So, long story short… I have some concentrated positions with massive capital gains that I'm working on drawing down and diversifying. My current practice is when I sell, I take 35% of the realized gain and immediately park it in SGOV for estimated quarterly taxes, while taking the rest and immediately buying VTI. (35% chosen for 20% LTCG + 3.8% NIIT + 9.3-10.3 CA tax.)
VTI is planned to be long-term buy and hold until retirement (best-case, 9 years away).
I'm considering a strategy, instead of immediately buying VTI, of parking the money I'd use to buy VTI into SGOV and then selling OTM (but near the money) CSPs on VTI to collect premium until being assigned and thus buying VTI at a discount.
VTI closed yesterday at 362.74. Right now, Jun 18 expiry puts at $355 strike are paying $3.80 premium, or a 1-month yield of 1.04%. Annualized (although I know being that close to the money I probably wouldn't avoid assignment that long) that's a 12.6% return on top of the 3.91% currently for SGOV, or essentially about 16.5%. The goal would be to continue running it at a convenient premium in the ~1% monthly range until assigned.
I look at it this way…
- If assigned, I'm only really "hurt" if I'm assigned at a price of $351.20 or lower, because that would be my cost basis. But if VTI drops to say $345, that's still better than buying it at $362.74 and riding it down to $345, which is what I planned to do as it's a long term play. And it doesn't hurt that much, because I can buy more shares at $351.20 than I can at $362.74.
- If not assigned, I'm really only "hurt" if VTI runs quickly and I miss out on those gains. I'll have to chase it up which means shares are more expensive (so I can afford fewer) but has the advantage of if I get assigned, it's probably at a higher cost basis which reduces taxable gains down the road in retirement. The only way I'm really hurt is if I continue avoiding assignment somewhat long-term and VTI's returns exceed the ~16% of this strategy–which isn't unheard of given that VTI has increased >24% YoY.
Seems like an easy way to juice the return for something I was planning to do anyway…
But I trust that you're all going to be able to point out some massive thing I'm missing here 😉
(Edit to add one more point: this isn't a realized income strategy–options premium and SGOV dividend would be used for additional investment.)
Is there a downside of using CSPs to acquire ETFs I want to hold long term?
byu/betarhoalphadelta inoptions
Posted by betarhoalphadelta
8 Comments
The downside is vti dips below your strike price and recovers before being assigned. You collect the premium but might not get another dip for a while. Imagine if you had done that late march and sold the april monthly.
The 12% return you’re assuming is not going to be consistent. It depends on volatility – if volatility drops (eg we grind sideways), you’ll be collecting less premium. You also miss out on the dividends from VTI, and are paying ordinary income tax rates on the short-term gains from selling options vs being able to hold for LTCG. And yes, there’s also a big risk that it goes up faster and you never buy in, missing out on gains + paying more in taxes.
Selling puts is fine on the side but I would not use it as a primary DCA strategy.
My question is why just VTI? You need to take a look at the lost decade after the Dot.com bubble burst. Have you noticed current yields? With the current regime and an unproven head of the Federal Reserve, you might want to revise/diversify your plan a bit…
Literally every strategy has a at least theoretical downside. There comes a point where as an individual you have to accept you can’t perfectly maximize everything and deal with both time restrictions and just say the extra 0.02% gain per year is not worth an extra 15 hours a month.
It depends if you’re looking for income or convinced it will dip and you want to get paid to wait? It seems like you’re looking for income, is so, buy shares soon and sell covered calls.
Have you looked at volatility recently? There is like no returns to be made selling these that will outperform just buying the underlying or something else. For where we are in the world and the global macro situation volatility is artificially low in my opinion.
Main downside is opportunity cost. CSPs feel like buying at a discount, but if VTI runs, you’re sitting in cash plus premium while the asset you wanted gets away. Premium is also taxable income, and VTI options aren’t always as clean/liquid as SPY. It’s fine if you’re truly indifferent between assignment and waiting, but if the goal is long-term ownership, just buying VTI is often simpler.
OP, if you have an *extremely rigid* price target (where if the etf is one penny above the target, then you won’t buy, and if the etf is at the target, then you put your entire portfolio into the etf), then selling puts exactly on your price target has no downside (assuming that taxes are negligible).
The problem is, pretty much no one thinks like this. You probably have a scale of how much you’d want to buy, not a binary switch.
The premium you collect will always be less than the amount you’d gain from holding 100 shares. For example, if I sold an ATM put for $5, and then the etf went up $5, the put wouldn’t be completely worthless (you’d still have to buy back the put for a nonzero amount).
On the other hand, the premium you collect won’t offset falls in the etf price below your break even. If the position is for the long term, it is usually better to DCA in and out of positions.