Cyanide, you are constantly underplaying the unstated risks of your investments whether option selling or real estate syndications. (Though at least your syndications are actual investments, you just bury your head in the sand when questioned what extra risk you are taking to earn that extra 10% over equities). I’m sure at least at some point you realized that selling puts is an actual contractual obligation that you are on the hook for? It’s not just an easy payday with risk associated with it. I know I won’t convince you because look at all your easy winners from your -9900 money lines! Surely that 1/100 event either won’t happen or won’t be that bad…right? Wall Street, just like Vegas, doesn’t make money on one sided gambles. They take both sides of the bet and make money on fees. When they DO gamble, it’s because of information or technology asynchrony.
You still clearly don’t understand wealth generation. When a stock eventually goes to zero/bust, the price when changing hands was zero sum, but the wealth generation/dividends/asset sales over the years were NOT. It was wealth created.
*sigh*...
I'm going to try my best to help you understand how selling premium works. You might not change your mind, that's okay. But hopefully it's education to a few people.
First:
Read this article -
https://seekingalpha.com/article/4210320-selling-puts-good-bad-and-ugly
So a put contract infact can be used as a vehicle of investment - essentially, my trades are not meant as a 1 off 45-90 day trade. These are positions, that fundamentally behave in a similar way to owning the actual company. Stock of company X goes up, put seller makes a profit, stock of company X goes down, put seller usually negative, though usually less negative than outright owning the underlying.
Now here's how trading works:
Lets say you're trading EWZ like me (I currently hold 515 contracts of EWZ) for $27 strike 64 days to expiration.
So lets say you sold 515 contracts like me, collected $23 per contract on average ~ 12k. 64 days to expiration. Todays price $31.63.
Lets assume 3 possible scenarios - EWZ goes up 10% in 2 weeks, stays the same in 2 weeks, goes down by 10% in 2 weeks (june 1st - 50 days to expiration).
1) EWZ goes up 10% - From $31.63 -> 34.8 on June 1st. See attached. I will have a 97% gain on my position if stable volatility, a gain of 11.7k. Great. But I'm not done, I roll up the strike to $29 keeping the same expiration. And play the game again.
2) Nothing happens in 2 weeks - Great. See attached. I gain 58.5% assuming stable volatility- so 7k profit. > 50% profit achieved. I roll forward in time another 2 weeks to again add another few thousand potential premium and do the same thing again.
3) EWZ goes down 10% in 2 weeks - From 31.63 -> 28.5. I lose 200% of premium - See attached. So 24k loss. My account happens to have 690k in it right now, so a 10% drop in EWZ results in a 24/690 = 3.4% drop in my account value. So, I definitely didn't lose 10% (risk mitigation of puts). In fact, If I had owned 51500 (515 contracts) shares of EWZ at todays price of $31.63, I would have paid $1.63 million dollars and losing 10% of that in 2 weeks would have been a drop of 160K. So...me holding 515 put contracts significantly far out of the money turns out is still lower risk despite the naked nature of the contract aka leverage. But hey...24k loss - Thats still gotta hurt right? Scroll below to see what needs to be done.
So what now?
I'm holding a bad position. It's dangerously close to my strike. There's 50 days left to expiration (since 2 weeks passed). I don't ever want to be in the money....So what do I do? I roll. And I keep on rolling until I win. Here's how:
I will roll my current position and add time. I will use that time value and drop my strike lower. The further out position will have a higher premium, I will use that higher premium to pay off my first contract. Here's what that would look like - Almost always this will be a positive roll where I will in fact add more net premium even after paying off the original contracts I hold. Of note, the screenshot below only shows the trades conceptually, the exact pricing isn't accurate right now because of this being afterhours - after market opens I could show how much extra premium I'd get. But in one sweep, I get more premium, and drop my strike to $25. This move officially closes the initial obligation, and uses the money from the second contract (new obligation) to pay off the first obligation. Because time is money and there's value in time, the second contract because it is further out had a higher premium than the first contract, resulting in a NET gain in premium. The losses you keep talking about, yeah they happen all the time - Great! I realized that loss, and I'm back at another high probability play with a lower strike. I just eventually need to win. If i win the second trade - i get all the losses covered and then profit on top.
Lets say EWZ drops another 10% from 28.5 to $25.6 in 1 month. I again suffer another BIG decline in account value. I realize that loss AGAIN, and do the same thing. This time exchanging my Sep position for something like January - while dropping strike to $23 or so. In fact, if I have other holdings, chances are I've closed all of them and started concentrating - The idea is that the bigger my loss is, the better the entry point for a bigger position.
Anyway, the point is, worst case scenario, I can extend time to 2 years out. And I can keep on extending. I can even drop the number of contracts with each roll or I can quite simply just drop the strike and instead of a net positive roll do a net negative premium roll and decrease my eventual gain. And guess what....EWZ eventually just has to close above my strike of 23 or whatever it is. It doesn't have to go above 31.63 for me to become profitable. As long as it's above my strike as theta decays, I will win it all. So, it can be at 26 by January in our example, then not only all my losses have been covered, but my account has gained all the premium value too despite EWZ being down at 26 from todays price of 31.63. In essence - in this situation, i gained wealth, while the equity holder lost wealth as the equity value dropped (but it stayed above my strike for my wealth to increase).
Heck, I could do the thing like the seeking alpha article and at some point just hold my strike, and just keep rolling after every 21 days - fundamentally the same as holding the ETF except you get paid in premium for recovery.
Put sellers usually win EVENTUALLY. we have time on our side. Each trade is 0 sum. But a series of trades over years and years is not 0 sum because one of major determinants of premium is time.
Time is a fixed constant. And I get paid for it. And it only benefits the seller and goes against the buyer.
Again, if one person is paying the other person every day a fixed amount (theta decay), then assuming both sellers and buyers have equal chances of success (zero sum), then the person paying the daily fee will be worse off than the person receiving the daily fee. Now that's just math
cheers.
Edit: And you know...please don't tell me I don't know how wealth is created. I've probably read 50+ finance books. I literally read every finance book at my local library. I read balance sheets for fun. I read offering memorandums from companies for fun. All i do is consume finance. I've read the entire bogleheads series, I'm 100% aware of what a perfect modern portfolio theory based portfolio looks like, I'm perfectly aware of what a 3 fund portfolio looks like and I'm perfectly aware of what factor investing looks like with small cap/value/momentum tilts. And after knowing ALLLLLL of that - this is what I choose to do. You know why? Because the valuation metrics are terrible for US markets. SPY price to book ratio is still incredibly high.
The buffet indicator (US stock value/GDP) is sky high.
The Buffett Indicator is currently 60.88% higher than its historical average, signifying that the stock market is Strongly Overvalued.
www.currentmarketvaluation.com
Shiller ratios are sky high
Shiller PE Ratio chart, historic, and current data. Current Shiller PE Ratio is 34.74, a change of +0.40 from previous market close.
www.multpl.com
The US debt is spiraling out of control. The Dollar is slowly losing market share as the currency of global trade. Oil is no longer 100% exclusively being traded with USD. Trillions is added to US debt each year with no political motivation to fix the issue - the US debt will only worsen as high interest rate means that all the treasury debt will be pretty damn expensive going forward as well. Everything is suggesting low-ish returns over the next decade right now. The government is literally in a Ponzi scheme of taking bigger and bigger loans (treasuries) while printing new money to pay off old loans.
The US market has had a 20 year bull run. In the last 100 years did you know there were 4 full decades that were slightly negative? I will not be surprised at all if there's a relatively flat stock market as values normalize over time. And hence I'm a put seller. I know EXACTLY what my gain will be, I'm not dependent on a stock going up for WEALTH CREATION as you mention. In fact, even if things go slightly down, I'll likely still increase wealth.
My wealth creation actually only requires time to go by. Your wealth creation actually requires markets to go up - mine doesnt It can stay flat for the next 2 decades for all I care. I'll say it again - You need the markets to go up to create wealth. I just need another day to go by
I pray for your sake that the US stock market isn't the next Japanese stock market.