With everything going on in the world right now (Russian invasion, supply chain shortages, staggering inflation, interest rate hikes, etc) the markets can seem pretty uncertain. And you might be wondering what am I gonna do? I'm down 15% YTD, that's basically half of last year's return figures.
Well I have a solution, or more technically, something that I conceived while studying backtests and options data by people much smarter than me.
What's the solution? Selling puts.
I see you rolling your eyes, this guy thinks he's a genius for discovering CSPs, what a moron.
Something you might not have heard before is that CSPs outperform in both bear and stagnant markets. So while in the last couple years CSPs have underperformed relative to growth stocks, when not if the market reverses the pendulum will swing back towards CSPs outperforming.
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.458.4882&rep=rep1&type=pdf
If you read the article, you can also note another important thing on page 50. CSPs also realize a much lower standard deviation, in fact, it happens to be 50% lower when compared to the S&P 500.
So what does it mean when you match the annualized returns (or sometimes slightly outperform) the overall index while also having a lower standard deviation? We lower the Sharpe ratio! Which makes our portfolio have better risk adjusted returns.
So now we get to my twist. If you sell CSPs on the index you get better risk adjusted returns, but what if we now want to raise our returns to a point where we have the same risk exposure as the overall market?
We concentrate our holdings. Rather than holding the entire index we hold less stocks, which increases our standard deviation, but at the same time should also raise our returns. Now I may have lost some of you at this point saying to shy away from indexes, but bear with me a little longer.
We don't need 500 stocks to be fully diversified.
According to this article where they randomly picked stocks within certain indexes and then calculated the standard deviation based on the number of holdings, the ideal number of holdings for large caps is between 15 and 26.
So that's the sweet spot, we find high yielding CSPs on blue chip stocks inside already built indexes like the S&P 500 and then pick between 15-26 of them to improve our returns.
Conveniently, I've built a handy tool in Python that screens for these options within the indexes (which you can find in my post history here) that uses Robinhood's unofficial API. I more recently rebuilt the whole project again using Python again, but this time with TDAmeritrade's API which is actually made for pulling options data.
So using that tool, I'm gonna lay out five CSP option plays that I would make for the next month.
Sell CCL $15P 04/14/2022 for $29 to capture a 1.93% ROI
This company has had some bad earnings since the pandemic started, but I think that it still is a good company with a low PB ratio at 1.65. As people return to their normal lives in the coming years they will want to go on cruises again.
Sell GPS $13P 04/14/2022 for $22 to capture a 1.69% ROI
This company also suffered from the pandemic, but is starting to make a recovery. Their PE ratio sits at 21.3 and PB ratio at 2.44.
Sell FANG $105P 04/14/2022 for $177 to capture a 1.69% ROI
Oil and gas company, pretty self explanatory. War makes oil prices go BRRR. PE ratio: 11.2 PB ratio: 1.58
Sell KMX $80P 04/14/2022 for $120 to capture a 1.5% ROI
Carmax is a retailer of used cars. With new cars suffering awful supply chain shortages, most people will be buying from sites like this for awhile. PE ratio: 14.2 PB ratio: 4.47
Sell F $14P 04/14/2022 for $21 to capture a 1.5% ROI
Ford is coming up with some great new vehicles. Their Mustang Mach-E gave Tesla a run for their money and they won't stop there. Their sales are also way up from where they were. PE ratio: 3.79 PB ratio: 1.76
Another thing to note, the prices at which I say to sell this options are subject to fluctuation, if you try to sell them on market open tomorrow the prices most likely will have changed. If you want to know if the option still offers a good ROI just take the option contract price and divide it by the strike prices times 100. Then just convert that number to a percentage.
**I am not a financial advisor, nor do I have any positions in the stocks that I recommended. If I did have the money I would definitely enter these positions, but sadly I am a broke 17 year old high school kid with an unhealthy obsession with the stock market. Take my recommendations with a grain of salt as you would any stock tips from a stranger on the internet.
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