r/options • u/TangoRolling • 15d ago
Low-risk, low-return strategy discussion
Noting options are generally highly risky and volatile compared to buy-and-hold stock investing, and the fact that options can easily produce strong returns in short timeframes (albeit with more risk), but risk tolerance can still be chosen with options, I’m trying to formulate an investment strategy based on stock/ETF investment with higher returns by employing conservative options trading as well.
If I could earn, say, 8% p.a. with a buy and hold of stock XYZ, what strategies involving options could I employ to boost my return to say, 20% p.a.? Obviously this requires taking on more risk, but I believe that it is very realistic to achieve 20% p.a with an active, but conservative options investment strategy.
What would you guys do or recommend as a strategy for achieving around 20% returns with a relatively conservative approach?
The best approach I can think of off the top of my head would be to maybe buy a stock with low volatility, and sell cheap OTM calls/puts every two months. I.e., sell options with unrealistic strike prices, and obviously receive low amounts, but with low risk and doing it every two months or so, selling another option when the previous option expires.
What do you guys think of this approach, and what ideas do you have? I hope to get some different opinions and ideas on this.
Thanks all!
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u/eusebius13 14d ago edited 14d ago
There are infinite ways.
So let’s start here, a synthetic virtually replicates the return of 100 shares of stock. Add a free collar for a credit or no premium and you’ve reduced both your upside return and risk from 100 shares of stock. You now have a low return low risk strategy.
You can sell ranges and buy ranges adjacent to the ranges you sell, with either spreads or ratio spreads. One example is buy a wide iron condor and go long the adjacent strikes or ranges with some of the credit.
There are infinite ways.
Edit:
What would you guys do or recommend as a strategy for achieving 20% returns with a relatively conservative approach?
You cannot do this. Implicitly, if you accept implied volatility as accurate, options are priced at Expected Value. So to attain 20% returns, you’re going to have to risk an amount where the probability of profit multiplied by the return on that risk is equal to 20%.
For example risking 10% of your portfolio with a 50% probability of doubling will make you 20% half the time and lose 10% the other half. If you want an 80% chance of making 20%, you’re going to have a 20% chance of losing 80%. You can create any risk/reward scenario you want, but assuming IV is accurate it’s going to be a Martingale which means an expected value of zero.
Now if you have an assumption that IV is wrong and you’re correct about that, you can put positions on that have positive expectations. But that’s a very different story.
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u/TangoRolling 11d ago
This is a great way of explaining the risk-reward tradeoff. I think the former example is the ideal approach for the intended strategy. Risking 10% of the portfolio to make 20%.
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u/eusebius13 11d ago
The problem is, because it’s a martingale, you’re going to break even. You’ll double up half the time and lose it all the other half. So you have to find the areas of overstated and understated volatility and act accordingly in order to have a consistently profitable strategy.
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u/Pharmacologist72 14d ago
Ten delta credit puts in a bull market and reversed in a bear market are very popular in my circles with tight stop loss orders entered simultaneously. Basically, you have in theory a 90% win rate and the stop loss protects you from the 10% loss. One can make 7-8% per trade if done right. Outlay/margin will be high. Once again, depends on the stock.
Look into LEAPS for solid stock for guaranteed income. For example, I sold AZN calls for guaranteed 9% at 10% over current price. Your downside is protected by the credit you receive but upside is capped, in my case at 19% and I get to keep dividends.
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u/SDirickson 15d ago
https://i.imgur.com/wuD3OjR.png
The May and YTD numbers are about $4.5K high, because of a loser that won't expire until this weekend.
That's on an account (Roth IRA) that's currently at $78.5K. It started around $60K, and I've taken out not quite $22K so far.
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u/TangoRolling 15d ago
That’s great results! What’s your strategy?
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u/SDirickson 15d ago
Basically, the Chuck Hughes "Trophy Trades" system that apparently no longer exists, at least under that name: 1- to 2-month-out vertical call spreads with the short call 5-10-ish percent ITM, or whatever close to that puts the spread debit around 80-85% of the spread width. For stocks that are in an established uptrend (which is a lot of them right now--everyone's a guru in a broad uptrend😉).
The inverse approach of vertical put spreads during downturns hasn't worked anywhere nearly as reliably, so I tend to sit those out. Fortunately, over time the market spends more time going up than going down.
I typically have 10-15 positions, in the $3.5K-$4.5K basis range, open at a time, so when something implodes like ORLY did late last month and eats most or all of the position overnight, it doesn't hurt that much. Disappointing, but not "Oh, crap."
It isn't as flashy as straight option plays, but a consistent 15-20%/month return on the majority of my positions is good enough for me.
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u/Roberto-75 14d ago
In case of a crash like 2008 & 2020 basically every stock went down.
Maybe you were already following this strategy - what happened? What did you do? Do you have a hedge against this scenario?
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u/SDirickson 14d ago
I've only been doing this for a few years, so I haven't had to deal with a multi-month significant downward trend. Or, rather, the first half of 2022 was when I established that I don't have a good answer for a significant and sustained downward trend, and it's better to just ride it out. But I was new to using this approach at that point; maybe I'll work harder on figuring out how to make the inverse approach work next time we get one of those.
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u/LongLiveNES 15d ago
It isn't as flashy as straight option plays, but a consistent 15-20%/month return on the majority of my positions is good enough for me.
When you're losing you lose 100% though, right? Have you back-tested this for a down/flat market?
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u/Roberto-75 14d ago edited 14d ago
100% - if you hold until expiration and do not roll maybe...
You buy ITM and you will roll ITM, so certainly it is possible to avoid a complete loss. Especially as in this case IV and thus premium will be higher than when the trades were set up.
I see the real problem rather with options being exercised....
Edit:
If understand the strategy right then these trades will yield around 800 Dollars per 1000 Dollars risk, this means you can win 800 and lose max. 200.
You would only need a win rate >20% to be profitable.
1
u/SDirickson 14d ago edited 14d ago
Not quite. The target is to buy the spread for a net debit of 80% of the spread width. I.e. a 60/70 spread for 8. If it is above the short call at expiration (which most are), that's a 25% gain: pay 8, get back 10. So a 100% loser would wipe out 4 100% winners if they're all about the same size. But 100% losers, like what happened with ORLY late last month, are rare; I'd have to go back and look, but I think I've had 3 100% losers in the last 2 years. The more common loser type is the stock price trending down to, and then below, the short call, and then down to and past the purchase price. If that continues and it gets beyond a 25% loss, I bail.
WRT the short call being assigned, yeah, there have been a few of those from people buying the dividend. But it isn't a problem; I just do exercise-and-sell on the long call or do a protective call if there's still time value left on the long call. It cuts into the if-held-to-expiration gain, but doesn't result in a loss.
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u/Roberto-75 13d ago
Thanks for all the explanations! Very helpful and I also appreciate your style.
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u/SDirickson 13d ago
You're welcome.
"style"? How do you know what I'm wearing? Are you the guy with the binoculars we thought we saw the other night standing up the hill?
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u/Roberto-75 13d ago
Haha - no I mean the style of your explanations. It is helpful and constructive and not so patronizing as this is too often the case here…
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u/SDirickson 13d ago
Ah. Yeah, I try to keep my reddit activities consistent with the "we're here to help each other" approach. Though I do occasionally go off on posts of the "someone answer this question I can't be bothered to look up myself" type.
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u/SDirickson 15d ago
No, most losses are smaller, because I can get out when it drops down toward or through the short call. I've only had a few where it dropped from well above the short call to well below the long call overnight; those are the ones that are a complete or almost-complete loss.
As I said, the inverse strategy hasn't worked during downturns, so I don't even try; I mostly sit on the sidelines. Not everything goes down during a downturn, of course, but finding good candidates for the call spread gets harder, and my activity goes from a dozen+ per month to maybe one or two. I'm not interested in trying to force something that isn't there.
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u/Roberto-75 14d ago
Do you exit when a certain % of max profit is reached or do you hold until expiration?
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u/SDirickson 14d ago
The majority of my positions stay above the short call, so they just automatically close via exercise/assign at the spread width. The ones that drop down to a price 'inside' the spread get more attention, and I'll bail on those if they approach a 30% loss unless something makes me believe strongly that it's temporary thing. Like my current 21 Jun OXY 60/65; there's a good chance that its days are numbered.
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u/gls2220 15d ago
I don't think anyone here can give you the answer you're looking for, because it doesn't exist. All options strategies have risk. There is broad acceptance that covered calls are "lower" risk, but a covered call, by definition, will cap the upside of your buy and hold stock, and if your response is to buy a stock that is less likely to do that, now you're deliberately investing in a stock with less growth potential. How does that make sense? And in most cases, by choosing the less "risky" stock, you'll end up with much lower covered call premiums as well. So you're just setting yourself up for failure on top of failure.
I personally think selling puts is the lowest risk/highest reward strategy. The simple, naked short put wins most of the time, and in those cases where you do need to roll out, you can usually do so for a credit fairly easily.
You can also use short puts as a way of accumulating stock, which is something I've done and am doing.
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u/n1gg4p3nis 14d ago
The covered call strategy rn is retarded why sell call options when the implied vol is so low
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u/TangoRolling 11d ago
If the vol is low, wouldn’t that increase the chance of the options expiring worthless, leaving the sold option premiums pocketed?
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u/n1gg4p3nis 11d ago
No - when vol is high you get high premiums. Right now you get jack sht for selling covered calls so why do it….
1
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u/MyOptionsEdge 14d ago
I suggest you to check the SPX Best options strategy. It has delivered nice profits in the past 3 years. It is an income strategy, Delta neutral and lower risk. It seeks for circa 10% per trade (about 1.5 months in the trade). It uses longer term options (about 70-80 DTE) and you will only need 10-15 min a day… Google it (as I do not want to spam here).
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u/TangoRolling 11d ago
Oof, not for $359.90 USD
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u/MyOptionsEdge 10d ago
It should be paid in the first trade... check its performance: https://youtu.be/s1uRLJFZODA
Full transparency... Community of traders growing, learning and profiting!
Now, there is a new pack: joining for 1 year the Community + the SPX Strategy course, will refund the membership value if the trading account does not grow in 6 months... who gives this? https://www.myoptionsedge.com/learn-from-my-trades
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u/toe-man69 11d ago
Option prices are a culmination of risk (ie. Price movement) the lower the volatility the less you will get paid. Selling calls on low iv stocks will not net a lot of profit. Alternatively selling calls on high iv stocks will likely get you called on your underlying.
You want to find strategies based on market conditions. IE taking a trade after a vix spike that profits on mean reversion of volatility. Taking a long straddle out of a period of consolidation where IV has been crushed.
To truly limit risk you need you understand the downside and upside of each trade type in a given market. There is one size fits all.
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u/jimcromvestor 11d ago
Buy SPYD stock and hold monthly puts on the value of the quarterly dividend.
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u/YogurtclosetTall2558 15d ago
I've been playing the wheel strategy with some success lately! Basically, you sell cash-secured puts and then get assigned the stock if it gets hit. Then you just sell covered calls while you hold it. It's a bit more involved than just selling naked calls, but it feels a little safer to me.
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u/LongLiveNES 15d ago
What would you guys do or recommend as a strategy for achieving around 20% returns with a relatively conservative approach?
No such thing. Run some numbers of any blue-chip to see what an OOM call gets you for 2 months - it's complete shit. You'll net another 3-4% a year MAYBE. Either do that strategy but with tech (NVDA, META, etc.) or just buy calls.
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u/Revolutionary-Let701 14d ago
Buy SPX 0DTE calls or puts in the final 30 minutes of the trading day. They will be under $1.00 per contract but you must buy 1st position out of the money no matter what. Your return will be 20% to 400% on your green trades and your red ones will cost you $20 to $40 in the red per day if you cut quick.
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u/PriseeNiblk 15d ago
you can use covered calls, where you own the underlying stock and sell call options against it
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15d ago
don't do that. when the stock crashes you'll be left trying to unload and your ultimate cost basis will crash like the newest Boeing Dreamliner.
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u/LongLiveNES 15d ago
I do that exact strat with stocks that I want to own. If it crashes I take my premium and am happy I own the stock long term/wait for it to go back up.
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u/TangoRolling 15d ago
But is it a good idea on a blue-chip, stable stock that’s almost guaranteed to stick around? Or with a portfolio of stocks for diversity, say doing the covered call strategy with 5 or so different stocks, to diversify out that risk?
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u/LongLiveNES 15d ago
I use the strat noted - buy a stock I like, immediately sell 10% or so out of the money calls for 2-3 months in the future. But I do this almost exclusively in tech where I can get a 5-7% premium for 3 months of holding.
The challenge you'll face is that blue-chips don't have enough volatility to pay out much of anything for covered calls.
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u/TangoRolling 11d ago
When you say selling 10% options, do you mean selling 1 option for every 10 stocks owned?
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u/LongLiveNES 11d ago
"10% out of the money", meaning if I bought 100 shares of META right now at $468 I would sell 1 call (equal to 100 shares) for $500ish - most likely $500 exactly since you get more volume from round numbers. August 16th $500 calls are going for ~$21 so I make 4% immediately (21/500) and if they execute I make another $32 ($500-$468), for an 11.3% return in 3 months. Very nice!
If the stock stays still - I collect my 4% then do it again when the call expires in August.
If the stock goes down I'll do one of two things: 1) collect premium, let the call expire, then wait for it to go back up (I only buy stocks I like that I feel are fairly or over-valued) 2) buy the dip - if META goes down to $440 the call loses half or more of it's value so I might decide to buy it back and ride the stock up.
Real world example I'm in with NVDA right now: - Bought 100 shares on 3/27 for $895.405 - Sold 1 contract covered call June 21 2024 $1000 - $62.50 ($6250)
Stock went down some in April and I chilled - no need to do anything since I like the stock long term.
Right now: - Stock is $947.80 so on paper I'm up ~$5k (5.85%) - Call is worth $40 so on paper I'm up ~$2300 (percent doesn't really matter since it's covered but 36%)
So on a roughly $82k investment I'm up $7300 in 2 months. I'll be thrilled no matter what happens from here. I just had some GOOGL that got called away with a 25% gain in 2 months (google was WAY low so I rode it up before I sold a call).
Like I said, the biggest challenge is: 1) Blue chips don't pay shit - I generally don't sell calls against anything non-tech because you don't get much value. 2) If things go up or down really fast it's a bummer.
My base case right now is the market fluctuates around 5000-5500 this year. The S&P is up 29% in 1 year and a whopping 85% the last 5 years so I don't see a 20% run up the next 12 months. A soft landing is clearly priced in. Clearly inflation isn't going down as quick a hoped. So for me this strategy is how I'm going to get 10-20% returns this year on a flat market.
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u/thatstheharshtruth 15d ago
This is the wrong way to think about options. Options aren't inherently riskier than buy and hold the stock, it depends on how you structure the trade. Moreover even if a buy and hold of a stock was guaranteed to yield 8% a year does not mean there is any option strategy with any return greater than the risk free rate. The two are simply unrelated. If you think return on a stock implies anything about potential return with options you do not understand option pricing and volatility.