Selling cash-secured puts (CSP) has a goal of generating weekly or monthly cash flow with or without taking possession of the underlying security. This article will analyze a real-life weekly (6/3/2024 – 6/7/2024) trade with Pinterest, Inc. (NYSE: PINS) where the goal was cash flow only.
Data accessed from the BCI Weekly Stock Screen & Watch List on 6/3/2024)
- PINS: $41.27
- On our stock list for 3weeks
- #6 on IBD Big Cap 20
- Modest implied volatility (IV): 25.2%
- Industry segment rank: B (Internet)
- Next ER: 7/30/2024
- $40.50 weekly put strike has a bid price of $0.22
- To avoid exercise, PINS must be above the $40.50 strike at expiration or exit strategy intervention would be necessary
PINS initial trade calculations
- Calculations are made using our BCI Trade Management Calculator (TMC)
- With PINS trading at $41.27, the breakeven (BE) price point is $40.28 (yellow cell)
- The 5-day initial return is 0.55%, 39.87% annualized) brown cells)
- If PINS is purchased at the BE price point, it will represent a 2.40% discount from the price when the trade was initiated (purple cell)
- At expiration, PINS was trading at $44.11, well above the $40.50m strike. No position management was required
Graphic representation of this 5-day trade
- When seeking to generate cash flow from option premium while, at the same time, avoiding exercise, our hope and expectation is that share price will main above the out-of-the-money (OTM) put strike
- If share price declines only slightly (stays above $40.50), stays the same or moves higher, we win
- In this case, PINS closed the week at $44.11, a big win for the good guys (us)
Discussion
Not all trades will be winning ones. Our reasonable goal is to have many more winners than losers. The odds are dramatically in our favor when we screen for stocks that are fundamentally and technically sound and meet our common-sense requirements (minimum trading volume, as 1 example).
In this case with PINS, no exit strategy intervention was needed, and our maximum return was realized.
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Hello again Alan,
A question about being assigned a cash secured put at a loss at expiration and the best strategy to recover from the loss.
I understand your stock repair strategy but what about classic covered calls based on the stocks the broker allocated to us. What would be the best option in your opinion ?
Best regards,
JC
JC,
When shares are “put” to us at an unrealized loss, we have 2 main choices outside of the stock repair strategy:
1. Sell the stock at a loss and move on.
2. Write weekly or monthly covered calls, avoiding the earnings dates.
The path we select is based on our bullish or bearish assumptions of that underlying security. Did share price decline due to overall market decline or is that stock an under-performer? Stated differently, do we still have confidence in that company?
Here is my philosophical (and practical) approach to losing stock holdings:
We don’t care about that stock (at all), we care about the cash invested in it. Let’s say we own 100 shares at $40.00 but paid $50.00. We are down an unrealized $1000.00.
We have $4000.00 invested in this declining stock. Where is that $4000.00 best placed? In the current holding or a new one.
We should never stay in a position because it is a losing one and want our “money back”.
Remember, it’s the cash, not the stock, we should focus in on.
Bottom line: If we are still bullish on the stock, write out-of-the-money weekly or monthly covered calls. If not, sell the shares at a loss and select a better-performing underlying security.
Alan
Alan,
A quick question regarding ITM CCs.
Just bought 100 shares ET @ a little over $17.00, then sold a $15 strike call expiring in January 2026.
So, I have a little over 10% downside protection, plus, with Trump in the White House, a chance for some capital appreciation.
Am I missing something? The dividend, of course is also nice.
Thoughts?
Regards,
Michael
Michael,
A few points regarding selling longer-dated in-the-money covered calls:
1. There is no chance of capturing share appreciation, because we are contractually obligated to sell at the ITM strike ($15.00). If ET goes to $100.00, we still must sell at $15.00.
2. ET will be going through 4 ex-dividend dates during this contract. Ex-dates are the most common reason for early exercise, so we are not guaranteed to capture those dividends.
3. ET will be going through 4 earnings reports which can impact the value of the shares in a big way, in either direction.
4. Longer-dated options result in lower annualized returns. Consider weekly or monthly options, circumventing ER and Ex-dates.
5. When we are anticipating share appreciation, only use out-of-the-money covered calls, so we can benefit from potential share appreciation from current market value up to that OTM strike.
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 avalable for download in the “Reports” section. Look for the report dated 11/08/24.
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:
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Hi Alan.
I started looking into covered calls as a way to generate income from my investments. While I can generate option premium every week, sometimes the cost to close out a call is more than the option premium when the stock price is up.
This creates a situation where the actual cash flow is negative. i understand that it’s often offset by the increase in the value of the underlying stock, but it seems like I’m defeating the purpose by paying to close out those positions.
Am I missing something?
Thanks.
Pete
Pete,
I’m happy to offer clarity on this issue.
There are numerous approaches to covered call writing (ccw). The 2 main ones are traditional and portfolio overwriting.
For traditional ccw, retaining the underlying shares is not critical to the success of the trades. It’s simply about generating cash flow. If a strike is expiring in-the-money (ITM), we do the math (our spreadsheets will do this for us), and if it makes financial sense, we buy back and roll the options out or out-and-up. If not, we “allow” assignment of our shares and move on to different underlying securities.
For “portfolio overwriting”, we have 2 goals: Generate cash flow + share retention. In this case, we must use deeper out-of-the-money (much higher than current market value) strikes and accept lower premium returns. This will minimize the risk of strikes expiring ITM and allows for greater share appreciation. Rolling the options will be necessary in a small % of the trades.
We must identify the type of ccw that meets are pre-stated goals and that will lead us to the appropriate blueprint.
Here is a link to one of articles I published on portfolio overwriting:
https://www.thebluecollarinvestor.com/3-approaches-to-strike-selection-when-portfolio-overwriting-existing-stocks-a-real-life-example-with-dow-inc-nyse-dow-july-11th-webinar-registration-link/
Alan
Thanks Alan! Appreciate your insight.
One follow up question – if you allow your shares to be assigned, it would seem that the only time you retain them is either in a flat or declining market. Wouldn’t that end up with your account value going down over time?
Thanks again.
Pete
Pete,
Let’s take 2 scenarios where shares are sold due to assignment.
1. Stock is $52.00, and we sell the $50.00 call for $3.00. Stock price remains above $50.00, and we “allow” assignment. We receive $50.00 for the stock and $3.00 premium = Net gain of $1.00 per share.
2. Stock is $48.00, and we sell the $50.00 call for $1.50. Stock moves above $50.00, and we “allow” assignment. We receive $50.00 for the shares + $1.50 premium = Net gain of $3.50 per share.
In both cases, a profit.
Alan
Dear Alan,
May I ask you about your trade of PINS in June 24 which you published in the newsletter:
On the trading day 03rd of June24 approaching the end of the day you sold the Put 40.50$.
Yes we still were above the EMA20 but MACD+Histogram were falling, Slow stochastic was falling and OBV was falling. How was the decision developped to enter this trade beside the fact it was 3 weeks on the list? Does it mean the number of IDB is ruling against the indicators/oscillators?
I just want to learn. Because with my present knowledge I wouldn’t had entered the trade at that point.
Thanks for your time.
Best
Juergen
Juergen,
I went back 6 months to check on the report you are alluding to (see screenshot below).
PINS passed all our fundamental and common-sense screens. Technical analysis was mixed. MACD was bearish, the stochastic oscillator bullish. OBV was also bullish.
Since the technical indicators were mixed, the stock appears on our watchlist in regular, not bold, font.
As a result, this is an acceptable candidate for option trading.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Premium Members,
The Weekly Report has been revised and uploaded to the Premium Member site. The stock DOCU was not included in the original report and has been added back to the updated version of the weekly report. Look for the report dated 11/08/24-RevB.
Best,
Barry and The Blue Collar investor Team
Premium members,
The new Blue Chip (Dow 30) Report for the December 2024 contracts has been uploaded to your member site.
Login and scroll down on the right side of the page to “B”.
Note that the Dow 30 has a new look:
NVDA has replaced INTC and
SHW has replaced DOW.
Alan & the BCI 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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