How do we manage our trades after allowing exercise of a cash-secured put? This gameplan must be in place prior to entering the put trade. In this article, I will compare 2 strategy choices, writing a weekly covered call or implementing the stock repair strategy. I will be highlighting a real-life trade taken from one of my option-selling portfolios.
Initial weekly put sale with ETSY
On 1/3/2022, with ETSY trading at $213.55, I sold 2 x 1/7/2022 $195.00 cash-secured puts generating $160.00 in time-value premium. On 1/5/2022, the Fed announced a hawkish approach to interest rate policy and that caused a severe market decline. ETSY declined to $185.85, and I allowed the $195.00 puts to be exercised. On Monday, 1/10/2022, the market was extremely volatile, so I decided to wait another day before making a trade decision with ETSY.
Exit strategy considerations after exercise of a cash-secured put
- Retain the shares in a longer-term buy-and-hold portfolio
- Sell the stock at a capital gain/loss
- Write covered calls
- Use the Stock Repair Strategy to lower the breakeven price point
This article will detail the last two. I ultimately decided to write covered calls
Writing a weekly covered call resulting in an annualized return of 23.5%
ETSY: 1-Week Covered Call Trade
Price chart of ETSY in early January 2022
ETSY: Price Chart in January 2022
What is the goal for the stock repair strategy?
We want to lower our breakeven price point ($195.00 for this ETSY trade) without adding additional cash to the trade. This is accomplished by purchasing 1 near-the-money call option and funding that debit by selling 2 out-of-the-money covered calls.
ETSY option-chain for the stock repair strategy
ETSY Option-Chain 1/11/2022
- Buy 1 x $185.00 call at $4.45
- Sell 2 x $190.00 calls at $2.32
BCI Stock Repair Calculator results
ETSY: Stock Repair Calculations
The breakeven price point was reduced from $195.00 to $189.91 per-share (red arrows) without adding additional cash to the trade. As a matter of fact, we received a $19.00 per-contract net credit (green arrow).
Discussion
After exercise of a cash-secured put, we have several exit strategy opportunities. Our plan must be in place prior to entering the initial trade. Of course, that plan can change if new information comes out. In the case of ETSY, my plan was to write covered calls if the put trade was exercised. If the $195.00 call is exercised, I will have generated a nice 2-week return on the option side.
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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
I wanted to take a moment to thank you for your presentation.
I went to several presentations, but without hesitation, content wise, yours was the best.
Thank you for all the work you put into what you do. I am sure that it is very gratifying to you, but clearly, we are the beneficiaries of your work.
Hope to see you soon.
Horacio
Upcoming events
1. Wealth365 Summit
Tuesday July 12th, 2022
4 PM ET – 5 PM ET
Selling Cash-Secured Puts
Exit Strategy Choices After Exercise of Cash-Secured Puts
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash flow by agreeing to buy shares at a price we determine, by a date we determine. In return for undertaking this obligation, we are paid a cash premium. We only sell puts on shares we would otherwise want to own and, if exercised, and shares are put to us, they are purchased at a discount from the price when the put trade was initiated.
This presentation includes an introduction to option basics, defines selling cash-secured puts and provides real-life examples. The focus of the webinar details the steps available to put sellers should the put be exercised, and we now own the discounted stock or ETF shares. The seminar includes a discussion of the PCP (put-call-put or wheel) Strategy and the Stock Repair Strategy among other exit strategy opportunities.
2. 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
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
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
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
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 QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow 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 bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Registration link and more details to follow.
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Hi Alan,
Watched your presentation last Wednesday as reinforcement-great stuff!!
The question, maybe I’m being lazy, but would it violate the strategy if instead of entering the 20% stop rule, I enter a 15% stop, splitting the difference between to 20-10 rules and maybe cut down on the moving parts and not the last 2 weeks going to the 10%, Just leave it at 15% until end of trade?
Thanks,
Jeff
Jeff,
No, it would not violate the 20%/10% guidelines. I, specifically, point to these as “guidelines” to allow investors the flexibility to veer slightly from the precise numbers, as opposed to the (let’s say) earnings report “rule”
That said, let me give you some background as to how I developed these guidelines which I now share with our BCI community.
In the 1990s, I realized the need for a stop on the short calls to mitigate declining shares. I sought to determine the relationship between Delta, Theta and time to expiration. The process took a few years using trial and error with various combinations and voila … the 20%/10% guidelines.
Now, using 15% for an entire monthly contract will work most of the time but not as frequently as using 20%/10% in my humble opinion. It is certainly much better than not having any limit orders in place, losing out on exit strategy opportunities.
Here’s how I use the plan: I enter the 20%/10% guidelines immediately after entering my covered call writing trades … 20% for monthlys; 10% for weeklys … I use mostly monthlys. Over the weekend, prior to the final 2 weeks of a monthly contract, I change 20% stats to 10% stats. It takes minutes. I enter a note in my calendar to do so after entering my initial trades.
I know we have many financial advisors who follow BCI who may be managing multiple portfolios where changing the stats mid-contract may be a bit more time-consuming.
To sum up or, perhaps, simplify my response: we are deciding on a very good approach versus an excellent approach.
Alan
Alan,
Thanks, I’m really familiar with following the 20/10 as far as my calendar is set up. I just wasn’t sure if I was really messing up the potential return.
I’ll stay as you taught us 20/10 is here to stay!!
Jeff
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 06/17/22.
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,
Barry and The Blue Collar Investor Team
[email protected]
Premium members,
The combination of extreme current market conditions and the rigorous BCI screening requirements,resulted in only 2 stocks that achieved “eligible” status in the stock report recently released.
For those investing in the market and seeking to populate a portfolio for the upcoming July contracts (market re-opens on Tuesday), here are some additional considerations:
• Consider the best-performing ETFs from the recent ETF report
• Consider implementing a percentage of inverse ETFs (see the chart below)
• Wait a week until next week’s report which, hopefully, will have many more choices
• Use a combination of the above 3
This is not the first time we have experienced challenging market conditions. We always get through it; the market always recovers (check any long-term price chart) and there will be a return to normalcy.
Premium members,
The combination of extreme current market conditions and the rigorous BCI screening requirements resulted in only 2 stocks that achieved “eligible” status in the stock report recently released.
For those investing in the market and seeking to populate a portfolio for the upcoming July contracts (market re-opens on Tuesday), here are some additional considerations:
• Consider the best-performing ETFs from the recent ETF report
• Consider implementing a percentage of inverse ETFs (see the chart included at the bottom of the previous Stock Report email)
• Wait a week until next week’s report which, hopefully, will have many more choices
• Use a combination of the above 3
This is not the first time we have experienced challenging market conditions. We always get through it; the market always recovers (check any long-term price chart) and there will be a return to normalcy.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan & Barry
Alan,
I own QQQ at 364. So I sell the Dec calls to make a few bucks?
George
George,
Let me offer a general response. If we own shares that have depreciated in value and choose to retain those shares in the expectations of a price recovery, we adhere to our system rules and guidelines and don’t allow emotions to alter these decisions.
Writing options 6 months out will result in lower annualized returns than writing shorter term options. If we normally use weeklys or monthlys, we stay on that path.
Since we still like the underlying and expect share recovery, we write OTM calls with the initial pre-determined time-value return goal range premiums.
Rather than go for the gusto of a substantial 6-month premium, we agree to smaller, shorter-term premiums that will accomplish 2 positives for us:
1. Greater annualized returns
2. Allow us to re-evaluate our bullish assumption regarding that underlying on a frequent basis.
Alan
Hi Alan –
Really appreciate the guidance and content you put out there. As a follow up question to the situation that George finds himself in with owning QQQ at 364, what strike would you reasonably be comfortable using for selecting the next monthly expiration? I currently have a few positions where the underlying stock is down 30%, 40%, 50% + and would still like to sells calls against it but I always worry about selecting a strike that is low enough to actually collect any type of premium but then running the risk of getting assigned if the stock were to finally make a decent move to the upside.
How do you balance those two things out when selecting the strike price on a stock that is WAY down from the initial entry price? Do you look at Delta? Do you use Prob OTM? Something else?
thanks,
Derek
Derek,
The strategy rules and guidelines do not change. If we own shares at price lower than the original price paid, and continue to believe in share price recovery, we use the current price as a starting point.
We look to our previously stated initial time-value return goal range for monthly expirations, let’s say 2% – 4% (as an example).
Next, we check the option-chain and look at OTM strikes that generate our return goals. If a stock was purchased at $120.00 and is currently trading at $100.00, we look at OTM strikes that generate $2.00 – $4.00 per-share. The more bullish we are, we move closer to a deeper OTM strike and closer to the $2.00 per-share return. This would be the typical way to manage these trades.
If retaining the shares is the main focus with a minor goal of cash generation, we would be “portfolio overwriting” and seek monthly returns closer to 0.5% per-month and much deeper OTM strikes.
In this latter case, we could also implement our 10-Delta and/or our implied volatility strategies to establish expected trading goal ranges during that specific time frame. The Expected Price Movement Calculator is located in the “resources/downloads section of the premium member site.
Alan
Dear Alan,
Thank you for all your efforts to help us during these challenging times.
We hope for the best, but we must plan for the worst.
The present situation shows no indication of a short-term recovery: COVID is still killing too many people each day, the war in Ukraine is not resolved, fuel prices and resulting inflation may cause a recession, and the FED’s rate measures may not reverse the trend soon.
Trading in these conditions is for professionals, and even pros can suffer significant losses, and most are not handling their own money.
Roni
Roni,
I respect your opinion and, for the most part, don’t disagree with it.
Based on feedback I have receiving from BCI members, we have a wide range of reactions to this bear market environment. Some are out, others cut back, and the rest are fully invested turning to our defensive tactics.
I never tell others what to do but seek to provide the information necessary to accommodate all members of our BCI community.
I appreciate your comments on this blog.
Alan
Thanks again, Alan,
I am sorry if I sound pessimistic and worried. I hope that I am wrong and that the headwinds are gone soon.
I would love to come back and apply the BCI methodology successfully, as in the last five years.
I miss the fun – Roni.
Alan,
Is this a good example of Etsy? Was there a positive outcome? If so how was that achieved? Now 6 months later ETSY is at 72?
From $185 to $72 looks like a disaster.
Thanks.
Gerry
Gerry,
In my humble opinion, this was an excellent example to use for the selected topic.
The focus is on steps to take when a put trade turns against us and 4 choices were mentioned, including selling the under-performing stock.
Although we are in an extreme market aberration, even in normal markets, there will always be a percentage of our trades that turn against us and providing the information on how to manage these scenarios will always be a mission statement of BCI.
This trade was taken directly from one of my portfolios. ETSY had generated significant cash for me for months until it headed south. I have featured this security multiple times showing both winning and losing trades. My decisions regarding which trades to publish is based on the educational value I feel it brings to our BCI community.
BTW: ETSY was removed from my portfolio many months ago and I didn’t suffer through that huge decline.
Alan
Hi Alan
I only have level 2. Can I sell Cash Secured Puts ?
Thanks
Malcolm
Malcolm,
Most likely, yes.
There are slight variations in how different brokers define the specifics of levels of trading approval, but most will allow this low-risk approach to options in levels 1 and 2.
You can check with a rep to be sure.
Alan
Hi Alan,
Do you apply the same 20% and 10% rules on the stocks after you have bought back the option part way through a contract?
I had a stock hit the 20% buy back Limit Order and I’ve resold the Out of the Money Option but haven’t put in place any new exit strategies as there was 2 weeks til expiration date. Would a 10% Limit Order be a smart move?
Regards,
Todd
Todd,
Yes. Let’s say we sold a monthly option for $2.00 and set a BTC (but-to-close) GTC (good-until-cancelled) limit order at $0.40 which was then executed.
We then sold a second option at $1.00 with 2 weeks remaining to contract expiration. At that point, we would enter a BTC GTC limit order at $0.10 (10%).
Alan
Alan,
Good afternoon. Hope you had a great Father’s Day.
Have a question. Can you point me to some of your resources that deal with trading in the current market environment?
I’m trading in a retirement account so Cash Secured Puts are not going to work.
Thanks in advance.
Mark
Mark,
Many brokers are now allowing cash-secured puts in sheltered accounts. Call a rep. You may be pleasantly surprised.
Start by reviewing our Emergency Management Report in the “resources/Downloads” section of the premium member site (right side, scroll down to “E”).
Here are links to a few of the articles I have published on this topic:
https://www.thebluecollarinvestor.com/how-to-generate-10-per-year-in-bear-markets-by-selling-stock-options/
https://www.thebluecollarinvestor.com/comparing-covered-call-writing-and-put-selling-in-bear-markets/
https://www.thebluecollarinvestor.com/comparing-itm-calls-and-otm-puts-in-bear-markets/
https://www.thebluecollarinvestor.com/using-delta-to-create-low-risk-high-return-put-selling-trades-a-real-life-example-with-etsy-inc-nasdaq-etsy/
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
Alan
Alan,
Hope mid-Summer is well for you.
What are your thoughts about whether and / or when to sell a Put and a C Call at same strike price and how far out you would dare go on a quality stock that is down in the recent tech sell off?
Thanks,
JP
JP,
We can craft our portfolios in bear and volatile market environments by selling deep ITM calls, deep OTM puts, using the PCP strategy, using our 10-Delta and implied volatility ultra-low-risk strategies etc. We can even hedge our portfolios with inverse ETFs.
If a tech stock that has been hit hard this year, but we still have confidence in share recovery, we sell OTM call strikes based on current market value and initial time-value return goal range. Once entered, we set our 20%/10% BTC GTC limit orders.
Finally, we would sell cash-secured puts on this same tech stock only if we were willing to increase our position in this security should the put be exercised. Otherwise, sell OTM calls in the hypothetical you present.
Alan
Hi Alan:
I recently read a recommendation to avoid writing Calls or Puts during periods when the VIX is ranging above 30.
I understand the reasoning behind this suggestion, especially if one of the desired results of the trade is to avoid exercise.
However, I would be most interested to hear your comments on this subject.
As always, thanks for your response & for all the most helpful information offered by BCI.
Paul
Paul,
The “market” or S&P 500 is inversely related to the VIX. When the VIX moves above 20, conditions become more challenging but not impossible to manage.
Our premiums will be more generous because of the overall increase in implied volatility of our securities as the VIX is based on current option pricing in the marketplace. This means risk will also be enhanced.
As I responded to JP above, we can craft our portfolios in bear and volatile market environments by selling deep ITM calls, deep OTM puts, using the PCP strategy, using our 10-Delta and implied volatility ultra-low-risk strategies etc. We can even hedge our portfolios with inverse ETFs.
Here is a link to an article I published that can also be applied to high VIX scenarios:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team
Dr. Ellman,
I hope you can spare a minute to help me over a slight hump in learning the BCI methodology. I’ve read thru the book on Exits and the other book on Covered Calls, and I have an understanding of your approach, although it’s not what I’m quite used to. But I’m studying the materials that came with the BCI calculator, such as the PDF about Exit strategies and I will eventually clear my head. But I’m going to ask you something that keeps popping into my head like a red warning light.
How do you ’terminate’ the ITM short position from one cycle that has been rolled over. By this I mean if you hold a short option position that ended ITM, and roll out another month for a net credit, there is a very good chance that at the close of that new cycle, you will still be ITM, maybe deeper if the underlying rises more.
Usually, I will roll out AND up and take a small loss if I can for less than it would cost to BTC, thinking that I lost less AND have a new position with more upside. Thus the stock can rise quite a lot before I’m ITM again. I don’t think you approach it the same way and I’m trying to get my head around it. The only strategy I can think of at my current level of understanding is that the long position could experience a price drop, and a BTC done at a lower loss?
Regards,
John
John,
When a call strike is expiring ITM and we still like the underlying security, we check the calculations to see if rolling the option meets our system requirements (stated return goal range).
Rolling-out: By definition, if we roll-out an ITM strike, we will roll-out to that same ITM strike, so we always roll-out to ITM strikes. The cost-basis is the strike price, and we have a net option credit. The BCI spreadsheets will do the math for us to determine if the results meet our initial goals.
Rolling-out-and-up: Here the math gets a bit more complicated.
The intrinsic-value cost-to-close in partially or mostly mitigated by the unrealized share appreciation. Let’s say we sold the $50.00 call on a stock now trading at $56.00 as expiration approaches. We buy-to-close that $50.00 call at $6.10 and STO the $60.00 call at $2.00. We are losing $4.10 on the option side for the rolling exit strategy. However, our shares which were worth only $50.00 while under the previous contract obligation, are now worth $56.00 (current market price) for an unrealized share gain of $6.00. That results in a net unrealized credit of $1.90 per-share on a cost-basis of $50.00 (pre-roll value) or 3.8%, with the possibility of the stock rising another $4.00 to the OTM strike. Our calculators will reflect all these stats.
When we roll out-and-up, we can do so to and ITM, ATM or OTM strike. In the example, an ITM strike would be $55.00; an ATM strike would be $56.00 and the $60.00 OTM strike I used in this response.
Here are links to articles I previously published on this topic:
https://www.thebluecollarinvestor.com/rolling-out-and-up-to-itm-and-otm-strikes-a-real-life-example-with-invesco-qqq-trust-nasdaq-qqq-trade-management-calculator-coupon-expires-5-15-2022/
https://www.thebluecollarinvestor.com/rolling-out-to-impressive-profits-a-real-life-example-with-nvidia-corp-nasdaq-nvda/
Also, have a look at the video at this link detailing our new Trade Management Calculator and exit strategy book:
https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/
Alan
Hi Alan,
hope you are doing well there. Firstly I wanted to say I enjoyed your most recent presentation at “The Mad Hedge” – it is always good to reinforce past learnings.
A question I had, given the recent wild volatility of the market and high inflation, would you suggest that weekly options using a low delta and ‘blue chips/ETFS’ is an appropriate strategy in order to still generate reasonable income whilst maintaining capital?
If assigned, would you then resort to deep ITM sold calls?
Keep well.
Regards,
Lindsay
Lindsay,
Using our 10-Delta cash-secured puts strategy in bear and volatile market environments is one of our reasonable approaches during these challenging conditions.
Integrating this strategy with our PCP strategy (incorporating covered call writing to this put-call-put strategy) adds another positive dimension to this approach.
Here are links to articles I previously published on this topic:
https://www.thebluecollarinvestor.com/using-delta-to-create-low-risk-high-return-put-selling-trades-a-real-life-example-with-etsy-inc-nasdaq-etsy/
https://www.thebluecollarinvestor.com/selling-10-delta-puts-with-4-day-expirations-2-free-webinar-registration-links/
https://www.thebluecollarinvestor.com/rolling-weekly-10-delta-put-options-prior-to-a-holiday-weekend-a-real-life-example-with-etsy-inc-nasdaq-etsy/
https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/
Alan