Cash-secured put and covered call writing trades can be winning or losing trades. When executed and managed properly, we will have many more winners than losers. Some trades will offer the opportunity to initiate exit strategy trade adjustments. In this article, a cash-secured put trade with NVDIA (Nasdaq: NVDA) will be analyzed. No position adjustments were executed.
NVDA data from our BCI Premium Member Stock Screen & Watch List on 11/11/2024
- NVDA: $145.37
- Ranked #3 on IBD 50
- On our stock list for 3 weeks
- Dividend yield: 0.00% ($0.01 per share)
- Ex-date: 9/12/2024
- Modest implied volatility (IV): 33.9%
- Industry segment rank: C (Chips)
- Next ER: 11/20/2024
- Bullish On Balance Volume (OBV)
- Analyst rating (MAR) an excellent 1.29
- Weekly options available
- $143.00 11/11/2024 OTM put strike has a bid price of $1.36
Initial calculations after trade entry on 11/11/2024
The initial 5-day option return is significant (0.96%, 70.09% annualized- brown cells). If share value drops below the $143.00 strike price, and no exit strategy intervention is taken, shares are purchased at the breakeven strike price ($141.64 yellow cell), a 2.57% discount (purple cell) from share price when the trade was executed.
Final trade results after contract expiration on 11/15/2024
On Friday November 15, 2024, the entire market declined significantly due to a disappointing retail sales report and mixed inflation data. NVDA closed at $141.98. During that last trading day of this weekly contract, I decided to “allow” exercise and assignment of the shares. The rationale for this decision was based on the upcoming earnings report on 11/20/2024. I decided to own NVDA through the ER, a maneuver I execute only rarely with certain specific stocks. NVDA has a strong history of ER “beats”. NVDA was now owned at a breakeven price of $141.64, $0.34 below current market value.
The 11/20/2024 earnings report results
- 11/20/2024: NVDA closes at $145.56 prior to the post-market hours report
- 11/20/2024: NVDA beats consensus, but market reaction was all over the map (see red and blue arrows)
- 11/22/2024: Decided to pursue a defensive course with the price volatility of concern, I sold NVDA at $141.85 and wrote a 12/20/2024 $135.00 cash-secured put for $3.50, generating a 29-day return of 2.7% and a breakeven price point of $131.50
Discussion
We should not have options in place that expire after an upcoming earnings report. Post-earnings volatility can last 1-2 days. If volatility is a concern, using deep out-of-the-money cash-secured puts is a reasonable course to consider.
Alan Ellman’s Complete Encyclopedia For Covered Call Writing- Classic Edition (softcover)
It took me four years to complete but here is the book you have been asking for. My goal when I started this project was to create the most comprehensive book ever written on the subject of covered call writing and gear it to the average retail investor, The Blue Collar Investor. I hope you feel that I have achieved my mission.
- This book contains SOME of the information found in my first two books, updated information (like the new options symbology) and subjects taken from over 100 journal articles published since 2007. It contains all the basic and advanced material you need to know to truly master this great strategy. It also addresses the questions you have sent to me over the years on subjects peripherally related to covered call writing like the use of cash-secured puts, for example.
- Over 500 pages packed with solid information, no useless filler material
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The area where you can fill and hypnotize your exit strategy allows me on a daily basis to plug in the current option price the sale of stock price and constantly manage my trades, I just keep on getting better and better with trade management and this calculator is the only thing I use for it.
I’m catching potential problems and exiting trades before there’s losses and I’m grateful we crossed paths.
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Barry and The Blue Collar Investor Team
Hi Alan,
after intensively digging into your learning material and scrolling through your “Ask Alan” videos, I still have question to my specific situation:
I have some seven stocks in my portfolio, which are eligible for options and have accumulated unrealised losses in the last couple of days/weeks of between 1.77% and 19.95%. Those stocks were all bought in the beginning of February 2025.
– How to find the appropriate option (ITM/OTM) in the current market environment?
– Does the initial purchase price of the stock appear anywhere in the calculators at hand from BCI (I would guess no) or do I have to use the current stock price in the (TMC) calculator?
– Shall I start with the April expiration month or rather start with May expiration.
A lot of questions, I know… Thank you very much for your help!
Best regards,
Gerald
Gerald,
I am selling only ITM calls and deep OTM puts because of the current challenging market environment. This approach will lower our breakeven price points and afford greater protection to the downside.
When entering trades into our Trade Management Calculator, we use current market value only.
Since you are just starting your option-selling career, I’d paper-trade for now.
This may be an arduous market to trade in, but it is a great market to learn from.
If you are determined to get started, I’d lean to the May contracts.
Alan
Hi Alan,
I forgot a probably important information:
For all of those stocks I would have to purchase a substantial number of shares to arrive at 100 shares.
That would of course lower my average share price.
Best regards,
Gerald
Gerald,
I can’t give specific financial advice in this venue to others, but if it were my decision for entry into the May contracts, I’d wait for market stabilization before adding more capital to my accounts.
Alan
Alan speaking at The Investment Masters Symposium in Dallas, Texas.
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