So Vanguard Prime Money Market is yielding 0.6. All other "Safer" money markets are yielding even less. This when just a couple of months back Prime was yielding more than what you could get in an FDIC insured MM account with a bank. While Bank MMs have also dropped their interest rates, Mutual MM fund yields have basically collapsed.
All of the above to simply explain I'm looking at selling OTM Puts to generate Income and wanted to know tax treatment. I learnt gains / losses from options are capital gains, all short term unless options are actually held over a year (and even here there are some exceptions). More curious was the fact index/bond/futures options get a more favorable treatment of 60/40 long term/short term tax rates. So now I have one question for those might be doing what I'm about to try, or otherwise use options regularly in their portfolios.
If I sell options on SPY - ETF that invests in the S&P 500 index - will I qualify for the favorable 60/40 tax treatment? I'm thinking not and only institutions that can actually sell options directly on the index may be able to do that. However, thought I would ask.
Comments
HOWEVER - these days I would not be selling puts unless I wanted to own the underlying stock for a long term position, as there is the great likelihood that things will go south again quickly and blow out my short put positions. If volatility makes *very*very* OTM puts attractive I'd consider them for a trade, but unless you're looking to either trade them or accumulate stock, selling puts is NOT recommended during periods of market volatility even if the volatility makes puts 'attractive' because of the increased IV.
Conversely you could write covered calls on ETFs or stocks you own - such as quality dividend stocks. That way you can collect *something* more than MM rates, and you have some downside protection to exit your position before losses kick in. If the stock goes up, whoop-de-doo, you make a profit.
Index futures options (/ES) or index options (OEX, SPX) also have trading nuances such as wide bid-ask spreads, goofy settlement schedules, and depending on the vehicle, limited liquidity.
In the event security gets "put" to me, I plan on immediately selling covered call at my cost basis. I'll need to aggressively track my cost basis and keep doing that if security keeps falling or just get out at loss. Needless to say I cannot eliminate risk ever with options but I am going to try. I mean all these alternative, long short, strategic !@#$%^&* funds have not actually done diddly in the market they are exactly supposed to work in, right? Right now I have high confidence I will F up less than overpaid fund managers.
I made $500 selling OTM puts in SPY last week in my fidelity account. SPY has 3 expiry dates every week. I just sold PUTs the day before each expiry. It was ridiculously easy.
There is something called beginners luck. I'm going to give this couple of months. If I continue to generate this kind of money I don't need RPHYX and RSIVX.
Seriously though, after what happened to bond, bond-like, "income" funds in the last couple of months I would rather take my own risk with money I would normally not invest. If MM funds offered something in return I would never have tried this. Few months back you could have gotten 2%. Now you can get 1.5% going to zero at Marcus, for instance. At brokerages though MM funds are not FDIC insured and after looking at how much Schwab Money Market yielded in March, I've absolutely had it.
The key is to stop being greedy and remind yourself you are not investing, and to simply take the money and run every chance you get. So far I've done well. Made another $400 odd since I started this thread. I just dunno if I can do it with larger amounts of cash and worried a bit if I mess up, so still researching a few things.
Lastly, wanted to add Vanguard sucks at options trading. Will likely ditch it for cash and go to Schwab or Fido.
Going back to my stance prior to buying outright bond funds. No more.
PS - Just to close out the situation with Vanguard. Getting options approval is so painful, I'm just not doing it. I have approval at Fido and Schwab, so I'm moving money out of Vanguard and will do options with them at other brokerages.
Good luck -- glad things are working out for you thus far ... volatility can make things both more interesting, profitable, and/or risky, but that's all part of the game!
https://www.streetdirectory.com/etoday/bull-put-credit-spread-eafow.html
Yes that's the thing. VF is just selling the put, though -- as I understand things, he's not buying the other put to limit losses to the downside.
That is not to say I will not buy protective puts ever.
And yes, call it beginners luck as whatever. I haven't had a single losing trade. I'm succeeding and not being cocky / greedy too. I think I can make 3-4 times what I'm earning at Fido Money Market funds. Hopefully this continues.
PS - I also learnt how to "roll" my trade when I was going to be forced into purchasing SPY, and then was able to get out of my obligation without losing any money. Was so gratifying. What you do is you buy back the put at more than you sold it for, but turn around and sell another put further out, but also at lower strike price and keep a credit. In my case the rolled put expired worthless.
Since my daughter earned a scholarship to university, thought I would earn some income, so revisited some of my learning. Cash earning absolutely nothing.
Don't have to do anything drastic. Just sell a put. And sell it on SPY knowing it will not go to zero. Important to note, I shouldn't blab. I feel today might signal a downtrend. I was lucky to start after the sell off was mostly over and selling puts with markets going up is ideal. If you sell a PUT there is an obligation to purchase. So if you are assigned a share of SPY, you need to immediately sell a covered call. Or just simply sell and get out.
It's really not too hard. Just youtube for a basic options course. Will take 1 hour at most.
PS - There are too many people out there selling too many "strategies". Ignore. You need to know what your objective is. Speculating buying calls and puts? or earn income? mine is the latter. I might have said this before. 0.25% a week should be the target. 1% a month. 12% a year. Now lets say 0.10% a week, 0.4% a month, 4.8% a year. I'll still take it.
What worked for me back then was, say if I lost 20K one day ... I would half my position sizing and not increase it back to normal trading lots until I had earned that money back. My thinking was that would reduce my risk and also force me to "be better" in my analysis and trading, even when it was "so clearly obvious" which way the market was going --- which if I acted on that impulse, I'd probably have been wrong.
Anyone selling you the idea you can make 5-15% overnight, per week, or per month using options (or anything, really) is likely selling you reckless ideas packaged as snake oil. Only pikers will buy into that b/c they are enamored only by the potential gains, not how the trades are structured or what could happen if they lose. In this case, the only person making a profit is the newsletter/signal provider.
You need your own strategy / scale / objective. One thing I can tell you is do not do 2X, 3X, 5X of your trade. what I mean is, if you have more money to play with do not sell 5 puts of SPY. instead make 5 trades with 1 put. That's the standard "casino" logic. They have limits on their tables because they want you to bet smaller more number times because the more times you play, the better probability THEY have of winning. When you are SELLING a put, you are the casino. You are selling RISK to the other guy who is buying the put from you.
Next is your objective. Few ways to think about it. One obvious way is "can i make more than i'm earning as interest"? another is "can i generate enough cash to pay my monthly utility bills". i trust you get the picture. have a goal in mind and don't be greedy.
Here's a guideline. Disclaimer if you lose money you suck not me. Say SPY is $280. 1.5% of SPY is $4.20. Go OTM and sell a put to collect $4.20. Chill. If you get assigned SPY because it drops at expiry, go out and sell a covered call to get 1.5% of what your cost basis is. Rinse. Repeat. Do with just 1 PUT for maybe 6 months, a year, whatever.
I cannot say this again. Paper trading will only take you so far. To know your "psychology" you need to have real money on the line. Hindsight is always 2020, and this being the year 2020 is absolutely no help at all.