Put Paper Trade

This morning I executed trades to create my put paper portfolio. As I mentioned the other day I want to see if there is a way to increase yield on the cash portion of a portfolio. The fictitious cash should be considered as part of a stock/bonds/cash allocation but with no visible need for the cash anytime soon. To repeat from the other day, cash you need soon should not be in something that can go down.

In putting this together I tried to blend together a mix of different volatilities with the intention of trying to minimize the likelihood of having the options assigned. Remember the intention is to enhance yield not pull in the most premium I can find. I also did not over leverage the account. As a rule of thumb the margin requirement for a naked put is 25% of the cost to buy the stock at the strike price. Fully leveraged our $100,000 could control $400,000 worth of stock. That could be a swift path to ruin. The way I have structured the portfolio if everything were assigned we would be spending $96,300. The puts are all out of the money by about 10% (some more and some less) and all expire in four, five or six months. This allows the strategy to be implemented at least twice a year. For each trade I assumed a $15 commission. The net income for all the trades was $1200. This is 1.2% on $100,000 so it annualizes out to 2.4% if it is in fact done twice a year. If your money market yields 1.5% adding 2.4% becomes significant (most brokerage firms will pay interest on cash being used to secure puts).

The stocks and ETFs chosen hopefully will not go down. I tried to use issues that don't have much recent history of big price drops, but who knows about the future? Also you may not want to write puts on companies that pay huge dividends. Stocks are reduced in price when they go ex-dividend. The options market prices in this type of event but a put you write 10% out of the money may suddenly be much closer to the money after a big dividend. I am purposely simplifying this issue too much. You should be able to find more detailed info on this aspect of the trade elsewhere if you are interested.

Here are the trades:
sold 3 DELL Aug 35's @ 0.45
sold 4 BK July 27.50's @ 0.50
sold 2 GSK Aug 42.50's @ 0.60
sold 4 XLI Sep 27's @ 0.25
sold 3 XLE Sep 37's @ 0.45
sold 2 NEM Sep 37.50's @ 0.70
sold 5 VOD Oct 22.50's @ 0.30
sold 4 XLU Sep 26's @ 0.25
sold 1 NKE July 80 @ 1.55
sold 2 HD Aug 35's @0.50

The only stock to disclose is Dell. Clients own it and I couldn't come up with another low impact tech stock that I have confidence in. Obviously I used several ETFs. ETFs have less option premium but the chance of XLI being down 10% in a day are slim. The stocks chosen are all fine companies but I do not know them as well as companies I own for clients, this is after all a paper trade to test a concept.

Another way to do this, but realize less premium would be to sell 19 OEF Sept 52 puts at $0.45. This would net $840, at twice a year, adding almost 1.7% in yield.

Also keep in mind that I am making several assumptions about future options premiums that may or may not be accurate. If interest rates at the short end of the curve go up a little more premiums might go up to. There are many variables to what could happen, there are no doubt some flaws and I 'm sure there is a better way to skin this cat but this is where we are. I'll give progress reports along the way. Fell free to weigh in if you have something to add.