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Comment by vivegi | Hacker News Reader

Combine stocks with options.

* Buy x quantity of $STOCK.

* Buy PUT options on the underlying x quantity of $STOCK (treat this as the insurance; you can choose to either pay a premium over the purchase price or a discount over the purchase price).

* Sell CALL options on the underlying x quantity of $STOCK (treat this as rent on your asset).

If the $STOCK loses in value, exercise your PUTs to protect value of invested capital. If the $STOCK gains in value, chances are the buyer of the CALL options you sold exercises their option. You still make a profit (although lower than selling at market rate which is higher than the CALL option exercise price). But you get cash (with profits) which you can then roll over into your next $STOCK + CALL + PUT transaction.

The strategy works regardless of market sentiment.

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You'll have to be careful on this. You need to make sure you buy back your calls before executing a put if we enter some wild volatility. Many platforms don't allow you to automatically do this, which means you have to manually manage it. You'd be better off finding an ETF that uses a similar strategy, especially since you can gain some tax efficiency that way.

You have underlying $STOCK that you have to cover the sold CALL options. When the counterparty exercises their CALL (because the market price is higher than the strike price), you can meet that obligation with the underlying stock.

After you meet this obligation, you have the option of letting the PUT expire without exercising it.

The purpose of the PUT is to help you safeguard drop in value of the $STOCK investment (in the OP's question - a hedge against inflation impact on the investment).

How do you pick dates and prices on the options?

The answer will depend on who you ask and what your goal/strategy is. There are numerous places like TastyTrade that go over picking dates and price points.

Ideally, for this strategy, the PUT is an insurance, so you can buy the longest available period that is priced optimally.

The sold CALL is nearest-date expiry.

After the CALL expiry date, you sell another CALL option and repeat this until the PUT option that you own expires (upon which you can buy a new PUT option and continue the strategy). You collect dividends on the underlying + the premiums on the sold CALLs.

Your long-term profit would include the dividiends + CALL premiums - PUT option purchase price while being protected from drops in the stock value.

In the event of a sold CALL or PUT exercise scenario, you also have capital gains adding to the profit.

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