Much like our covered call writing trades, our cash-secured put trades can also be crafted to be aggressive or defensive. Factors to consider include overall market assessment, chart technical indicators, personal risk tolerance and initial time-value return goal ranges. In this article, a real-life example with Shopify, Inc. (Nasdaq: SHOP) will be used to analyze both approaches.
SHOP option-chain on 12/2/2024
- The $113.00 out-of-the-money strike shows a bid price of $2.92 (red arrow, brown cell)- aggressive approach
- The $113.00 strike shows a Delta of 37.7%, meaning an approximate 37.7% probability of expiring in-the-money, something we want to avoid. Let’s call this a 37.7% risk factor
- The $108.00 deeper out-of-the-money put strike shows a bid price of $1.40 (red arrow, yellow cell)- defensive approach
- The $108.00 strike shows a Delta of 21.8%, reflecting a low risk of expiring in-the-money for this strike
- Note the Deltas for puts show minus signs. This is due to the fact that put deltas are inversely related to share price movement
SHOP initial aggressive calculations using the BCI Trade Management Calculator (TMC)
- The TMC shows a 19-day (red circle) return of 2.65%, 50.96% annualized (brown cells)
- The breakeven price is $110.08 (yellow cell)
- If exercised, SHOP would be purchased at a 4.78% discount from the price at trade entry (purple cell)
SHOP initial defensive calculations using the BCI Trade Management Calculator (TMC)
- The TMC shows a 19-day (red circle) return of 1.31%,25.23% annualized (brown cells)
- The breakeven price is $106.60 (yellow cell), much lower than the aggressive approach
- If exercised, SHOP would be purchased at a 7.79% discount from the price at trade entry (purple cell)
Discussion
Cash-secured put trades can be constructed to be aggressive or conservative. In the BCI methodology, we favor out-of-the-money (OTM) cash-secured puts. The slightly OTM puts are considered more aggressive and deeper OTM put strikes, more defensive.
Stock Investing for Students: A Plan to Get Rich Slowly and Retire Young
Self-investing starting at a young age can ensure a successful financial future and an early and comfortable retirement. So why is nobody doing this? The answer includes such factors as the social pressures facing our youth, certain pre-conceived ideas regarding our ability to successfully self-invest and the education or lack thereof needed to motivate our youth to undertake such a long-term project. The purpose of this book is to change that way of thinking and create a goal and a user-friendly methodology that will facilitate a plan which will allow you to retire financially secure at a relatively young age.
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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Barry,
Your responses have been much better than I was expecting.
I think you guys are really great. It’s VERY helpful to us that you are accessible.
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Hi Alan and Barry,
I recently purchased the above book and found it extremely helpful.
I do have a few questions and would love to your hear your suggestions.
Quick background. Past year I have been running the option wheel strategy on relatively small trades to get practice and refine my strategy.
Given the current volatile environment I have found myself assigned on a few CSPs where the underlying stock value declined rapidly and I ended up getting assigned.
Thus a lot of interest in your 3% guideline for exit strategy.
You indicate in your book that to execute on this you generally wait for share price decline >3% till end of day and if still the case next trading day morning execute your buy to close order.
My question is ( I use Fidelity) can you enter a gtc order on a buy to close at that 3% lower strike level instead of waiting?
Reason I ask is recently had sold a put on NVDA and with the recent dramatic drop in value it blew through the 3% level.
If I had a gtc order in at a strike I was comfortable with, would that have saved me from the dramatic price decline?
First does that make sense as an exit/protection strategy?
Second, if so it doesn’t appear fidelity lets you use a strike as the exit but the put price. So you have to have a put price as the gtc order. And not sure what to use so it equates to the exercise protection price. Hope this makes sense and would love to have your input.
Thank you and best regards,
Michael
Michael,
Your question does make a lot of sense.
The 3% guideline applies to the strike price of the put sale for monthly trades.
For weekly option, I typically will use the strike price of slightly below it (the breakeven price point is a reasonable guideline).
Now, to your excellent question:
I suggest calling a rep at Fidelity and asking if they provide OTO (one triggers the other) option orders. You would explain that if share price drops to _______________, then BTC the put option at market.
The potential issue with this approach is that the trigger is usually based on the primary order (option sale), not the price of the underlying. It’s worth asking.
If they can’t accommodate this request, monitoring the trades more frequently (we all have phones) would be the only solution.
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 04/25/25.
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:
https://www.youtube.com/user/BlueCollarInvestor
Barry and The Blue Collar Investor Team
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team