Podcast – Episode 64 – Selling Puts vs Owning Stock

Podcast Transcript

Passive traders, I hope the markets are treating you nicely. Today I want to do something pretty cool. So I am finishing up the book called Passive Trading. Has been taken me I think over two years, but I’m finally getting close to completion. My editor told me that it’s probably better to add a few examples of trades that I’ve done in the past and some examples of the different strategies that we’re talking about. So I was like, “Yeah, that makes sense.” So what I did was I decided to go into the past and pick a stock and say, “Okay, this is a stock. What if I did what I’m telling everybody to do? How would it work out without knowing anything about the future or anything like that?”

The example was for naked puts, selling naked puts. That’s one of the strategies I cover in the book. I talk about it, say how to do it, this and that. And I said, “Well, what would happen if I take my strategy, how to do it, and go and apply it in real life?” So I picked Walmart because Walmart is not a stock that I own. I don’t follow it on a regular basis. It is on my watch list because it’s a good company and it pays dividend. It might be one that I want to get into, but up till now I don’t own it and haven’t traded it very much. So I said, “You know what? Let me go into Walmart. Let me try it and see.”

So 2018, January 2018, Walmart was trading at $98.59. That was really good because in 2017 the stock was up 42%, so had a great year in 2017. What’s it going to do in 2018? I don’t know. I don’t remember. And I haven’t traded, so I don’t know. So what I decided was I am not going to own the stock. I am only going to sell naked puts on it. If I get assigned on those puts, then I will see what I have to do there. Maybe I will sell the stock and keep selling more puts or maybe I will keep the stock and start selling covered calls. Either way, I’m going to have to do something, but I’m not going to roll. That was the decision. I wasn’t going to roll my putts. I was just going to take the stock.

So I started on the 2nd of January, okay? First trade I did sold some puts, made 3.6% because the puts expired. Nice. Did another trade in February after that one expired. After the first expired, I did it in February. That one also expired. 3.2% gain. Then I did do one in March. 3.54% gain. Did one in April. 5.54% gain. Geez. This is easy, right? All I’m doing is selling naked puts on Walmart away from the money and I’m getting really nice monthly gains, and I’m not having to watch it. I’m not following. I’m not adjusting. I’m not doing anything. I’m selling the put, waiting till it expires, and then selling another one. That’s all I’m doing.

Then, May came. Those puts expired. 2.83% gain. June, 1.85% gain. July, 3.9% gain. August, 2.53% gain. September, 2.75% gain. October, 4.89% gain. And November. Oh, November I finally get assigned. So on December 21st, Walmart closed at $87.13, which was 37 cents lower than my sold strike, so I had to buy the stock at $87.50.

Now, you might be thinking, “Oh wow, Allen, yeah, anybody can make money selling naked puts in a bear market.” Walmart went up 42% the year before. It probably went up close to that in 2018 when you were doing it, right? Well, yes and no. 2018 was a year when Walmart traded from $98.59 at the beginning of the year. That’s when I started trading. It went up to $109.55, so it did go up. But then once it got there, it turned around and went down all the way to $82.40, and then it ended the year at $93.15, which means that the stock was actually negative 5.6% for the year. So if you had owned this stock, if you had bought it on January 2nd, first day of trading in 2018, and you held it to the end of the year, you would’ve lost 5.6%. Now, you would’ve gotten the dividends, so maybe it’s an even, but still that’s dead money. You’re not making any money on this stock if you are only buying it and holding it for the whole year.

But if you had done what I did and you had sold naked puts the whole way, you would’ve made 34.65%. Let that sink in here. I was selling naked puts on a stock that went up and down and up again and closed down. So this was not a stock that just went up in a straight line. This stock lost money on the year. But because of the naked put strategy, I made 34%, okay?

This is without owning any stock. I didn’t own the stock until very end of the year, until December 21 when I actually had to buy the shares. Until then, I didn’t own any stock, and I didn’t really spend much time on it. I just put the trade on, let it expire, and then put on another one every month. Takes literally five minutes or less. Didn’t watch the news on Walmart. Didn’t care about earnings, or announcements, or what they were doing, or how the stock was doing. Doesn’t matter. Didn’t care. All I did was sell a naked put every month. Let the one expire, sell more, let it expire, sell more, let it expire, sell more, let it expire, some more on a stock that went up or down. Now, I understand if this was a stock that had just gone straight up, then yeah, you could say, “Oh, yeah. It just went straight up. Of course you’ve made money.” True, but this was not that. This was a stock that went up and down, right?

So this was just one example that I did for the book. I just thought this was a really freaking cool example. I did a couple other examples we did on credit spreads on comparing owning the stock, a stock that was really good. I’m just going to tease you here. I’m not going to tell you what it was. But I picked a stock, I went back and I said, “All right, in this year, 2000 … ” I don’t know what year it was. Think 2017 or 2018. I said, “Give me one of the best performing stocks.” And I got a list of all the ones, and I said, “Okay, this one I think we can do credit spreads on.” So I picked it, and I did spreads on it month, after month, after month, after month, after month, and the credit spreads did better than if you had just held the stock. Even though the stock was one of the best performing stocks of the year, you would have done better by selling options than holding the stock.

And this Walmart example is the same thing, same conclusion. 34% compared to negative 5%, okay? Less stress, less time, and a lot more money. That is why we sell options. That is why I’m into passive trading. Cool?

So if you want to learn more about passive trading, you can go to passivetrading.com. The book itself is … Like I said, I’m going back and forth with the editor. Hopefully it will be out soon. If you want, you can email us about it or just go to passivetrading.com and see. It might there. But that’s it. Yeah. Selling options come put together with owning stocks makes more money. I don’t know if I can make it any simpler. And this was a real example. Like, dude, these are the numbers, you know? And in the book, I’m going to have what are the dates, what are the exploration, what are the price, what did I get, was the result. Everything is there. So you can go and check it for yourself.

Were these actual trade? Yeah, they were done. This was real numbers, okay? I didn’t even think it was going to be this good. To be honest, I didn’t know it was going to be this much of a difference, 34% gain versus negative 5% for owning a stock. Holy cow. That blew my mind. That’s why I wanted to do an episode on. That’s why I’m be like, “You guys got to look at this. This is so cool. This is so amazing. Why aren’t you doing this, right? Why aren’t you doing this right now?” All right folks. Until next time, trade with the odds in your favor.



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