a cash secured put. You will sell more or less at market price and after that you don’t want the price to go down anymore. If you would start by selling a call, you first have to have 100 shares of that stock to cover it.

The way I trade is I look for stocks I would not mind owning if I ever get assigned. Then I check for high IV and uptrend. I start by selling a CSP, usually it’s not ATM but further out. I look for a price/delta value combination I’m comfortable with. If the price goes down and I get assigned, I sell a covered call and collect more premium thus bringing my cost basis down.

12 months would be way too long for me personally. Considering the price for SPY (>$300), that means for a single contract at least $30k would be blocked. I now better understand your point about uninvested money. If I went for contracts 12 months out I would probably aim to close the positions after reaching a certain profit target. I have to say that in comparison to SPY I’m playing with peanuts here so my approach may not even be applicable to more expensive options and long DTE.

If the price keeps going down you can keep on selling covered calls. This will reduce your cost basis for that stock. The Wheel strategy covers this scenario too. You alternate selling puts and calls depending on if you got assigned. If there is a crash, you can easily bring down your break even price. Here’s a pretty good video (the actual topic starts around 6min55s) explaining how to manage a trade when it goes south. If you want to read up more, check The Wheel strategy from various sources. That’s the one which forced me to learn more about the different aspects like the Greeks.

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