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Suppose a retiree wants to generate stable income from selling S&P500 (or other stock index) put options. Is this an advisable strategy for a retiree?

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    I see multiple questions from you about stable income for a retiree but involving high risk options. Stable income for retirees isn't going to produce good returns. – Loren Pechtel Sep 24 '15 at 4:48
  • @Loren Pechtel, Thanks, you're right. The low interest rate and financially repressive environment thanks to central bankers is driving retirees to look for alternatives. – curious Sep 24 '15 at 4:51
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    @curious If there were good alternatives, then they would be mainstream and everyone would use them. – Mike Scott Sep 24 '15 at 5:51
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No.

In good years, the income seems free. In a down year, particularly a bad one, the investor will be subject to large losses that will prove the strategy a bad one.

On the other hand, one often hears of the strategy of selling puts on stock you would like to own. If the stock rises, you keep the premium, if it drops, you own it at a bit of a discount from that starting point.

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    or selling calls on stocks you want to sell anyways to collect premiums. Many different strategies out there but anything that involves a type of 'trading' does not usually lead to 'stable income'. – Ross Sep 25 '15 at 15:53
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    Picking up nickels in front of a bulldozer. – stannius Sep 25 '15 at 16:43
  • @stannius definitely not something a retiree should do... (literally or figuratively!) – Michael Nov 10 '15 at 21:57
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    @Xalorous, I disagree completely. If a retiree doesn't have some of the nest egg in the market, the current value of the spendable income drops over time since most fixed income won't really keep up with inflation. How much to have in the market is a matter for debate, but I think 30% is a good one. I'm comfortable with more risk, so I will never go below 60%. – zeta-band Oct 26 '16 at 17:42
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    Funny how this is getting activity a year later. @zeta-band I agree with you. 40% is 10 year's worth of cash, enough to survive a crash and wait for rebound on the invested money. – JTP - Apologise to Monica Oct 26 '16 at 17:44
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This is a really bad idea. You are asking to be forced to pay for something at a time when you most likely NOT want to buy it. Why? There is no stability (much less any degree of predictability) to give up the right to control when and for how much you would be willing to own the S&P500. Just don't do it....."generate stable income" and "selling puts" is an oxymoron.

===retired investment advisor

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I am close to retirement and sell cash secured puts and covered calls on a regular basis. I make 15 % plus per year from the puts. Less risky than buying stocks, which I also do. Riskier than bonds, but several times the income.

Example: I owned 4,000 shares of XYZ, which I bought last year at 6.50 and was at 7.70 two months ago. I sold 3,000 shares, sold 10 Dec puts @ 7.50 (1,000 shares) for $.90 per share and sold 10 Dec calls at 10.00 for $.20. Now I had cash from the sale of 3,000 shares ($23,100) plus $900 cash from the sale of the puts, plus $200 cash from the sale of the calls. Price is now at 6.25. Had I held the 4,000 shares, I would be down $5,800 from when it was 7.70. Instead, I am down $1,450 from the held 1,000 shares, down $550 on the put and up $200 on the calls. So down $1,800 instead of down $5,800. I began buying XYZ back at 6.25 today.

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There is only one way to create "stable" income using options: write COVERED calls. This means you must own some stocks which offer an active and liquid option market (FB would be good; T would be useless.) In other words, you need to own some "unstable" stocks, tickers that have sometimes scary volatility, and of course these are not great stocks for a retiree. But, let's assume you own 500 shares of FB, which you bought in June of 2015 for $75. Today, you could have been paid $2,375 for selling five Mar18'16 $105 Calls. Your reasoning is:

  1. if I get exercised, I'll be selling my FB shares for $105 and have total option+shares proceeds of $54,875 and a profit of $37,500. (Of course, you would also be giving up the additional profit which attracted the option holder to exercise)
  2. if I don't get exercised, I will have made $2,375 and reduced my basis in my FB shares by that same amount.

So, the rule is: ONLY SELL COVERED CALLS AT A PRICE YOU WOULD BE HAPPY TO ACCEPT. If you follow the rule, you'll generate more-or-less "stable" income. Do not venture off this narrow path into the rest of Option Land. There be dragons. You can select strike prices that are far out of the money to minimize the chance of being exercised (and sweeten the deal by collecting an even higher price if the stock flies that high). If you are thinking about doing this, study the subject thoroughly until you know the terminology backwards and forwards. (Don't worry about "the greeks" since market makers manipulate implied volatility so wildly that it overrides everything else.)

  • "There is only one way to create stable income using options: write COVERED calls." Sorry but that's NOT even close to being true. Covered calls have an asymmetric risk profile which means that you bear all of the downside risk and have only some of the upside potential. Many describe it as picking up pennies in front of a steamroller. To add insult to injury, you are telling the OP NOT to sell put options and yet you are telling him to do exactly that (you lack any understanding of synthetic positions). A short put is equivalent to a covered call if they are of the same series. – Bob Baerker Sep 22 '18 at 21:05
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As you move toward retirement, your portfolio is supposed to move toward low risk, stable investments, more bonds, less stocks, etc. Your question implies that you want to increase your income, most likely because your income is not satisfying your desires.

First, any idea that you have that risks your savings, just eliminate it. You are not able to replace those savings. The time for those kind of plays has passed.

However, you can improve your situation. Do random odd jobs. Find a part time job that you're willing to do for 10 hours a week or something. Keep this money separate from your retirement savings. Research the stock trades you would like to make and use that 'extra' money to play in the market. Set a rule that you do not touch your nest egg for trading. You may find that being retired gives you the time to do the #1 thing that helps investors make good investments -- research.

Then when you make your first million doing this, write a book. If you call it Retire - And Then Get Rich, I expect royalties and a dedication.

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Selling options is a great idea, but tweak it a bit and sell credit spreads on both sides of the market, i.e. sell OTM bear call spreads and OTM bull put spreads. This is also known as an iron condor, and limits risk, and allows for much more flexibility.

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    You put up a chart for the results of such trades, and I will vote up. – JTP - Apologise to Monica Sep 25 '15 at 16:46
  • This type of trading is a bad idea for someone who has no income with which to recover from a down period. OP is a retiree and living on assets. – Xalorous Oct 26 '16 at 0:30
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Yes -- If you are prepared to own the stock and have the cash to buy it, it can be a good way to generate income. The downside is really no more than buying a stock and it goes down -- which can happen to any investment -- and you have the premium of the put. Just don't do it on any stock you would not buy outright. To the posters who say it's a bad idea, I would like some more info on why they think that. It's not more bad idea than any investment. Yes it has risk, but so does buying stocks in general, buying dividend stocks etc and since most options expire worthless the odds are more in your favor selling puts.

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    Well, there is the point that selling puts gives you all the downside risk, yet upside is limited to the premium received. – JTP - Apologise to Monica Oct 25 '16 at 20:21
  • The reason it's a bad idea is that OP is a retiree with fixed income, based on assets that he is using as collateral for derivative trading. Derivatives are high risk trading. Like any trading, it's a gamble. In this case OP would be gambling with their basis for survival – Xalorous Oct 26 '16 at 0:29
  • Ok,t let's say he get the premium. Stock goes down and he is forced to buy the stock at the put price. That is less risk than owning a stock outright. He would have bought high then the stock went down and he would be down even more. I guess it does give you all the downside risk if the stock itself goes to $0 but if you are choosing good companies that is unlikely – Todd Redd Nov 7 '16 at 20:53

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