Cash Secured Puts vs S&P 500 Challenge. Month 1, June 2023

It’s been a month since I started tracking my cash secured puts and covered calls, or options wheel strategy, against the performance of one of the most popular S&P 500 etfs, the Vanguard etf, ticker symbol VOO.

For those of you who may have missed the first post you can read about how I am trying to beat the S&P 500 here. Basically I’m going to trade options using the Wheel Strategy. It’s where you start by selling puts, in my case out of the money puts, on stocks I wouldn’t mind owning. This part is considered a bullish strategy to buy a stock at a discount if the stock expires below the put strike price. Then if the put position is assigned, the next part of the wheel is to sell a covered call and collect a premium again. The goal is to sell them on a weekly basis collecting premiums at a rate of 1% or more each week.

I started by putting $6,000 into a Roth IRA account to commence selling puts. At the same time I started a worksheet that will track the value of the S&P 500 ETF, or VOO, to compare with. I anticipate this will be a long term comparison review which is why I wanted to put it into a Roth. This way I don’t have to worry about taxes affecting the results on an ongoing basis. This could be a significant difference if this experiment goes well.

For the ETF tracking, I also put in the number of shares it would buy with the same $6,000, so I can track dividend reinvestments and any other income it might receive. To make the best comparison, all income and any distribution from the ETF will be reinvested at the next day’s opening price.

For any of you who missed the initial post, you can read about it here. Or, the short version of this investment strategy is selling put options at a lower price than the strike price to generate income by the premium you receive. Using options like this any investor needs to be willing to buy the stock if the price of the stock is lower than the strike price when the option expires. It’s a good strategy to buy stocks at a discount.

Sooner or later the stock price will decline enough that the cash secured put option will be assigned and I’ll own the stock. The second part of the strategy is to start selling options out-of-the-money on the call side, or selling calls. Again the goal here is to generate an additional income from the premiums. Similar to the put sales if the stock passes the call price the option contract will get assigned and I’ll end up selling the stock at the strike price. At this point I can analyze if I still like the stock or look for new ones.

I’m writing this post to document the trades in the account along with some of my thoughts along the way.

Recap Day 1 (June 1-2)

June 1st happened to be on a Thursday, so I decided to go ahead and sell a really short term put on Coinbase, ticker COIN. I sold the $60 put that was set to expire the next day and collected $73.34! Woohoo! I already made over 1% in the first day. Great way to start, right. Then came the real first week.

Week 1 Recap June 5-9

After the quick success I decided to sell another option on COIN. Again I sold the at the money (atm) $60 put set to expire at the end of the week. Because there was more time for this options trade, I collected an option premium of $153.34. I was excited. I was off to a good start. Unfortunately, this is the week that the SEC decided to sue Coinbase and “alleges Coinbase operated its crypto asset trading platform as an unregistered national securities exchange and broker….” Consequently the stock dropped drastically. I knew there was a lot of volatility with Coinbase, but did not expect that.

Watchout!

Lesson relearned (not the first time this has happened) I wrote about the risks in the first series of the challenge, so I knew this was a possibility. During that week I was already questioning how long it would take to get back to a breakeven point, let alone keep up with VOO. As and investor that wants to deploy option strategies selling cash-secured puts for income generation, this is the risk. If the price of the underlying security is lower than the strike price on the expiration date, you’ll get to buy the stock.

So as you can already tell, my put option went south. I collected the $153.34 premium, but also ended up being assigned the stock and purchased 100 shares of Coinbase (COIN) at $60 per share. Technically the option expires on Friday, but the removal and assignment show up in my account on the next Monday, in this case the 12th.

Week 2 Recap June 12-16

There wasn’t much do with the options wheel strategy this week. Coinbase was currently trading around $52 per share and my cost was $60 (even though the way my broker factors it shows up as less due to the option used to acquire the individual stocks). The stock had gone down so fast I though I would have more time until it recovered and I still wanted to collect a premium, so I sold a call with a strike price at $58, thinking it would expire worthless and I could do it again. Worst case scenario if I was called out, I’d still be ahead since I had already collected over $200 in premiums. I collected a premium of $46.34 on this one.

Week 3 Recap June 19-23

Last week my call option expired worthless, so it was time to sell another. This week was one day shorted due to the markets being closed for Juneteenth, so I wanted to sell my call as soon as possible on Tuesday the 20th. They say timing is everything and it was on the day I sold mine. I figured I’d sell first thing in the morning to have the longest amount of time value in the trade, which makes sense, but little did I know the stock would jump up that day and had I waited, I could have sold the same put option for almost double.

That would be more of a guessing game though and could have easily gone in the opposite direction. I ended up selling another $60 call for the week and collected a premium of $38.84, just over 1/2% of the $6,000 investment. The week ended good though. Just as COIN had dropped a bunch this week it jumped a bunch and ended the week at $61.47. Not too bad. I got called out and ended the week in all cash again.

Week 4 Recap June 26-30

On Monday morning I noticed that COIN continued to rise, pricing me out of selling another cash secured put, so I needed to find another stock or two to use. This time I chose to use Affirm (AFRM) and Palantir (PLTR). I sold 2 puts on each. First I sold two $16 puts on AFRM and collected a premium of $90.68, then I sold 2 puts on PLTR with a strike price of $14 for a total of $54.68. Combined I needed to have $6,000 in cash to sell the puts and collected a combined $145.36, which equates to a 2.4% on the $6,000, but not on the entire balance which was now about $6,300. I included the first trading day of July in the picture below to show the options expiring worthless.

In all the month ended pretty good. I know, If I had just not done anything with the Coinbase stock I would have done way better since it’s trading at almost $80 as of the time I’m writing this. That wasn’t the plan though. The plan was to find good stocks with good premiums and try and outperform the VOO, Vanguard’s S&P 500 fund. So let’s see how that performed.

VOO – S&P 500 ETF Monthly Summary

To be consistant through the process I’ll always buy VOO at the open on the day there is a transaction. At the beginning of the month VOO opened at 384.20, so I’m showing a purchase of 15.617 shares with my same $6,000. This was a good month for VOO. On June 29, a dividend was paid in the amount of $1.576 per share which would be $24.61… Had the funds been distributed and automatically reinvested at the open this would equate to .061 new share, so I would have ended the month with 15.678 shares.

The closing price of VOO on June 30th was $407.28. My total account balance with the reinvested dividend would be at $6385.46, or an increase of 6.42% for the month. Imagine that on a monthly basis. That would be a great year! Here’s a screenshot of my Vanguard S&P 500 worksheet.

Final Results

How did I fare against it? I ended up selling 4 cash secured puts and 2 covered calls for the month. I was assigned some stock and called out of some stock. The end result? I ended up the month with a total account balance of $6,457.71 and all was back in cash (IDA is Insured Deposit Account where cash is swept).

Woohoo! I won, right? Hang on! It’s only a month and based on how things went it could have easily gone the other way. At one point I was thinking how it might look to start off this whole experiment at almost 10% in the hole! So I’ll take the lucky win. After all we can’t really call it skill after just 4 weeks of trading, right? The S&P ETF rose by 6.42% for the month and my Roth IRA account rose by 7.63%. At the start of the month I was hoping to average 2% each week, but after the big up and down movements, I was just happy to have a positive result. We’ll see how next Month goes.