Advanced Investing - Options - Part 3 - Selling Calls and Puts together

Welcome.

Putting it together: Selling Calls and Selling Puts

In Part 1 of this series we talked about selling Puts on stocks that you would like to own.  Go back and read that if you haven't already.

In part 2 of this series we talked about selling covered Calls on stocks that you already own.  Go back and read that if you haven't already.


We're about to start getting a little more involved and you need to be comfortable with those strategies before you begin doing "fancier" stuff.


Ok, here we go.

There are times when you might want to both sell and Put and a Call on a stock.  In exchange, you are going to take in premium payments upfront - you are going to receive cash right away.
This strategy is best when you like owning the stock but it is either:
     Volatile - where the price normally moves up and down a lot, or
     "Dead Money"- where the price doesn't move much at all.
In my mind, there are other strategies that are better when you can identify a clear price trend.  Perhaps we'll talk about those another time.
This is a strategy for when there is not a clear trend, either because the price is bouncing up and down a lot or because it is not moving up or down much at all.

By selling the Put, you are agreeing to buy shares at a set price, if the price falls that low or lower.  This is a good thing if you already know that you like the company and you know that you'd like to get shares of the company when they go "on sale" (during a price decline).

By selling the covered Call, you are agreeing to sell the shares that you have if the price rises that high or higher.  This is a great thing, if you are confident about how much the shares are worth, and you think you know that the price will come back down before long, or if you are simply ready to sell the shares and be done with that company for a while, but you want to sell only if/when the price rises.

For each of these contracts, both the Put and the Call, you will receive cash in exchange for selling someone else in the market those contracts.  This "premium" can really be a nice way to increase your position in a company because you are effectively decreasing your purchase price by the amount of premium you take in, if you are put the shares.

For example.

First Solar.  FSLR.

I'm not suggesting that anyone take a particular position on this stock.  I don't have a position in this particular stock.  I'm just using this as an example.

As you can see, while FSLR has periods where the price trends up and down, it has done both in the last several years within a fairly defined range.  If you bought when the price was at or below $40 per share, you did well.  If you sold when the price was at or above $60 per share, you did well.

You could have made even more money, by taking in upfront premiums to do the same thing.  If you have sold Puts on FSLR at a $40 strike price ($40 per share) and also sold Calls on FSLR at a $60 strike you would have been paid a lot of money in premiums that would have usually expired worthless, but when they didn't, you would be buying stock at the bottom of a defined trading range and selling at the top of the range.  And you would have been paid to do it several times over and over again.

This is the power of this two-legged strategy.  It allows you to get paid to wait to buy shares when they go on sale and also to get paid to wait to sell those same shares when they are in demand and the price is high.  

"Buy Low, Sell High" is the old saying.  

And here we've told you how to get paid to do it.

But, as I've said before, keep in mind, this article is just for your education about how this idea works.  

I'm not suggesting that you should actually do this, or that you should actually execute the illustrated example.  

This is just an educational exercise.  I'm not your adviser, broker, financial planner, etc.  

Do your own homework so you become comfortable with this concept.

Challenges are Brewing

Friends, there is a major crisis brewing in our country.

You have noticed the symptoms of it, I'm sure: the BLM protests, the race protests, the emerging violence that is being used to suppress free speech, the rise of neo nazi groups, political radicalization. It is sad.

I think I know why it is happening, though, and it has nothing to do with race or politics; it is all about debt.

The poorest 20% of households held negligible debt relative to their incomes back in 1980. Now that same poorest 20% of our population - those most in need of a chance to get ahead - they now hold 250% of their income as debt. This is five times more debt to income than the wealthiest 20% hold.
Those poor people can never repay it.
As they are starting to realize this, they are becoming angry and they are starting to lash out. We are starting to see this as the symptoms of this pervasive feeling that "something is wrong".

Most of those mentioned above have borrowed to finance education, a worthy goal. But even as the government encouraged and facilitated this widespread debt bubble in education, those who are struggling under its obligation have little of real value to show for it. Many are unable to service their debt, in fact 3,000 student loans become delinquent EACH DAY. This bubble is unfathomably big - over $1.5 TRILLION and climbing.

Student loan debt is not collateralized at all. There is nothing to repossess when they stop paying.

The most insidious problem, however, is that these loans are specifically exempt from being able to be discharged through bankruptcy. Even if someone goes bankrupt, they still owe for these student loans.

Will they somehow figure out a way to suddenly come up with the cash to pay it off? I don't think so. They're backed into a corner...They don't have anything to lose.

I think they're starting to turn to violence as their only means of possibly effecting change. 

I don't think they're really thinking about it this way - it is more like the zeitgeist that is growing and turning this huge chunk of the populace slowly.

44 Million Americans have student loans. Many are unable to repay them. The rate of default on student loans is growing.
None of that is good for anybody.

Getting back to the whole poorest 20%, and not just the portion of that population that are mired in education debt - the problem is that the rate of debt accumulation and the interest on that debt (even in these very low interest rate times) is growing faster than the economy as a whole.
There literally is no economic means for these mostly good people to ever solve a math problem like that! It is an unwinnable fight.

In addition to the student loans, we are seeing the highest ever total loans for cars, and they're being financed for longer terms than ever before - why - because people can't make the monthly payments under the past "normal" terms.

There is also a huge amount of simple consumer debt - credit card debt, department store debt, gasoline card debt, even cell phone debt! - you name it. It's hard to repossess it, it's not worth much anyway if you did repossess it and the rate of growth of this debt and its interest rate is growing faster than people will ever be able to repay.

Total household debt is now above $13 Trillion. That's higher than it ever was before the financial collapse in 2008. The government's debt has doubled since 2008.

Total household income has been stagnant for decades (really it has actually been declining since there are more two-income households than ever now). This is a bad problem. We're more productive than ever, but things cost more, and we have less disposable income to buy things with. And there are more things to buy now (smartphones, cell service, internet access, etc).

This shift is happening. We can all feel (I think) that something is not right. We know about the symptoms.

I believe that at some point the government is going to have to wipe out and forgive all of these loans. They've tried everything. They've tried quantitative easing, they've tried lowering borrowing costs so that debt could be refinanced and paid off more easily over time - but most borrowers (both people and corporations with debt problems) simply borrowed more money since the rate was lower; it seemed like they could afford more.

Individuals and some corporations have been forced into austerity through bankruptcy, but I believe austerity is coming country-wide.

The call for the massive wipeout of debt will become deafening. It will become so because so many people are so without hope because of the debt load they bear. There are so many of them the poorest 20%, the 44 million Americans with student loans (yes there may be some overlap in those two groups) that together, they are going to bring massive change. It will happen on a scale that will call to use the term Revolution. It will happen because, taken all together, they are the single largest voting block.

We may even see great people with great prospects renounce their citizenship and set out for a new life in other countries, effectively reversing the flow of immigration which has allowed America to attract so many of the world's brightest minds for so long!

If you have read this far, you might be concerned, even afraid. I know that I'm more worried about this now than ever before...

What can we do...?

If you can, pay down your debt(s).

If you can, seek great financial information about your investments. I use my own service (shameless plug) RB Research.

If you can, buy a little collectible gold before the government bans it. (They did before, then they confiscated it all, and then they devalued the dollar in relation to gold - effectively stealing the gold and then declaring it to be more valuable after the fact. Only some jewelry and collectible gold was exempt.)
If you can, buy a little cryptocurrency (Bitcoin or an altcoin that suits you).

If you can, stock up on food that you can keep at home which has a long shelf life.

What might this massive shift in our great country bring about?

We may see a massive fall in the value and usefulness of the dollar. Imagine a $20 loaf of bread or a $5 can of coke.

We may see an actual overhaul of our tax, tax service, health service, and social safety nets....for example....Rather than being able to keep paying for things that the government wants to spend on, but can't afford based on tax revenue, which is usually covered by issuing more bonds (US Government debt) we may see real tax reform. I suspect that it will be a national sales tax that will replace income taxes with a rebate mechanism to effectively keep poor folks from being taxed on purchasing life's necessities. This may be pushed through with a ban on /elimination of cash (to eliminate gray and black market transactions).

If something like that happens, where the government starts getting its tax revenue from sales tax receipts that are collected at checkout by WalMart, Amazon, and every other retailer, we can expect the collapse of the tax-preparation industry (no more Turbo Tax or H&R Block).

If healthcare keeps getting more expensive and then the system is rebuilt, we are likely to see lower prices overall in that system, and a whole new set of policies that govern the purchase, terms, and limits of "insurance" coverage.

If we go through an overhaul like that, our social safety nets will likely be disbanded and reformed under one program where each candidate receives all support, aid, and service from one agency and has one "case manager" (which might be a computer algorithm). This will probably be done to reduce cost and to reduce duplication of services.

There may be a real examination of a Universal Basic Income and a punitive tax on the wealthy to redistribute some of their wealth.

The changes that we can expect are hard to forecast and I'm not at all sure that I'm correct about how these things that the government either does now or is heavily involved with, will change and I am only giving you my best guess as to what form they will take in the future.

I just want to bring some of this information to your attention.

I'll leave you with a few parting figures to drive the point home.

There are 44 million Americans with student loan debts.

Those good people have an average of $30,000 in student loan debt.

Their average starting salary is under $60,000 per year.

The average cost of a new home in America is around $250,000. That makes their achieving the "American Dream" harder than ever - or perhaps impossible.

Rates for all kinds of debts are rising. That means that those who are struggling to make ends meet now will have a harder time in the future, or it will become impossible for them.

The average new car is purchased for $36,000.
The average new car loan payment is around $400 per month.

Rents are rising.

The price of almost every good and service, except food, has been rising for a long time.

Total household income is lower than it has been in a long time despite productivity being higher than ever.

Total household disposable (discretionary) income peaked in 1969.

Total personal debt is higher now than ever before.

Total household debt is higher than ever before.

Total government debt is higher than ever before.

Political radicalization is becoming mainstream.

Violence, justified by political disagreement in the mind of its actors, is becoming more common and accepted.

Suicides are increasing.

Retirement Savings are, on average, woefully inadequate. People are finding that they simply have to keep working even when they don't want to, even if they can't physically do it anymore.

This is all bad, friends.

Start getting ready. But be kind to those who have it worse than you - as you can see - they really are struggling, massively. They feel like they're being backed into a corner.

Give our elected representatives a break too - they've got to deal with this set of issues. And there may be no "good" solution available at all, just a host of bad ones and all the attendant unintended consequences thereof.

Be kind.