Put Selling For Small Monthly Returns Adds Up To Big Annual Gains

When I was first introduced to Put Selling in 1974 by my mentor I thought it seemed like an incredibly weird way of approaching investing. I had always thought that I should buy stock or mutual funds (no ETFs back then) and hold it and just kept putting more and more money into the mutual funds or stocks and someday I was supposed to cash out and live off what I had invested.

The whole idea was that I would get rich by saving and watching my investment grow bigger annually. This didn’t happened. Instead the brokers I used, each year lost more of my capital.

It was my mentor who showed me that even earning just 10% a year was an incredible return if:

A) It was consistent year and year.

B) The original capital invested was never lost.

When I started Put Selling I was amazed at how by the end of the year I had earned 12% on my invested capital. I had two stocks where my puts were in the money but as he explained, my capital was still earning money as I kept rolling to stay ahead of assignment. I had two other stocks where I had been assigned shares and I had sold covered calls in the money to get out with both my capital intact and a gain of about 6% for the year on those two stocks. But when I added up everything, I had earned a total of 12% for the entire portfolio. My Mentor told me then that Put Selling is a strategy of earning small monthly gains while protecting my capital from loss. The goal he said was to try to earn 1% a month on the entire portfolio, not just one stock. While some stocks only returned half a percent others returned 2% so I found that monthly I was meeting my goal of 1% and often exceeding it.

Put Selling then became a major investment strategy which he then showed me how to combine with other strategies to grow it even more. Over the ensuing decades I developed more and more strategies to meet various types of stocks and industries. I developed charting strategies to determine when a particular stock was overvalued and undervalued. I developed a variety of Put Selling and covered calls strategies around these different stocks and industries and I have never looked back.

Put Selling Question

I recently received an email from an investor asking about Put Selling and this got me reflecting on the many years I have used Put Selling as my principal investment method. Here’s the question. I have done some editing for the purpose of this article:

Hi Teddi;

I love your website so far, though I am just a beginner at this. I don’t understand the money amounts. When you talk about selling a put for .48 cents (for example), surely there is more money involved. Can you point me in the right direction? Mickey

Put Selling Answer

It does seem strange that I would risk capital to earn 48 cents or often even less. I had a similar reaction when I was first introduced to Put Selling. The whole concept behind Put Selling is to earn small amounts of money against stocks and these monthly gains will grow and compound.

Put Selling Is About Consistent Profits

Most investors have been “raised” on the understanding that investing is buying a stock, mutual fund or ETF, it rises and then it is sold at some time for a profit. For most investors this seems like “true investing”. But as we all know, most investors never know when to sell and the majority of investors buy when the stock is high not low, so the reverse happens. Instead forget everything you have learned about investing including dollar cost averaging and similar strategies. Start from a blank page and consider for a moment what it would be like if your entire invested portfolio earned just 1% every month. Done as an options investing strategy, this 1% every month will generate a compounding effect of your capital.

Remember that not every Put Selling trade will earn 1% a month. Some earn less and some more but the ultimate goal is to see the entire capital invested grow by 1% a month.

Put Selling Growth Example

Let’s look at earning just 1% a month on a portfolio of $200,000.00. The first month the portfolio earns 2000.00. This means that the next month I now am investing 202,000.00. The second month then my return of 1% is 2020.00.

Here is the first year of Put Selling:

Month 1 Earn 2000.00 – Available to invest for next month – 202,000.00

Month 2 Earn 2020.00 – Available to invest for next month – 204,020.00

Month 3 Earn 2040.00 – Available to invest for next month – 206,060.00

Month 4 Earn 2060.00 – Available to invest for next month – 208,120.00

Month 5 Earn 2081.00 – Available to invest for next month – 210,201.00

Month 6 Earn 2102.00 – Available to invest for next month – 212,303.00

Month 7 Earn 2123.00 – Available to invest for next month – 214,426.00

Month 8 Earn 2144.00 – Available to invest for next month – 216,570.00

Month 9 Earn 2165.00 – Available to invest for next month – 218,735.00

Month 10 Earn 2187.00 – Available to invest for next month – 220,922.00

Month 11 Earn 2209.00 – Available to invest for next month – 223,131.00

Month 12 Earn 2231.00 – Available to invest for next month – 225,362.00

TOTAL EARNINGS – 25,362.00 = 12.68%

Now consider what this means for 10, 20 and 30 years of consistently applying this Put Selling strategy.

Put Selling and In The Money Puts

Even if 25% of my naked puts end up in the money and I have to roll them forward or forward and down and they earn less. I simply look for other Put Selling trades that can earn more. In the end the goal os 1% is easier to reach then anyone realizes.

So even when I am Put Selling for perhaps just 25 cents it is not the dollar size but the return size. If a stock is trading for $8.00 and I do Put Selling against it that earns 25 cents for a month, the return is 3.1%. This is an incredible return which assists other trades that perhaps are earning just a quarter of a percent for the month.

Put Selling and Margin Use

Now consider adding a bit of margin use. In my recent article on margin use I explained how I approach using margin for additional Put Selling. Here is a good article that outlines margin use.  Another good article is this one on how I put my cash to work in margin. It is a members only article so I apologize if you are not a member. But to outline it in simple terms, look at margin as “free money” until you are assigned shares. Consider then that if you only have $50,000 invested in stocks or ETFs and $25,000 in cash, you actually have an additional capital base built from margin. When you are Put Selling using this margin, you are not charged any interest by your broker since you are not using the capital until you are assigned the underlying stock. Therefore if your Put Selling earns just 1% each month, consider that margin use could add an extra half percent or even a quarter of a percent. Margin can be used on rising stocks and selling far out of the money puts for very small gains. But these small gains boost your overall returns so instead of earning 12% a year you are earning 15%.

Then consider that this margin use is not only boosting your annual return but it is putting actual cash back into your portfolio with every single trade whether it be .25 cents or .50 cents or whatever. It is all cash for your portfolio. Now get even more excited when you think that this small amount of cash which might be as little as a quarter percent a month is costing you nothing except commission fees unless you are assigned but it flows and helps to compound your portfolio AND this profit being made from margin use is also compounding itself because the more you earn each month the more margin is available to you.

Put Selling With Margin on Rising Stocks

This is why in my article in the members section I explain how I use my cash to boost margin for Put Selling rising stocks. A rising stock is the ultimate earner for margin. Since I am Put Selling through margin I want to stay far out of the money and because the stock is rising the amount of put premium I will earn is less. But I don’t care. This use of margin is just to boost my entire capital base. I am setting up a new stream of money flowing into my portfolio. Think about having a $250,000 portfolio of Put Selling stocks and adding in another $125,000 of margin Put Selling.

Reducing Risk With Put Selling Margin Use

By only Put Selling with margin against a rising stock I have greatly reduced my risk of being assigned and needing to actually use the margin and paying interest to my broker. First, the stock is in a long-term uptrend which means if it did pull back and I was assigned I can probably quickly sell in the money covered calls and get out of the stock fast enough that the interest paid would be minimal. Second I am selling far out of the money put strikes which also helps avoid assignment and the chance of having to pay interest to my broker. The stock is rising and I am a far away from the stock price with my puts. There are other parts to the strategy on margin use with Put Selling while avoiding assignment and they are covered in both of these two members only articles:

Members Articles:

Put Selling With Margin Strategy This article outlines the cash portion of my portfolio and how I aim for a 6% return annually and the strategies I use to reach that amount while protecting my cash from possible allocation to any position.

Home Depot Stock Put Sell Trades With Margin Only This article outlines the trades for 2012 in Home Depot Stock which are being done entirely with margin.

Put Selling For Big Annual Gains Summary

I went beyond the scope of the investor’s question but it is was done to show that Put Selling is an incredible money-making strategy that if applied properly means forgetting about ever again having to chase more risk oriented stocks, penny stocks, juniors and certainly the latest hot stock. Why would I even bother when my entire portfolio is earn me a consistent annual return of 12% plus through very simple strategies based on strong large cap dividend paying stocks.

Here are some other links that will assist in understanding Put Selling as a principal investment method. Remember, think outside the box. Start from a blank page and forget everything you thought you know about investing. Paper trade to prove to yourself whether the strategy of Put Selling is for you. Review my 2012 results to see the actual returns. Then review prior years of Put Selling as well and finally think about how I have been Put Selling since 1974 and have never had a single year where I earned less than 12%. Then think about your own capital and how much it might be worth in the future and then decide if the strategy is for you.

A good place to start is through this Put Selling index link where there is a list of a lot of different topics dealing with Put Selling.

This article also might help as it explains the concept behind my Put Selling strategy.

Finally this article may also help as I try to explain how I use Put Selling as my principal investment method.

Best Regards

Teddi Knight