NOT-ADVICE.
Like really for real - this is how I'm taking a bunch of leverage out of my portfolio and aiming for my own adequate level of income (based in historical life style). Its putting together familiar elements into something new for me, and I'm certain I'll be tweaking from here.
The larger approach / change to my strategy might be interesting for others as well.
My context is that I'm looking for dividend / income type of results. The thing that I sorted out over the last week is that to achieve a desirable outcome (generating actual living expenses worth of income) I need to achieve $2/share weekly results from my call and put sales. Last year and front of this year I've been using leverage (via share replacement calls and put spreads primarily) to get significantly better results. As well as significant bad results on occasion. I need to take out that level of volatility. While I'm at it, it'd be nice if I could reduce my daily effort somewhat, and I think I'll get that as a side effect.
Also part of my context is that in the end, excess results will go somewhat into lifestyle. Mostly the extra good results become more $$ to give away to worthy causes. While I look forward to giving away a lot of money, taking on significant levels of risk and leverage to get it isn't a good use of stomach acid.
I get to $2/week this way:
Given a little over $1M portfolio (net of taxes due, or in a retirement account), using today's share prices I can put that into 700 shares and have cash left over to support 5 naked puts. I think of this as having 12 total positions. At $2/week I'm getting $2500/week or $10k/month. The most important element here is that all of the positions are fully owned - no margin or other leverage involved.
I use the $1M portfolio and $10k/month as round numbers to make the math easy to work in one's head. If this is as good of a result as I get ($2/contract, 12 positions) for all weeks of the year, then that works out to a 12% return for the year. That might sound wimpy compared to some of the results we were seeing, but if you can find a 12% dividend anywhere else please let me know. This level of result makes this well worth my time.
I would like to do better, and I need to do better on some trades so that extra can offset losses that come along. These 12 positions are all positions that I can roll forever if desired. And the random net credit on each of those rolls can easily average out to $2/week, so even a roll when far ITM can yield the target weekly income.
The biggest risk I see are big and fast moves in opposite directions, happening back to back (to back, to back, ..). Big moves aren't $50 or even $100 per week. It's that level of move for 3+ weeks in a row. Even 3 $50 weeks in a row isn't a problem - 3 $100 weeks in a row in the same direction, with no or slow regression - that is the sort of scale one of those moves will need to be to become a problem. Followed by just enough time to get a little comfortable at the new level, before turning around for $300 in a short time (and back, and forth, ..).
I've seen these circumstances a couple of times now and I have a much more experienced and informed idea of how I'll react and handle them.
The most visible risk I can see is the opportunity cost of the shares taking off and my call strikes being unable to roll far enough, fast enough to keep up. I.e. - the $920 shares I bought today - maybe I roll the cc strike to 1100 before losing contact with the 1300 share price. Boohoo - my income strategy picked up an extra $180/share along with the cc credits, while missing out on the incremental $200. Yeah I'd like to get that extra $200, but this is income generation, not a portfolio growth focus. From that income perspective this is an extra 90 weeks of income. And in other circumstances of more sideways trading this will do marvelously.
I'm going heavier into share ownership than put sales - I want the extra exposure to moves up which I consider inevitable for Tesla, even if the next big leg up is 2 or 6 years away. As long as the week to week changes in the share price are slow enough (in my testing last night I could still get a $5 move in the strike price when $100 ITM (VERY IV dependent), or a $30 strike improvement for $75 ITM. For risk minimization reasons, and given the very low weekly credits I need to reach, any rolls for time will always be max strike (or max strike minus 1) when ITM. Well - or rolling to the ATM strike; that bit is more flexible
And since these are paired with winning sales on the other side, I also have the choice of taking the winning and larger credits from the other side to buy extra strike improvements while still achieving the $2/position weekly income.
The really big risk I see over time will be strike to strike changes when taking assignment. Those can be in my favor or against. Those that go against can also be large enough to easily wipe out months or more of income, so the extra credits over and above the small weekly income target are important. I am, in effect, improving my break even with all of the extra credits to prepare for any negative strike to strike changes.
Bigger picture management will start looking like the wheel. When the share price is relatively low as it is now more shares than puts is desirable. I'm going about 2:1. If the share price keeps going down, then more and more shares are desirable, thus taking assignment on some of the puts that go ITM (cash into shares).
As the share price goes up, and particularly as it approaches ATH territory, then the share count can start going down (taking assignment on the calls). I figure I might draw down as low as 1:1, but those are details I'll figure out later - not something I need to know now.
Oh yeah - and as cash accumulates, additional put and call sales can be supported, further improving income over the minimum!
