I’m an interest rate nerd, obsessed with maximizing each idle dollar. Every Jackson, Grant,
“Would that I were born to Warren Buffet! The Oracle would have used meLamentations of a misused buck
proper. But nooo, I had the ill fortune of landing in Mr. Ignoramus’s pocket and he hasn’t a clue.”
I like 100% odds and sure things as much as the next guy. But the payout has to move the needle. And with the risk-free rate dutifully dumped a quarter-point by the wizards at the Fed, the 2% available in high yield savings accounts or T-bills is leaving me dissatisfied.
If only there were a way to juice that return while maintaining the high odds of payout.
Perhaps a naked put would serve as a satisfactory substitute? It carries high odds, that much is true. And while it’s not 100% like the good old Treasury Bill, we can still get something close. But is the additional reward large enough to add risk to the equation?
Maybe. Let’s tease this out a bit more.
$30k in a 2% yielding risk-free investment nets $600 over one year or $50 per month.
Think of this as a zero delta put we’re selling for $50 per month.
Probability of Profit = 100%
The Could Actually Get you Outta Bed in the Morning Alternative
$30k set aside to sell a single cash-secured, 30-day, 10-delta naked put on SPY would yield approximately $90 per month (at least if the VIX remains near 16), or $1,080
This is selling a 10-delta put for $90 per month, or almost double what’s available in risk-free alternatives.
Probability of Profit = 90%
So here’s the crucial question. Would you rather have a 100% chance of nabbing $50 a month on your $30k or a 90% chance of capturing $90 per month on your $30k?
Of course, if we are willing to shift the odds further we could increase the payout. Maybe well sell a 15 or 20 delta or put.
The Management Drama
A further wrinkle in the comparison is the domino of decision-making that triggers when you take the naked put route. When do you enter? Do you ride to expiration every month before selling the next or do you overlap? Do you close early at 5 cents? What if SPY plunges? Do you buy back the put and eat a big loss, potentially giving back all those $90 payments of months gone by? Or do you allow assignment, and embark on a covered call selling adventure, dramatically shifting your odds and payout in the process?
Each path forks into more paths. Dominoes after dominoes.
And yet, the management doesn’t have to be overly difficult. You could keep it simple. One target rule, one stop loss rule.
I would very much like to craft a savings account killing strategy. The key objectives are maintaining the high odds of success while sidestepping any dramatic drawdowns that thwart my reach for greater yield.
What say you, dear reader?
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