Selling Options on the S&P 500: My Process

I do a lot of reading about investing and retirement and I have to say that one of the things that I see all too often on blogs and websites devoted to investing are people talking about how great their system is and how it makes them so much money. Eventually you get to the end of the article and realize that they never actually say what their fantastic system is. Well I hate that so today I'm going to share my system that I am currently using to sell options on the S&P 500 Index.

Overview: EAF Options Selling

I consider my Options Selling technique to be extremely low risk for actual loss (though it can tie up your capital for extended periods). Hand in hand with that you shouldn't see huge profits from it either, rather steady income/growth is what I am aiming for.



Requirements: This is a covered Options technique which means you need to have the amount of money necessary to cover 100 shares of the stock you are trading on. Currently with the S&P 500 that amount is a little over $20k ($209 x 100). I'm using the [SPY] ticker which is widely considered the most popular and liquid ETF for tracking the S&P500 Index. You will also need a brokerage account that allows you to Sell Options. Most brokerages require a specific amount of money in an account and then you must request access to Sell Options. Once you have those two things you are set.



Risks: One of the things I love about this system is that as long as you are content to buy and hold the S&P500 then the possibility exists for you to never have a losing trade. The main risk is that you end up holding shares of [SPY] for an extended period of time. To date the longest I've had to hold is 6 months. The only other risk is that you miss out on a massive stock market run. This method takes guaranteed returns over riding the market.

Trading Rules

     Sticking to a set of rules for your trades ensures that you take emotion out of the equation and removes any doubts as to when/if you should trade.

1. Selling Puts
1. Time: Weekly Puts - This reduces your time in market so you can better track the price of [SPY] as it can fluctuate pretty widely over a 5 day course. I sell my Options Monday morning around 10am that expire that Friday.
2. Strike Price - I base my strike price on the following rules:
1. 1% Out of the money - plenty of buffer.
2. Prefer 0.5% Premium - This is the sweet spot. If you have room you can extend further out of the money as long as you are making at least 0.5% premium on the totality of the Option.
3. Let your options expire - Weekend time value is already priced into Friday, you won't gain much by trying to capture weekend time by rolling an Option on Friday.

Rinse and repeat. The best outcome is that your Put never gets exercised so you can do this over and over making more and more money while never owning stock. As nice as that would be you will eventually get exercised and end up with 100 shares of [SPY]. Here is what to do once that happens

1. Selling Calls
1. Strike Price: One standard level above the strike of the Put that got exercised. This will ensure that when the stock gets Called away it makes additional money on the stock. itself. Currently this is $0.50 above a Put for [SPY] which will net $50 extra.
2. Minimum Premium: $15. If I can't get $15 of premium I don't sell the call, I wait for the market to return to where the call is at this level.
3. Time: Maximum 2 weeks. If I can't get at least $15 on one week I will extend to two but beyond that is more than I want to hold a position for.
4. Don't be afraid to hold the stock: [SPY] bears a 2% dividend so there is still profit to be harvested here even if the stock is held for a length of time.

That is my entire options strategy for the [SPY]. It isn't flashy or exciting but it has been profitable so far.
 


Disclaimer: All investments have many risks and can lose principal in the short and long term. This article is for informational purposes only. By reading this you agree, understand, and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work regarding any investments you may make.

Disclosure: I am long [SPY]