DGI Adventure 08-31-16 Sold Cash Secured Put – Schwab US Broad Market ETF (SCHB) – $52.00 strike – September 16 Expiration

Back on Brexit day when everything went ape shit, I managed to sell a sweet put option on this index fund. It had a very good annualized return for an index fund option, and even a fair bit of downside protection.

That level of volatility hasn’t been back since. I was hoping it would come in August, but it looks like last year’s Hot August Chaos won’t be repeated. Could still have some fun in September I guess but who knows…

One thing seems likely though, if I get fed up with waiting and just go long, I’m sure some volatility will precipitate. So when everything goes haywire in couple of weeks…you’re welcome. We can all blame this trade for getting the ball rolling.

Since SCHB is an index fund, this doesn’t really conform to my core philosophies article on my investment thesis process. I’m simply trying to average into a position in index funds. I’m using options to lower my cost basis and generate income in the process. Since this trade doesn’t have much downside, it’s mostly about income.

Dividend Cycle

SCHB should go ex-dividend on 09/19/16 which will be the Monday after this trade expires. So if I get assigned, I should get a dividend payout, but who knows what that will be or how they come up with the amount. I’m more interested in this investment as a way to diversify my holdings.


The QC (Quantitative Case)

It’s an index fund. There’s no payout ratio, or EPS, or whatever. There is no quantitative case.

SPL (Strike Price Logic)

There is not a lot of options activity on this ETF compared to say SPY. But I like that it’s a total market fund rather than just an S&P500 tracker. Also the share price is lower than SPY, so I can commit to 100 shares much more easily. The SPY mini options are only 10 share contracts, but they don’t trade monthly, only as LEAPS.

I normally look for at least a 12% annualized return when I sell puts, but I will relax that a little bit for index funds, because they rarely offer that much premium. I had to go pretty close to the money to get much of anything because volatility is so low.

$52/share is pretty close to the 52 week high (which is an all-time high). I’d be lying if I said that didn’t make me at least a little nervous.

This is nearly a double digit annualized return though (would have been if it weren’t for the commission actually). That’s really not too bad. The trade is also a pretty short duration, so I think I got a pretty fair price.

Who knows what will spark the next bout of chaos, but if it’s the next FOMC meeting, then it shouldn’t affect this trade since that isn’t until September 20th – 21st. Although I guess if I get assigned, I might want to think quickly about what I want to do with the shares.

QWaF (Qualitative Warm and Fuzzy)

I would like to have some of my equity exposure through a low cost, broad market ETF like this. It provides diversification compared to picking individual stocks. If you really want to drink the buy and hold index investing kool aid, it doesn’t matter what price you get it at. I don’t completely buy that, so I’d rather get it at a slightly lower price or at least get paid for taking the risk. Options allow that.

CPR (Cold and Prickly Risks)

Maybe the US market is about to enter a prolonged bear market, where equities will lose value. Maybe it is, maybe it isn’t. Index investing ya’ll. Comes with the territory.

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