Re: Jeff clark of Stansberry researchCan anyone comment on this latest tease about how to ’unlock your account for instant cash’? Apparently you need to talk your broker into giving you a ’special form’ which along with Clarks instructions allows you to ’unlock’ a hidden feature on your account page enabling you to access a share of the brokers fees. Sounds fishy, but great if true.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
It’s all about naked options. My IRA (Fidelity) doesn’t allow them. Be very careful with naked options.
Selling naked puts on high quality, cash-rich, dividend paying stocks such as MSFT, INTC, KO, etc., at a strike price at which you would buy the stock anyway is a very conservative strategy, more conservative than buying stocks outright. It is safe enough that it is allowed in an IRA. Sellng naked calls is extremely risky. If I even think about selling a naked call I immediately call my psychiatrist.
The form is the options trading form, and the strategy is either covered call writing, or put selling (cash covered, probably, unless you have a margin account).
I have rarely made money with covered call writing, although have used it to balance losses sometimes.
I have made plenty of money with put selling, however, and it’s a great way to buy stocks you want, at a lower price than their trading for, and make some money while it waits to get down there.
Watch out for taxes.
Can you expand on the “taxes” comment? I see many investment advice services touting puts, but none cover the tax implications. How are they reported?
I would love to hear more on this also.
As an enrolled agent, I have done many tax returns that have my clients doing options strategies such as put and call writing.
Basically, I treat it the same as any capital transaction, whereas, you sell a put at let’s say, $10 and it expires at 0. You have a $10 gain, and since it is usually held less than a year, it is a short term gain taxed as ordinary rates.
If you get exercised, you would still have the same gain, but you would also have a new cost of the new position or in the case of a covered call, a sale of the stock causing, hopefully a gain.
Hope this helps.
Would the gain also have to be reported in a non-taxable account such as an IRA or 401K?
Thanks
Ric, when you sell a covered call or naked (cash-covered) put, you are short the option. I don’t think you can ever get long-term tax treatment on a short, even if the position is open more than a year. And the tax treatment can get even more ugly if you sell a call against a stock that you’ve held long term; if the option is so much in-the-money that you are essentially taking risk off the table, then you might lose your long-term status on the underlying stock.
I find it’s just neater to execute these option strategies in my IRA where there are no tax consequences.
I subscribed to the Stansberry stuff for awhile. For what it’s worth, my personal experience with this fellow was that his recommendations lost money far more often than they made money. I would have been a net loser if I followed them all. Granted my results are far from scientific and must be considered anecdotal. Just be careful. The case he makes for his recommendations always sounds foolproof – until it moves against you at which time he has an equally “sound” explanation. I realize that that last part could apply to the majority of newsletter pundits.
Options and taxes is a good subject.
Here is what I understand about it: my brokerage company does not seem to report the
option transactions to the IRS. So, it seems that you could have gains on the transactions without reporting it to the IRS. It sort of works like the honor system.
However, I was told recently that will change in the near future. The brokerage companies will be required to include the option transactions on their report to the IRS.
This is a significant change that you should verify with someone who is well versed in this subject.
Others can speak to tax consequences better than I, but I have made money writing covered calls and cash backed puts. Doing a little research on your own and paying attention to basics like PE and current price relative to annual high/low, you can get annualized returns of 10 to 20 percent. I have averaged about 17% this year. I am operating in an IRA, so the taxes are put off anyway.
I never buy options. That is like insurance; betting against something. I sell so I get cash in the account. I always sell puts on some stock I would like to have anyway. If I get exercised, no big deal since I wanted the stock at a good price anyway. I sell covered calls on something I’d like to maybe sell anyway.
I am not brave (foolish) enough to write naked calls or puts and that is not allowed in an IRA anyway.
What is the term ‘naked’ supposed to imply? I understand call and put.. but why the ‘naked’ put – what is the difference?
When one buys an option, the risk is limited to the cost of the option (which can lose 100%), but the potential gain is essentially unlimited.
When one sells an option, the gain can never be more than the cost of the option, but the potential loss is essentially unlimited.
This proposed strategy (selling uncovered options) is occasionally used very cautiously by top experts with advanced degrees in finance and years of experience; what do you think is the likelihood that you or I will routinely profit from it? To use a term from science and statistics, the probability is “vanishingly small.”
Selling “naked” calls is less risky than shorting a stock. Stock “A” is $25. I sell the 20 calls in a future month for maybe $7. I have now shorted the stock @ 27 and will collect the difference if it goes down. Like selling puts on a stock you want, I’m shorting a stock at a higher price. Of course I’m relatively comfortable with my bet. Risky yes, but no more than shorting.
I have been looking into selling calls and puts. Covered type only. My question has to do with the underlying stock getting assigned. Say you sell a jan 13 call for 3.00 and next week the underlying goes over the strike price. What I think I know is that my stock will get assigned. One question is when will it be assigned? Is there a cost of assigning my stock to the buyer? Why do people prefer not to have the underlying assigned? Thanks in advance for any information passed along.
Joel, from your question, I think you know this, but just for the record, selling a covered call or a naked put are equivalent; they have identical profit-and-loss profiles.
Regarding assignment, usually options you’ve sold will not be exercised until just before or at expiration. This is because most options have a time value, and a person owning the option can normally realize more cash from selling the option in the market than from exercising it. Exceptions (early exercise) might occur if the option is deep in-the-money (and the time value might have evaporated) or there is a dividend coming that the option holder wishes to capture, or … ? As to the cost to you of being assigned, it is just another transaction and involves a commission. (In the case of my broker, the commission is a little higher than normal.)
Why would I rather not be assigned? Well, the commission, for one thing. For another, being assigned might means that you’ve misjudged the market and now it’s time to pay up.