Is it true that when we sell cash-secured puts, our maximum return is the initial put premium? Come on now, we’ve all heard and read that statement. This article will demonstrate how I generated a 6-income stream series of trades by executing, and then managing, a 10-Delta Monthly cash-secured put with INMD from 9/20/2021 through 10/15/2021.
What is a 10-Delta Monthly cash-secured put?
When we sell a cash-secured put, we are agreeing to buy the option holder’s shares at the strike price by the expiration date. In return, we are paid a cash premium. The broker will require us to place a certain amount of cash [(put strike – put premium) x # shares] into our cash account in the event that the option is exercised.
10-Delta means the strike is deep out-of-the-money (lower than share price) and approximates a 90% probability of not being exercised… it is a defensive approach to option-selling,
Exit strategies for cash-secured puts
There is a myriad of exit strategy opportunities that may arise during our contracts, and we must be prepared to act, when appropriate. During this particular contract, INMD appreciated in value significantly and also completed a 2-for-1 stock split.
Rolling-up and still retaining the 10-Delta status
The Delta of puts is signified with a minus sign because the put value is inversely related to share value. As share price rises, put value declines. This means that we can frequently buy back the short put at a lower price and re-sell a higher strike for a net credit while still retaining our required 10-Delta status.
Broker screenshot of a rolling-up trade with INMD on 9/20/2021
Rolling-Up from the $110.00 to the $120.00 Put Strike
The put was sold for $95.00 per-contract and then rolled-up for an additional net credit of $47.00 per-contract.
Summary of rolling put trades generating 6 income streams
6 Income Streams for 1-Monthly Cash-Secured Put
Post exit strategy calculations
- Total option credits = $1050.00
- Total option debits: $530.00
- Net option credit: $520.00
- Last cash required amount (4 contracts): $29,480.00 –[($75.00 x 400) – $520.00]
- 1-month return: $520.00/$29,480.00 = 1.8%
- Annualized return: 21.1%
- Exit strategies doubled initial annualized returns (10.5%)
Discussion
- Selling deep OTM cash-secured puts with Deltas of 10 or less creates an ultra-conservative approach to option-selling
- 10-Delta strikes approximate a 90%+ probability of success
- Returns will be lower than traditional put-selling in exchange for greater downside protection
- Exit strategies remain an integral part of the strategy approach
- Rolling-up while still retaining our 10-Delta status is a viable exit strategy when share price accelerates
For more information on selling cash-secured puts
Best online video course with downloadable workbook
Best calculator (calls & puts)
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
I’ve read and watched YouTube’s by many people who purport to utilize option selling programs. What is exceptional about what you do is the way you document your articles. It’s almost like reading a synopsis of a medical case. Regardless of what approach one does, being highly organized is very important, IMO.
Best regards,
David
Upcoming events
1. Wealth365 Summit: Free Zoom presentation
Thursday April 7, 2022
11 AM – 12 PM ET
An Ultra-Low-Risk Approach to Selling Cash-Secured Puts
Entering and Managing 10-Delta Trades
Selling cash-secured puts is a low-risk option-selling strategy seeking
to generate cash-flow with capital preservation in mind. This
presentation will highlight an ultra-low-risk path to option-selling
using Delta stats as a basis for the methodology. A new one-of-a-kind
trade management tool will also be introduced that will assist in
entering managing and receiving final trade results from start-to-
finish for both covered call writing and selling cash-secured puts.
Topics detailed in the course:
- Option basics
- Hypothetical and real-life traditional cash-secured put trades
- Pros & cons of selling cash-secured puts
- The 3-required skills for elite option-selling results
- Delta defined and implemented
- Real-life monthly cash-secured put trade with 6 income streams
- BCI Trade Management System (first-ever such tool)
2.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
7:30 PM ET – 9:30 PM ET
3. LIVE at The Money Show Las Vegas
May 10th – 11th
2 presentations:
Portfolio Overwriting (free)
Tuesday May 10th at 1:30 PM – 2:15 PM
Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing
A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)
Wednesday May 11th at 1:30 PM – 3:30 PM
How to master all aspects of this low-risk option-selling strategy
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
****************************************************************************************************************
Alan,
Ok…I’ve sat on the sidelines enough. I think most people are predicting a downturn, so I’m going all in (be greedy when others are fearful, know what I mean?) However, I’m going to use the lower risk strategy of ETFs and covered calls.
400 XLF, 300 XLU, 200 XLB, 100 XLI, and 100 XLV. These are all trending above the SPY right now. I will be selling both ITM and OTM weekly calls. Some other good things are that I don’t have to be concerned about earnings reports, and since I’m going to own the shares today, I will be able to capture the ex div date on Monday for all of these ETFs….I must be crazy, right?
Joanna
Joanna,
If you’re crazy, then so am I.
Each investor must make a determination as to the market conditions that align with their personal risk-tolerance. For some, the current conditions are too risky. For others, this level of volatility is manageable. No right or wrong here.
Using the best-performing Select sector SPDRs is a conservative approach to covered call writing (or put-selling) and is a reasonable plan in volatile conditions. One of my smaller portfolios is dedicated specifically to this strategy approach and it is currently one of my best-performing portfolios for 2022, up over 3% since the start of the January 2022 contracts, out-performing the S&P 500 by about 7%.
Be prepared with our exit strategy arsenal as there will be some sector rotation but that’s okay as long as we are skilled at managing our positions.
Alan
Joanna,
You are cool.
We have major simultaneous events driving the market : Ukraine, COVID, inflation/FED raising interest rates, supply interruption, oil price, and more.
Most people would avoid investing in the stock market these days, but I agree. We BCI members should be able to handle it.
I’m not too fond of ETFs because they have low ROO and are very diversified, which is a disadvantage in the present situation. I prefer to pick my tickers from Barry’s list and use common sense.
I always choose only American companies because the regulations in the US are strict and respected. At this point, I prefer companies that operate exclusively in the States.
Tomorrow I will be placing my April 15 CC trades, and I expect to be fully invested by the end of this week.
Good luck to you – Roni
Best of luck to you Roni and Joanna.
Thank you, Terry 🙂
Hi Roni,
I see you are back in or will be by the end of the week. I wish you much luck.
Since I never went to all cash, but I did basically suspend opening new positions and closed several positions, I guess you might say I kept my toe in the pool. Last week was obviously very beneficial. I am still as nervous as a cat on a hot tin roof.
I believe you have identified the factors driving the markets. I also believe that here in the US we have COVID in a position where we can function almost normally. I am more concerned with Ukraine and rising interest rates. Rising rates can play havoc with the supply chain too. This means we have evolved into a stock pickers market and that is how we, you and I, have always traded. Most traders are stock pickers.
Good luck with your stock and strike picks.
Hoyt
Thank you, Hoyt. 🙂
Yesterday I placed several 04/14 CC trades, picked from Barry’s list, most of them NTM or slightly OTM with 2% to 4% ROO, and today I intend to continue if I can find some other adequate tickers.
I did not find strikes with ITM favorable ROO.
“Cat on a hot tin roof” describes my feeling perfectly, too 😅, but I will stay next to the exit during the whole cycle and will run before the alarm sounds.
Maybe the volatility will give us MCU opportunities ???
Roni
Dear Allan
I am reviewing the Blue Chips and ETF reports in order to prepare my April contracts. Although the stocks or ETF have been outperforming the SPX in a 1 and 3 month periods, do you also consider important to do the selection based on the technical analysis (EMA, Macd, STO)?
For example, Chevron (CVX) had increased more than Travelers (TRV). However, CVX has Macd and STO downtrending while TRV has them uptreding.
Thanks so much as always.
TRV
Alex,
Both are eligible securities based on our 1- and 3-month chart analysis. If deciding between these 2 stocks, we would note that CVX has had greater returns recently and this relates to the fact that energy prices are rising due to events in Ukraine Because of the higher implied volatility (see IV stats in report), the premiums will be greater. An ATM 1-month strike will return about 3%.
TRV has been a solid performer recently. A 1-month ATM strike will return about 2%.
I would base my decision on our strategy goals and personal risk-tolerance. If seeking greater returns with additional risk, consider CVX. If 2%/month meets our goals, TRV is a bit safer approach.
MACD and stochastics can be used as secondary indicators when deciding between eligible securities. In the case of CVX versus TRV, I would look at goals and risk-tolerance as my main decision-making factors.
Alan
Thanks so much for taking time to respond! Have a great day.
Hello Alan,
Is there an article or video that assesses when to sell ITM CC vs selling CSP?
Looking at SPY 424 3/25 strike for either.
Goal is income.
thanks
Bob
Bob,
Have you considered using both? In the BCI methodology, we refer to this as the PCP strategy (put-call-put). Below is a screenshot of a graphic representation of the strategy. First, sell an OTM c-s put and if exercised, sell an ITM covered call, and so on. This is a wonderful defensive strategy approach.
Here is a link to a video I produced on this topic:
https://www.thebluecollarinvestor.com/bci-podcast-70-comparing-call-and-put-selling-strategies/
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alam,
Yes, I am familiar with the strategy. I do have all of your books and reread them regularly.
It seems to me in an upmarket the ITM would be favored and in a down market the CSP favored.
I am employing your .1 delta strategy, that you have written about, for a bond substitute for safe income.
Last month I sold 205 put on VTI and it expired 3/18 for an annualized 8%, which is much better than the 2.5% I was getting on the bond fund, and no loss of principle.
Just trying to learn and confirm my strategy on safe income. Keeping my goals modest on this portion of portfolio (again bond like).
I am constantly refining and learning.
Much appreciate your “hand holding”.
Bob
Bob,
You’re certainly on the right track by using CSP, PCP and the 10-Delta put strategy to take a defensive path to option-selling while still creating an opportunity for significant annualized returns. Well done with VTI.
In normal to bull markets, covered call writing offers the advantage of a second income stream (share appreciation) when using OTM call strikes.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 03/18/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I just read your recent Blog articie, “A 6-Income Stream Monthly Cash-Secured Put: A Real-Life Example with InMode Ltd. (Nasdaq: INMD)” and had two questions.
1. At what price do you set your BTC order for this strategy? It is obviously not 10%/20% looking at your trades.
2. I thought you use weekly options for your “10 Delta” cash secured put strategy. I have been using 10 delta weekly options over the last couple of months quite successfully with this crazy market lately.
Thank you for your wonderful methodology.
Sincerely,
Bill
Bill,
With our 10-Delta Put strategy, the focus is on Delta and, therefore, our 20%/10% BTC limit orders cannot be automated and implemented as they can with traditional put-selling.
The small amount of extra effort is well worth it, in my humble opinion because I, and many members of the BCI community, have realized the same level of success as you have using this approach.
When we see a stock price accelerating, as in the case of INMD, we must go to an option-chain that offers Delta stats (https://www.cboe.com/delayed_quotes/vix).
Check strikes with Deltas of 10 or less and then the net premium credit. If we can roll-up and still retain that 10-Delta status, it’s time to generate another income stream.
The reason I went with a monthly option with INMD is because there are no weekly options associated with this security, otherwise I would have gone weekly.
Alan
Alan,
Thank you for clarifying the strategy.
Sincerely,
Bill
Alan,
Is the new Trade management calculator up at the premium site? not seeing it ugh.
way behind in learning!
thanks George!
George,
The new Trade Management Calculator is in the beta-testing stage. We have been working on this unique new tool for over a year and it’s very close.
We will be sending out notification to our premium members as soon as it’s available, hopefully in the next few weeks, depending on beta-tester’s feedback.
It’s a long and challenging process but my expectation and goal are that it will be a game-changer in managing our trades.
Alan
Hi Alan
Have you somewhere in your WEB site, explanation regarding auto-exercise rules and implication on your strategies?
Best regards.
Leonardo
Leonardo,
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/will-my-broker-automatically-exercise-options-that-expire-in-the-money/
Alan
Thursday webinar for The Money Show Virtual event:
I have been invited to participate in this event:
https://online.moneyshow.com/2022/march/virtual-expo/speakers/e413c9dea90047bcba9fded15d808435/alan-ellman/?scode=055716
Alan
Hi Alan
Sorry for disturb again.
I’m learning more about cash secured put.
Three days ago’ I have sold a put (one contract only to try the strategy) with 40USD strike, ex-date 04/14 for 4,6USD premium.
Yesterday the stock min was 38.22USD (closed at 39.40)
Why I was not assigned?
Because break point is at 35.4USD?
Thank you.
Best regards.
Leonardo
Leonardo,
The reason you weren’t assigned is that there was still a significant time-value component remaining on the put option with 3 weeks remaining until expiration. Let’s say the put value is now at $4.00:
1. If the put is exercised, the buyer sells the stock at $40.00 and benefit by $0.60 per-share or $1.78 when it was trading at $38.22. Factoring in the cost of the put, this is a big loss for the put buyer.
2. The put buyer can sell the put for $4.00 and still have realized loss, but a muchsmaller one.
3. With so much time until expiration, the most likely scenario is that put buyers would take no action at this time. Early exercise is extremely rare. If the put is still in-the-money as expiration approaches, we can close the short put, roll the put or allow exercise.
We must have our exit strategy arsenal available to take advantage of all position management opportunities at all times. A plan must be in place for all possible scenarios before entering a trade as this will allow us to trade non-emotionally and achieve the highest levels of success.
Bottom line: Exercise will result in the put buyer capturing intrinsic-value but losing time-value.
Alan
Hi Alan,
I’m off to a great start on the April 14 expirations! Both DAR and STLD were winning trades a week after opening them.
I did have a question about closing trades when you reach a certain % of max profit. In the case of DAR which I opened on 3/16, I was able to close the trade in less than a week for almost 75% of the max profit that would be available if I held it to expiration.
Unless I am missing something, I don’t see this mentioned in your covered call books on trade strategies. Do you think that it makes sense to close trades early when you are above 75% of the max profit.
As always, thanks for everything that you and your team do! Looking forward to your upcoming presentation to the LI stock traders meeting. Hopefully you can make it up to Long Island and present in person in the not too distant future.
Thanks,
Bruce
Huntington, NY
Bruce,
I have written about this scenario extensively in a strategy BCI refers to as the “mid-contract unwind exit strategy”. As share price accelerates, the time-value cost-to-close approaches zero and it may make sense to close both legs of the covered call trade and use the cash to generate a second income stream with the same contract expiration. Use the “Unwind Now” tab of the Elite and Elite-Plus Calculators to assist.
Here is a link to a trade demonstrating this strategy and also one I will use in a new book I am writing:
https://www.thebluecollarinvestor.com/closing-a-covered-call-trade-mid-contract-a-real-life-example-with-nucor-corp-nyse-nue/
There is also detailed information on the MCU strategy in these resources:
Complete Encyclopedia-classic: Pages 266 – 273
Complete Encyclopedia- Volume 2: 243 – 252
Alan
Thank you Alan for this very interesting article.
I have one remark, I am a bit astonished that no roll up was no proposed between point 3 and point 4 as there is a large increase of the stock price …;
Please could you make some comments
Sincerely
Jean Philippe
Jean,
Since I executed these trades 6 months ago and I sell 75 – 125 contracts each month, I’ll offer 2 possible explanations:
1. Despite the share price increase, The Delta and time-value benefit requirements were not achieved during this time frame.
2. If #1 did not occur, then I simply missed an opportunity to generate 7 income streams in the same contract month.
Although #2 is possible, #1 is the most likely explanation.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
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Alan and the BCI team
Alan,
your article is great, but INMD was my worst trade ever.
I placed a monthly CC trade on 11/10 @ 89.18 and after several buy-backs and roll downs I finally gave up on 01/04 @ 63.02 with a significant loss. 🙁
INMD closed yesterday @ 38.64
Important lesson learned.
Roni
Dear Alan.
Roni’s comments looks very interesting to me. What were the factors you considered to not continue entering a new CSP in the following month with INMD. Thanks as always.
Roni. I was checking and the 7% guideline for closing the entire CC should have been at 82.93. I also experienced this situation with several of my CCs in the December cycle. So, I am reviewing my trades to analyze the importance of the 7% guideline. Cut your losses earlier. This is the most difficult aspect to me right now.
Thanks everyone for the comments on this blog. I learn a lot.
Roni, Alex,
I didn’t sell another cash-secured put on INMD after expiration of the October contracts because of the upcoming earnings report during the November monthly contract. I would have used Weeklys to circumvent the ER but INMD does not have weekly options. During the November contract is when INMD started its price decline.
Had I been in a C-S put trade in November, the 3% guideline was probably breached, depending on the strike selected. Same for the 7% guideline had I been in a covered call trade.
Alan
Thank you, Alan,
Yes, I really failed to unwind my INMD trade when it broke the 7% guideline. Too bad.
Roni