Prior to executing our cash-secured put trades, we must establish our initial time-value return goal range. This will lead us to the most appropriate strike. This article will focus on a real-life trade with Marvel Technology, Inc. (Nasdaq: MRVL), shared with me by David, a BCI premium member. He was concerned because he was having difficulty achieving his pre-stated weekly initial time-value return goal range of 0.5% – 1% or 26% – 48% annualized. He was also seeking trades that offered low risk of exercise. The specific trade David inquired about (see below) represented a terrific learning experience and that’s why I decided to use it in this publication.
Is it reasonable to expect a 26% – 48% annualized initial return while retaining low risk of exercise?
No. To achieve traditional put-selling returns, we must use relatively near-the-money strikes which have Deltas in the 30% – 40% range (guidelines), and therefore subject to exercise (without exit strategies) approximately 30% – 40% of the time. The strikes will be slightly out-of-the-money.
David’s real-life 10-day trade with MRVL
- 11/27/2024: MRVL trading at $90.21
- 11/27/2024: STO 1 x 12/6/2024 $79.00 put at $0.74
- 11/27/2024: The $79.00 put shows a Delta of 13%, meaning approximately a 13% of being subject to exercise
- 11/27/2024: The implied volatility of the ATM $90.00 strike is a whopping 84%
MRVL calculations using the BCI Trade Management Calculator (TMC)
- The initial 10-day time-value return is 0.95%, 34.51% annualized (brown cells)
- The breakeven price is $78.26 (yellow cell)
- If exercised, MRVL will be purchased at a 13.25% discount from share price at trade entry (purple cell)
- This trade seems to meet both goals, so what’s the catch?
How is it possible to generate a 34% annualized return with a strike that has a Delta of 13% and an ATM implied volatility of 84%?
I’ll bet most of you already have this one figured out.
That’s right. There is an earnings report (ER) due prior to the 12/6/2024 contract expiration. This trade should be avoided due to the risk of a disappointing ER.
Discussion
Weekly (10-day, in this case) cash-secured put initial time-value returns of 0.5% – 1% is achievable, but not without moderate risk of being subjected to exercise at expiration. To create low risk of exercise trades, we need to use strikes deeper out-of-the-money which will generate lower weekly/annualized returns. In this article, exercise risk was replaced by earnings report risk. Not worth it, in my humble opinion.
This is a unique tool that is used to manage covered call writing and selling cash-secured put trades from start-to-finish. To our knowledge, it’s the only one of its kind anywhere.
The TMS consists of 4 tabs at the bottom of the spreadsheet:
- TMC
- TMC user guide
- “What Now Worksheet” tab for covered call writing
- “Unwind Now Worksheet” tab for covered call writing
The TMC is the” meat and potatoes” of the TMS. It has 2 main sections: one for covered call writing (top of spreadsheet) and one for selling cash-secured puts (lower half of spreadsheet).
Each of these sections is divided into 7 sections that flow left to right in the same sequence as we enter and manage our trades:
- Opening trade entries
- Opening trade and total portfolio initial calculations
- Total portfolio initial trade calculations
- Exit strategy trade adjustment entries
- Exit strategy calculations & final combined trade results for both individual trades and total portfolio results
- Total portfolio post-adjusted returns
- Trade journal for comments and notes
Click here for 2 videos and more information.
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Alan,
I have a couple of questions about the MRVL put example you highlight here:
a) The first has to do with how the TMC calculates. You note that, “If exercised, MRVL will be purchased at a 13.25% discount from share price at trade entry (purple cell).” However, when I subtract the strike price ($79.00) from the trading price ($90.21) I get $11.21, which equates to a purchase discount of 12.4% ($11.21/$90.21). I do get a discount of13.25% if I use the breakeven price ($78.26) in place of the strike price in the calculation. However, the breakeven price, strictly speaking, is not the purchase/exercise price. What I would actually purchase MRVL for is the strike price of 79.00, if exercised. So, why does the TMC use the breakeven price in calculating the purchase discount? What am I not seeing?
b) With such a high IV (84%) ATM, intuitively, should we still expect that the chances of the trade ending in the money will remain at a relatively low 13% through the life of the trade, especially considering the presence of an ER within the trade window?
Thanks,
John
John,
Good questions. My responses:
1. Exit strategies aside, the 2 possible outcomes when selling cash-secured puts are generating cash flow (if unexercised) or buying a stock at a discount (exercised outcome).
Your first question relates to the latter. My preference and the way I set up the Trade Management Calculator (TMC) is to make the purchase price the (strike – put premium), the breakeven price. This is also the purchase price of the stock that will be used for tax purposes.
You can still use the TMC if your preference is to calculate the results of put exercise into 2 distinct results, final realized time-value return (0.95%, in this trade) and a separate purchase price (the put strike) with a discount of 12.30% (13.25% – 0.95%). Excel rounding accounts for the slight difference between this and your calculations on the discount.
2. I agree that the Delta reflects a low likelihood of expiring ITM. However, I would still avoid earnings reports because a disappointing report can result unexpected precipitous share price decline. Selling cash-secured puts is a low-risk option-selling strategy. Why create a potential high-risk scenario that can easily be circumvented?
Alan
Thanks.
Since the break-even price is used as the basis for any future gain/loss calculation for tax purposes I can see why you use it to calculate the purchase price discount percentage in place of the strike price.
I agree about avoiding ERs. Forgot that once and paid for it. There just seems to be an intuitive disconnect between a trade that has an IV of 84% and an ER inside the trade window that has a Delta of only 13%.
John
John,
I agree 100% on the disconnect. This is a topic I’ve discussed with my contacts at the Options Industry Council on numerous occasions.
The 13 Delta was probably related to the fact that the strike was deep OTM and there were only 10 calendar days (and 8 trading days) to expiration.
There is a substantial unknown and unpredictable component to projecting a stock’s reaction to its earnings release. This is the main reason I always avoid them.
Alan
Hello Alan,
Came across this strategy, (idea) today while following option call/put peoples sites on twitter or X You know the adage…..if it sounds too good to be true?? There are some interesting strategies. While I’ll stick with the conservative and “ BCI rules” I find this type trade compelling. Your take?
I can buy 100 shares of $AMZN at current price of $173…
Or I can sell a put on for March 2026
Strike Price of $220
I get $5,125 as premium
If $AMZN is below $220… I buy 100 shares of $AMZN at $220
But my real cost is $168.75
If $AMZN is above $220… I made 23% return.
Thanks,
Neil
PS. I bought and received your Exit strategies, covered call/puts book. This was the one of the three parts I felt I needed extra help with. It’s an easy to understand and follow book. The roll out, up, down rules have already saved me $$$.
Neil,
We must first define our goal. Is it to own AMZN at a discounted price or to generate cash flow?
If it’s cash flow, we would be better off selling shorter-dated OTM puts which will generate greater annualized returns, allow us to re-evaluate are bullish/bearish assumptions on AMZN much more frequently and adjust our strike prices accordingly. It will also allow us to circumvent the 4 earnings reports during this time frame.
If our plan is to own AMZN at a discounted price with a target near $168.75, we can sell a shorter-dated option and take possession of the shares sooner rather than in 334 days.
The “shiny object” is the $5125.00 in premium. The actual unexercised return is 30%, 33% annualized. Can we do better using shorter-dated options? Probably, yes. Can we avoid 4 earnings reports using shorter-dated options? Yes.
Bottom line: Before we decide to enter a trade, we must determine our goals, personal risk tolerance, make sure we have a full understanding of the calculations as well as the pros & cons of such a trade.
This trade may be appropriate for some investors depending on the factors I discussed. For me, I’d pass on it.
Alan
*** Glad you’re benefitting from my book.
Thanks for the quick response!
What you wrote makes sense. That’s why you WRITE the books and we PAY to read them.😂😂 For sure the shiny object caught my eye. Yet with weekly or monthly trades with AMZN PUTS I see where the $5,125 amount can reasonably be reached in the same time frame.
One scenario/dilemma I’ve been trying to figure is this…. Over my 30+ years of equity investing, and DRIP I’ve accumulated a substantial $ amount in :
AAPL, MSFT, NVDA, GOOG, AMZN, ORCL, QCOM, MCD, PEP, ELV and others.
These are some of my CORE long term holdings. I’ve dabbled in a few sell calls on these. The IV is elevated on most is good, but I’ve selected high strike prices as I really don’t want to sell these. Capital gains taxes by SELLING these 15+ years equities would be substantial.
And, I’m not hitting the BCI goal 2-4% trade goal with the higher price strikes which of course has lower premiums.
So, I’m thinking since they are “CORE” holdings should I buy shares on NEW stocks, then STO on these holdings.
OR, is there a BCI /method plan, idea, or suggestion as to the BEST way to trade these long term holdings??
I’m sure many of your BCI members are in the same situation.
Best to you,
Neil
Neil,
The strategy you are interested in is referred to as “portfolio overwriting”(PO) in our BCI community. It is a covered call writing-like strategy, NOT traditional covered call writing.
With PO, we add an additional requirement to the strategy … we do not want our shares sold (the option exercised).
To accomplish this, we use deeper OTM call strikes (much higher than current market value) and accept lower initial option returns (throw the 2% – 4%/month out the window).
I have published dozens of articles and produced dozens of videos on this topic. Here’s one:
https://www.thebluecollarinvestor.com/portfolio-overwriting-nvda-using-implied-volatility/
In our store, we have a PO video course and book (“Covered Call Writing Alternative Strategies”) available on this topic.
We must define our initial time-value return goal range (much lower than 2% – 4%/ month), use only deep OTM call strikes, learn to quantify risk of exercise using Delta or implied volatility or both and be prepared to roll the option if it is expiring in-the-money.
Dates to avoid having an option in place are earnings and ex-dividend dates.
I strongly suggest you use our Trade Management Calculator (TMC) to enter and manage your trades.
Once you’ve mastered these elements (it won’t take that long), you will have years and decades to benefit from PO.
Alan
Thanks for the explanation, and the prompt response.
THANK YOU, some of the ones I listed are up 800 to 1,300%. I’ve never heard of that, PO. STRATEGY.
I would alternate the 12-14 that are very high percentage gainers and use this.
I WILL use the TMC.
THIS method, while lower returns, will generate income.
Best regards,
Neil
Hi, Neil, Alan, and Berry,
If the stock shoots up past your strike price, which happens, the deeper the trade goes in-the-money the harder it is to roll. I have had better luck not waiting until expiration to act. Acting when the stock price nears the strike price can make it easier to roll out-and-up.
Alan and Berry,
How do you guys handle an overwrite that has gone deep ITM?
Thank you.
William
William,
We must be extremely meticulous in our OTM call strike selection when using portfolio overwriting and share retention is critical.
I use Delta and implied volatility to establish the level of risk of exercise and avoid earnings and ex-dividend dates.
If these guidelines are followed, the probability of the option expiring deep ITM is quite low.
Okay, let’s discuss the rare occasions when this does occur. If the share appreciation occurs early-to-mid contract, I’ll roll-out-and-up prior to expiration. This may involve a loss on the option side. Keep in mind that this would represent an aberration and is highly unlikely if our guidelines are adhered to.
If the option is expiring slightly ITM as expiration approaches, I’ll roll any time close to 4 PM ET on expiration Friday when the time-value has eroded to pennies.
Alan
Hi Alan
Quick question on this statement (see screenshot): “All stocks on the running list, except those stocks that are highlighted in gold (ER this month), are eligible candidates for the current week” – I am a bit confused: which are the ones highlighted in gold and does it mean that all those with earnings reports this month cannot be used for the current week?
What exactly is the earnings reports rule – from watching your previous videos, I understood that we can sell options that expire before the earnings report – is that correct?
Many thanks,
Mabel
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Mabel,
You are absolutely correct … weekly options are eligible as long as they expire prior to the ER date.
I’ll ask my team to add clarification to that note in our premium stock reports.
Alan
Thanks, Alan.
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.
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https://youtu.be/EXMO-KwZuJs
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