Put Selling VS 10 Baggers

A recent email got me thinking about Put Selling, the importance of strategies and the true value of investing. Here is the email from a reader:

“How do you respond to those who say that selling puts gives you very little upside and unlimited downside?  I have sold puts in the past with mixed results, but you miss the infrequent 10-20 bagger.  Thanks !  – Al”

Put Selling As A Financial Strategy

On November 7 2011 I wrote an article entitled “Put Selling as a Principal Investment Method.” You can read that article through this link. There is no need to repeat everything in that article. Instead what I would prefer to say is that I have heard this many times over the past 4 decades. Long before options were in vogue and certainly before many were available on a lot of stocks, I looked to Put Selling as my principal investment method.

But it is true that I miss out on the 10-20 baggers, but I also miss out on the 10-20 downers as well. It comes down to your choices as an investor. I choose safety and caution through Put Selling large cap dividend stocks in exchange for what I feel is a very good return.

Often the 10-20 baggers are not stocks I would trade, even if I was not Put Selling as a principal investment method.  The stocks I do Put Selling against I believe will be around for decades. Most should definitely outlast me and that gives me great confidence. I don’t chase any stock.  I like strategies and I think Put Selling has huge potential if done on the proper stocks.

Let’s take one of my favorite stocks YUM Stock.

Put Selling Yum Stock

If an investor had bought YUM Stock on August 11 2009 when I started Put Selling YUM Stock and was still holding the stock today, he would have earned $30.32 in capital gains and $3.65 in dividend payments. His return on Feb 22 2013 if he cashed out would be 97%. Basically he would have doubled his capital. A $50,000 investment in YUM Stock would have resulted in a return of roughly $48500.00. A very nice trade indeed.

Put Selling YUM Stock

Put Selling comparison of YUM Stock from August 2009 to Feb 2013

My YUM Stock Put Selling over this same period of time has returned 4.6% for the 5 months of 2009, 13.25% in 2010, 26% in 2011, 17 % in 2012 and 8% so far in 2013. My total return has been 68.85%. My return is lower by 28.15% but how many investors would still be holding YUM Stock today if they had bought it on August 11 2009? If they had used a stop-loss they would have been stopped out in May 2010 or a dozen other places along the way. How many investors would have then bought back into YUM Stock for another move higher? In the end how many investors would have actually made 97%. The truth is very few. It is incredible hard for retail investors to buy a stock and hold it indefinitely.

With Put Selling, each month I am earning capital and that capital is being reused for further investments. The investor with YUM Stock must hold it until he finally sells it 4 years later. But I am already earning my profit and compounding my capital each and every trade. By the time the first year was up I had earned $1397  which was being used to assist in Put Selling. By the end of the second year I had earned $7361 which was being used in Put Selling. By the end of the third year I had earned $14224 which was being used for more Yum Stock Put Selling and by the end of 2012 I had earned a total of $39595.00 in Yum Stock trades which was being used for more Put Selling. So while the buy and hold investor has their capital locked for years in this trade, my capital is growing faster as each year passes and allows me to withdraw the original capital from the trade as the Put Selling trade continues to earn more each month. Eventually the YUM Stock trade will have none of the original capital but instead be nothing but capital I have earned from Put Selling.

Put Selling Walmart Stock

Where Put Selling as an investment strategy shines is over even longer periods and on strong big cap stocks like Walmart Stock. An investor who bought Walmart Stock in early January 2000 might have paid $54.75. On Feb 22 2013, Fourteen years later between the dividend and the capital gains, if this investor cashed out he would have earned 47%.

Put Selling Walmart Stock

Put Selling comparison of Walmart Stock from 2000 to 2013

I commenced Put Selling Walmart Stock in 2008 when the stock was at $61.00. In 2008 I earned 23%. In 2009 24%, in 2010 14% ,in 2011 12%,and in 2012 19% for a total return of 92%. Imagine if I had started in 2000!

Put Selling RIM Stock

There are many other advantages to Put Selling. One of the areas that Put Selling stands out is selecting highly volatile stocks and Put Selling against them. Through Put Selling strategies for example I earned 60.5% from June 2009 to June 2011 Put Selling against RIM Stock before stopping as the stock collapsed. Those who held stock or kept averaging down in RIM Stock as it collapsed may never see much of their original capital ever returned.

Put Selling RIM Stock

Put Selling Rim Stock June 2009 to June 2011

Put Selling As An Investment Method

The value of Put Selling against stocks becomes apparent the more Put Selling that an investor does. Eventually over time you begin to realize that the returns can be consistent and the losses are easily controlled. So while it is true that I never end up with a 10-20 bagger, the consistency of winning trades which compounds my capital allows me to sleep nights safe in the knowledge that if I ever wake to find my sold puts deep in the money, I know that the naked put positions I am holding are within the types of stocks I would own without hesitation. I am confident that if my selected stocks should fall they will recover and in the meantime I would be able to do even more Put Selling at much lower prices for larger premiums and reduce the cost of ownership even more.

There is a lot to like about Put Selling as a principal investment method and once you have done Put Selling through proper strategies against large cap dividend paying stocks, you may wonder why you never started years earlier.

Put Selling Internal Links

Put Selling Strategies Index

Put Selling Stock Examples Of Trades

Put Selling Strategy Articles For Members

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  • Thanks Rob for your comments. It is true that very few ever get the 10-20 baggers but instead once in a while hit a winning stock. Consistently winning trades is what will build up a portfolio.