SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
25% returns in the past 8 months
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Today I computed the returns on my investment using a strategy I started doing in late August 2008. I was very pleasantly surprised with the results – we had a gross return (before commissions and tax) of 25%! This is a fantastic return considering the All Ordinaries fell 25% from around 5000 to 3750 during this period (see chart below). This simple strategy involves selling options over a core portfolio of blue chip stocks. I would like to share this strategy first because I believe it is one which most Self Managed Super Fund trustees can do with their current stock portfolio and this is probably the ideal time to do it. Don’t worry if you don’t know what options are as there is plenty of free or very inexpensive education on options (see Resource page) and you don’t need to be an options expert to be able to do this strategy.
When I started this strategy, the stock market had already fallen about 25% from its all time high at around 6750. It looked like the market was bottoming but with a financial crisis globally, I did not expect a quick recovery or a very bullish market anytime soon but I did not mind owning some fundamentally sound stocks if I could buy them at a discounted price. I had my eye on Westpac, BHP, CSL and Woolworth and I watched the price charts each day and when the price pulled back to a historical low, I would sell put options.
For example, in the past year, I noticed that BHP always rebounded when the price fell close to $30 (see chart below). In Sept 08 when BHP was trading at $34, I sold a PUT 33 option which expired in Oct 08 for a premium of $1.50. What this meant was that on 27 Oct 2008 which is the date when this PUT option expires, if price of BHP was less than $33, I will have the obligation to buy 1000 shares of BHP shares from the person who bought this option, at the price of $33 per share. For the right to sell at this guaranteed price, the option buyer paid me a premium of $1.50 per share. In the event that BHP falls below $33, I would buy the stock for $33 but the net cost to me would actually be $31.50 because of the $1.50 premium I received up front. I was happy to own BHP stock at $31.50. On 27 Oct 2008, BHP closed at $24.60 so I had to buy the BHP at $33 as per my obligation for selling the Oct 33 PUT option.
After I became the owner of the BHP shares, I could sell CALL options to generate additional income. In Nov 08, BHP shares rebounded strongly back to $30. I saw this was a strong technical resistance area so I decided to sell a CALL option to get some extra income to help offset any capital loss if BHP shares fell in price. I sold a Dec 32 CALL option which meant that on 18 Dec 08 when this call option expires, if the price of BHP goes above $32, I would be forced to sell my shares at $32 to the option buyer. For the right to buy at this pre-determined price, the option buyer paid me a premium of $1.25 per share. If the BHP share price was higher than $32 on 18 Dec 08, I would have to sell my shares at $32 which would mean a capital loss of $1 per share but because I had also received $2.75 ($1.50 from the PUT option and $1.25 from the CALL option), I would effectively still enjoy a net profit of $1.75 per share. On 18 Dec 2008, BHP share price fell below $32 as I expected so the option expired worthless as no sane buyer is going to buy the stock from me at $32 when then can buy it from the market at $31 that day. I sold some more CALL options for Feb 09 which expired worthless and collected more premium which helped to reduce the cost base for my BHP shares. I also sold Apr 30 CALL options which expired yesterday. Because BHP closed at $32.48, my option was assigned so I was forced to sell my shares at $30 which resulted in a capital loss of $3 per share as I bought BHP at $33 and sold at $30. However, as I had collected $5.75 in option premiums, this more than offsets my capital loss and I made a decent 8% profit from holding this stock for 6 months.
On top of the 8% net profit from my option premiums from BHP, I was also able to use my BHP stock as collateral when I sold PUT options for other stocks. I sold put options for WOW and CSL without having to put in any additional cash to cover the margins normally required by the broker when you sell PUT options. All these option premiums helped to boost my returns on the capital that was tied up in my shares resulting in net returns of 25% on capital in the past 8 months.
I like this strategy as it has no additional risk to a buy and hold strategy. Most Self Managed Super Funds already hold shares of blue chip stocks so why not sell some calls to boost your income especially when dividend income is being reduced for most stocks due to poor earnings. If you have some extra cash from new super contributions and have your eye on some good blue chip shares, why not sell some PUT options and buy them at a discount? Options are available for most ASX 50 stocks. To find out if your shares are optionable, go to the options page on the ASX website and type in the code for the stocks you own.
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I like your layout and graphics. Also found the article easy to read. Only comment would be that I have found that this strategy works for me as well. But in the extreme case of selling your initial PUT when the All Ords was at the all time high of 6750 would require quite a large number of sell CALL/PUT trades before recovering your losses. Under most circumstance, this strategy works just fine.
Thanks Felix for your feedback. Selling a PUT when a stock has hit its all time high has a similar risk as buying the stock at that price. You must be prepared to own the stock at whatever strike price you sell your PUT option for less any premium you get for the PUT. I fully agree that if the stock falls a lot, it will take a long time in selling calls to recover your losses.
Christina