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Covered Call Writing & Selling Cash-Secured Puts: Strategies or Exit Strategies? A Real-Life Example with T-Mobile US Inc. (Nasdaq: TMUS)

and selling cash-secured puts are low-risk option-selling strategies seeking to generate weekly or monthly cash-flow. Can these basic strategies be considered exit strategies as well? In this article, I will make the case that, yes, they can be considered both.

 

When is an exit strategy? 

After selling a cash-secured put, if the strike is expiring ITM, one of our exit strategy choices is to allow exercise and take possession of the shares with the intent to then write a covered call.

 

When is selling cash-secured puts an exit strategy?

After selling a covered call, if the strike is expiring ITM, one of our exit strategy choices is to allow exercise resulting in sale of our shares and then using the cash to secure a put sale.

 

The Put-Call-Put (PCP) Strategy (also called the wheel strategy outside the BCI community): Graphic representation

 

Real-life example with TMUS (taken from Chapter 27 of my new book, The Blue Collar Investor’s Guide to: Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts

 

  • 4/7/2020: TMUS is trading at $86.09
  • 4/7/2020: STO 1 x 5/15/2020 $82.50 OTM put at $2.91
  • 5/15/2020: The $82.50 put expires ITM and shares are put to us at $82.50 (less the $2.91 put premium for a breakeven price point of $79.59
  • 5/18/2020: Consider the 6/19/2020 OTM $82.50 call strike
  • 5/18/2020: Consider the 6/19/2020 ITM $77.50 call strike

 

Initial put trade returns

TMUS: Initial Put Trade Results

Using the BCI one-of-a-kind Trade Management Calculator (TMC), we see that the initial return on the put option sale is 3.66%, 34.22% annualized based on a 39-day trade. Shares are put to us if the strike moves ITM at expiration and we take no action to close the ITM short put. TMUS is purchased at a breakeven price point of $79.59 or a 7.55% discount from the share price when the put sale was initiated.

 

Initial covered call trade returns if shares are put to us at $79.59

 

TMUS: Call Leg Opportunities

The OTM (from the perspective of the breakeven price point of $79.59) $82.50 call strike (red arrows) shows an initial time-value return of 2.89%, 31.96% annualized based on a 33-day trade. There is also an upside potential of an additional 3.66% if share value moves up to or beyond the $82.50 OTM strike. The breakeven price point is $77.29.

The ITM $77.50 call strike (blue arrows) shows an initial return of 2.79%, 30.83% annualized based on a 33-day trade. There is also downside protection of the initial time-value profit of 2.63%. This means that if share value declines by 2.63% or less, we are guaranteed that the initial 2.89% time-value profit will be realized.

 

Discussion 

and selling cash-secured puts are low-risk option-selling strategies. They can also serve as exit strategies for each other. The goal of the is to generate cash-flow. Each leg of the trade will accomplish either premium returns or purchasing a stock at a discount. Since there is a breakeven price point associated with each leg of the trade, there is risk that share value can decline below that price and we can start to lose money. We must always be prepared with our exit strategy arsenal to mitigate losses, enhance gains and turn losses into gains.

 

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Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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 name unless given permission:

Alan,

I’ve been meaning to send you a short note.  While I’m still studying the books and tools (I have purchased most of your books already), I think they are exactly what I was hoping to find.  I’ve been selling calls for about a year before I found you on YouTube.  During the year, I was looking for a better set of trading rules AND looking for help with how to account for the P/L.  All the time I was learning, I knew I should be accounting for the profit or loss of the underlying.  So, I was always sketching notes on these two topics.  Now, I’ve found someone that’s been able to write on these subjects so I’m learning more useful ways to buy/sell options.  So far, I’m very impressed with the books and vids.

Thank you so much for your great contribution to this area of finance.

John

 

Upcoming event

Money Show Orlando live event

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI team at Booth # 415

 

Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions

Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

 

Masters Class

Comprehensive Course on Selling

Detailed start-to-finish 6-part program

This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:

  • Section I:
    • Option basics
  • Section II
    • Traditional put-selling
  • Section III
    • PCP (wheel) strategy
  • Section IV
  • Section V
    • Ultra-low-risk put/ strategy
  • Section VI

This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.

45-minute presentation

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco Trust (Nasdaq: QQQ)

is a low-risk strategy geared to generating with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, , will be used to establish rules and guidelines to benefit in these market circumstances.

Registration link and more details to follow.

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

8 Responses to “Covered Call Writing & Selling Cash-Secured Puts: Strategies or Exit Strategies? A Real-Life Example with T-Mobile US Inc. (Nasdaq: TMUS)”

  1. Alexandre August 6, 2022 1:56 am #

    Good morning Alan,

    I was thinking about this sentence : “As a reasonable example, one would have to invest $200,000.00 to generate $1000.00 per-week.”

    Are you referring to $200,000 has cash or has a buying power? If it’s buying power and my broker offers 2 for 1, then I “only” need $100,000 in cash instead of $200,000.

    Regards,
    Alexandre

    • Alan Ellman August 6, 2022 7:35 am #

      Alexandre,

      I made this comment based on the following:

      1. It is from an options-only perspective. The stock side may result in higher or lower returns.

      2. It is based on reasonable option returns of 1/2% per-week.

      3. If employing margin, interest rates will need to be deducted.

      4. ***In my humble opinion, most retail investors should avoid margin accounts. There are exceptions for sophisticated, experienced investors.

      5. Bottom line: Yes, buying power which, for most retail investors, should be cash available.

      Alan

  2. Swag August 6, 2022 3:05 am #

    Hi Alan,

    Hope you are well.

    I purchased your new Exit Strategies e-book and loved it. I think it takes out all guesswork and emotions from trading options. And while I am relatively new to this, I can see how some mistakes I have already made would have been prevented if I knew about these before.

    I had a couple of questions, I was hoping you could answer. They are both related to the relationship between a cash secured put and in-the-money covered call?

    1. Is there any difference between selling a CSP and buying stock and selling a call option for the same In-the-money strike? Both will give us the same down protection and similar time value premium.
    2. Hitting a double: If the price of the underlying stock declines mid-contract, we can use the hitting a double exit strategy for our ITM CC. But there is no similar strategy with a CSP. All we can do is roll down or exit the trade (3% guideline) and sell a new position in a new stock. Am I right?

    Thanks in advance!

    Regards,
    Swag

    • Alan Ellman August 6, 2022 8:19 am #

      Swag,

      Thank you for your generous comments about my new book.

      My responses:

      1. Yes, selling ITM calls and OTM puts with the same time-value premium are similar strategies with similar results. The reason some investors favor CSPs is that they don’t want to take possession of the shares but are willing to undertake the risk of possible assignment in return for the cash premiums.

      One of the main benefits of covered call writing in normal to bull markets is when we can use OTM calls and set up trades with 2 potential income streams (option premium + share appreciation from current market value up to the OTM call strike). When selling ITM calls, that advantage does not exist.

      The 2 strategies can be combined (the PCP strategy) where OTM puts are sold and, if exercised, ITM or OTM calls can be written.

      Both are wonderful, low-risk cash-generating strategies. I favor CSPs in bear and volatile markets and covered calls in normal to bull markets. Both work in all market conditions.

      2. “Hitting a double” is a term I adopted when 2 income streams are generated in the same contract cycle with the same underlying security. It normally applies to covered call writing where we see the classic V-shaped chart pattern.

      Technically, it can be applied to CSPs as well, if we close the short put and then sell another put on the same security if share price recovers. If not, we can use the freed-up cash (from closing the original put sale), to secure another put with a different underlying security. In both cases, the exit strategy selected from the dropdown in the spreadsheet is “Close ITM strike & exit”

      ***If you are using our Trade Management Calculator and implementing multiple exit strategies with the same (or different) underlying in the same contract cycle, make sure you take advantage of the “capital adjustment” section to ensure the accuracy of our calculations.

      Alan

  3. Alan Ellman August 6, 2022 11:41 am #

    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 08/4/22.

    Due to family vacations, the data in the report was calculated as of market close on Thursday August 4th. The market tone has been updated through Friday August 5th and will be sent as a separate attachment. This approach allowed us to get the report published on Saturday rather than late Monday evening.

    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,

    Alan, Barry and The Blue Collar Investor Team
    [email protected]

  4. Roni August 7, 2022 2:45 pm #

    Alan,

    After more than a two months pause, I started to invest again last week. I placed 3 very conservative 08/19 CC trades, totaling 20% of my trading cash.

    It seems that the market has stabilized despite the strong headwinds of inflation, the Ukraine war, interest rate hikes, housing sales slump, supply chain issues, and recession fears, all still active.

    The positive jobs report, earnings reports, and the lack of alternatives are certainly mitigating investors’ moods.

    Anyway, the BCI methodology should keep us safe.

    Roni

  5. Bill August 7, 2022 3:41 pm #

    Question for ALAN-

    You mentioned to stay away from selling calling in a month that the stock reports earnings. What if you already own the stock? Do you just recommend not selling a call that month, or do you advocate selling to stock also?

    Thanks in advance for your reply!

    Bill

  6. Malcolm August 7, 2022 4:53 pm #

    Alan,

    What level (re broker) do you have to have to sell Cash Secured Puts ? I am only at level 2 and can only do Covered Calls (I THINK !!)

    THANKS

    Malcolm

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