"Premium Income" strategy

I've mentioned my strategy on here before, but this isnt far off from what I do.

I have my brokerage with Robinhood and pay for gold; this is NOT meant to be long term invested money, it's our savings that I call it a "supercharged savings" account basically that is very liquid at any point we want to add to or take money out of it.

The account sits around $82k right now; paying for RH gold my cash sits there uninvested at 3.35% APY. This is roughly $225-$230/mo or so of interest. I selected XSP (S&P 500 mini index options fund) because this settles european style (cash at end, never hold any of the ETF if exercised). I sell a put option usually about a week out (or choose friday if on a monday, something to that effect) typically when I see a sharp turn down or just go ahead and do one if it's fairly steady after a while as well. Typically it's holding $71k-$73k recently of that cash hostage as collateral most recently for the put option I sold and I collect anywhere from $150-$200 typically. I aim for basically a 10% annualized RoR on these trades, I rarely am holding to expiration, it's just to give it a little time basically if needed. A lot of times I can turn these around for much larger annualized RoR in just 2-3 days than hold for 4-7 days, especially if there's a jump up in the S&P 500.

All the gains are taxed at 60% LTCG and 40% STCG, so most of it is long term capital gains. RH announced on March 9 this year they would continue to pay interest on options collateral, so this is where the "supercharged" savings comes into play. Even when I have most of the account sitting as collateral, it's earning 3.35% APY.

Since starting this strat in March with the interest still being paid on collateral, I've only lost on 1 trade. Was a big one (thanks, war in Iran), $332. but overall I'm up $2,068 including that loss since starting doing this specifically since that changeover to paying interest on cash collateral for options trading.

If you include the interest paid, which tomorrow will be $1,078.89 from Mar-Jul; that's up a total of $3,146.89 in not quite 5 full months on what's now a ~$82k account (it started closer to $70k at the start of this, added $10k over the months and took out $2k as well from transfers). I was pretty slow getting started out too. <$200 the first 2 months each month, but $703 not including interest in Jun and $603 this month now.

This does require some active trading and watching, but it's still pretty minimal from my end. Getting the higher premiums on days where it starts dipping are the juiciest for sure, tends to bounce back within a day or two a lot of times right now and can sell a $220 premium and close for like $40 a day or two later.

You can do all of this with spreads as well, just wont make the same premiums and return, as see with the lower returns they are suggesting. I like the fact RH still also pays my 3.35% APY on the cash whether its sitting there or actively being held as collateral (which it is more times than not). I dont know what all brokerages also do this, but its a nice add.

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the added stress of being directly responsible if I slip up and F it up

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as opposed to you paying someone to do the same? There are no guarantees these trades are going to work LOL

JEPI pays about 8% with 0.35% cost

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Are you referring to selling calls against your VTI position, e.g., covered calls?

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I assume that’s what he meant. And that strategy is a bit more resource intensive per call with VTI at 300+ per share than the other Vanguard funds which all split back in April and have lower individual share prices (like VGT)

Schwab is definitely making a commission, I realize that. Trying to get informed before follow up call in a few weeks.

I have a good bit of VTI with 100+% appreciation so not considering selling (realizing LTCG) to move into a dividend income producing asset. Plus, as previously mentioned I only want this extra income for a few years before reducing income to facilitate Roth conversions.

One risk is the price goes past the call strike and you miss out on future gains.

I’ve sold covered calls over the years.

Most expire worthless, but when my Seagate 125 option got assigned I missed out on a huge upside.

My basis was in the 50s. It was in a retirement account. I got some premium, but it’s hard to look at today’s price and say I did a good job.

My basic understanding of covered calls…auto profit selling a call (selling them cost you nothing). Risk to you is if underlying stock price has steep incline or steep decline during contract term. Most expire and when stock stays within a range (most of the time depending on stock) then this strategy is relatively safe “income” strategy.

Have a buddy who has sold them for decades. I almost did but simplified our investing machine as free time was more of premium than income premium.

I would not hire Schwab or pay anyone to sell covered calls for you. DIY or do not do it, assuming you now have the time / interest / confidence.

It is a relative safe way to increase income and enjoy significant LTCG taxes.

If you did this you would be taking additional leveraged tail risk and paying an annual management fee mainly to avoid realizing long-term gains on a relatively small portion of your VTI. Before doing that, calculate the actual tax from selling the highest-basis VTI lots needed to fund five years of extra spending. Only the gain portion is taxable, while virtually all of the options profit is currently taxable under 60/40 treatment. Unless Mariner can provide live, net-of-fee performance showing that the overlay materially improves total return and survives major downdraws, planned VTI sales are probably the cleaner and less risky solution. You can spend more now or maximize the stepped-up inheritance, but an options overlay does not eliminate that trade-off.

As an aside, I've been reading The Missing Billionaires and the authors have studied short-option strategies and concluded that repeated short-term put selling historically produced a poorer risk/return combination than a simple stock/T-bill portfolio. Their broader point is that options only belong in the portfolio if they improve expected lifetime utility (factors other than financial gain).

"Do Options Belong in the Portfolios of Individual Investors?" by Haghani and White

I do not use Elm Wealth and am not affiliated with them.

Would you recommend the book The Missing Billionaires?