When we sell cash-secured puts, we have selected a stock or ETF based on sound fundamental, technical and common-sense principles. We generally select out-of-the-money put strikes that meet our stated initial time-value return goal range. Once the trade is executed, we move to position management mode. This article will highlight the choices we have available should our cash-secured puts be exercised as our plan for this potential event must be in place prior to entering our trades.
Real-life example with Etsy, Inc. (Nasdaq: ETSY)
On expiration Friday, January 15, 2021, I had 2 x $205.00 ETSY cash-secured puts in place and the market declined significantly that day moving the original out-of-the-money put strike to in-the-money as 4 PM ET approached. ETSY was trading at $204.68. I could have closed the short put position thereby avoiding exercise and assignment of the shares. However, that was not part of my plan. Instead, I allowed assignment and, on the following day, 200 shares of ETSY were put to me at $205.00.
200 Shares of ETSY Assigned on 1/16/2021
Choices after assignment of cash-secured puts
1- Retain shares as part of our buy-and-hold portfolio
In scenario #1, we sell cash-secured puts to buy a stock at a discount instead of using limit orders. Since we are selling out-of-the-money puts, the breakeven price point is the put strike minus the put premium. The BCI put-selling calculators will generate this information.
2. Write a covered call
Scenario #2 is the PCP (put-call-put) strategy where our objectives are to generate premium cash-flow or buy a stock at a discount. If this were my objective, I could have sold in-the-money (defensive) or out-of-the-money (more aggressive) calls depending on the overall market assessment and personal risk-tolerance. All strike premiums should align with our initial time-value return goal range.
3. Sell the stock if share price recovers
Scenario #3 is an adjunct to scenario #1. ETSY, at the time of these trades was a security I would otherwise want to own for the longer-term. My plan, prior to entering the initial put sale, was, if exercised, retain the shares unless I could generate a substantial short-term profit.
The final outcome
On Monday January 19, the market, along with ETSY, bounced back and I decided to sell the 200 shares at a net profit of $2529.00.
ETSY Sold at a $2529.00 Profit
Discussion
Our entire plan for selling cash-secured puts must be in place prior to entering all trades. Stock and option selection will launch our trades and a detailed game plan for position management must be in place so that we can react in a non-emotional manner for every potential outcome.
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,
As a former subscriber to BCI “University” several years ago, I’ve screened many of the wannabees in the provision of options trading programs, and tried a few. Without a doubt, your Premium Membership offers the very best options trading education and services among your MANY competitors! Alan, it feels good to be back!!
Best wishes…
Richard
Upcoming events
1.Ramapo College of New Jersey | Anisfield School of Business: Private Webinar
The Basics of Stock Options
November 30, 2021
9:30 AM ET – 11:00 AM ET
2.Mad Hedge Summit: Free webinar
December 8th – 10th
Using Low-Risk Option Strategies to Enhance and Protect Portfolio Profits and Buy Stocks at a Discount
Covered call Writing and Selling Cash-Secured Puts
Time, date, and registration link to follow
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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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Alan,
In my batch of goodies that I traded last month was XLE. Just out of curiosity, when the price goes 7% below the price one acquired an ETF, should a person immediately get out, or are the rules slightly different regarding exit strategies for ETFs since they aren’t really a singular company. What is your opinion?
Joanna
Joanna,
BCI offers “guidelines” when to close both legs of a covered call trade. These include:
1. When an underlying is significantly under-performing the S&P 500
2. Unexpected, concerning negative news comes out during the current contract.
3. The share price declines > 7% from when the trade was initiated.
We use the 20%/10% guidelines to assist in determining when to buy-back the short call and a combination of the above to decide if and when to sell the shares. If we do sell the shares, we use the most recent premium stock and ETF reports for replacement securities.
If we do close the short call and decide not to sell our shares, we use the remaining arsenal of our exit strategies to mitigate losses and, in some cases, turn losses into gains.
All guidelines apply to both individual stocks and ETFs.
Alan
So, here is my sob story in regards to the energy ETF XLE.
On 11/8, I bought 300 shares at $58.67.
I then sold three 11/26 calls at a strike of $60 for 0.80 premium.
I immediately set a BTC of 20% at 0.16. These were then BTC on 11/17 This same day, I decided to sell another 3 at a lower strike price – same exp date, strike = 59, prem = .27 I immediately entered a BTC at 0.05, and about 1 hour later they were BTC at 0.05.
I then set an alert to notify me if the price of the underlying goes 7% below the purchase price. Sadly, today (11/19), that alert was activated and I dumped the shares at $54.75.
Doing all the math, I incurred a stock loss of $1176, but on the flipside, this loss was mitigated down to $918 as a result of selling the call options. Losses are always pretty craptastic, but at least the bleeding wasn’t as bad as it could have been.
Joanna
Joanna,
I congratulate you for following your pre-established rule.
7% is bad enough. Forget it, never look back, and move on; you will undoubtedly recover it back soon.
Roni
Thanks, Roni!
Greetings Alan,
Question regarding the elite covered call calculator-
If I am rolling up within the same expiration date isn’t the “comparative return” (in %) inaccurate?
For example I rolled an AVGO 490 call expiration 12/17 to 530 exp 12/17.
I outlayed BTC $53.94/share on the 490 call and STO $23.95 on the 530 call for net approx $30 but bought up $40 thus making $10/ share, if sells at 530 or greater on 12/17.
Since the expiration date was the same, isn’t my comparative return 10/30? The calculator uses the 490 as the denominator.
Since the expiration date is the same I don’t think 490 should be used; I am locked in to that date regardless.
What am I missing?
Thank you for a response.
Do appreciate your service.
Bob
Bob,
When we roll an ITM call strike, we are comparing those calculations to “allowing assignment” Our cost-basis is the value of the shares at that point in time. In this example, if we “allow assignment”, we will receive $490.00 per-share. When rolling, we must use the same cost-basis in order to compare “apples-to-apples.
Stated differently, that’s how much cash we have invested in this rolling trade at the time of the roll.
When rolling this option up to the $530.00 strike, we generate an additional 2% to our current trade status but moved the strike much higher as we give up downside protection of the total time-value profit. We weigh the pros and cons of the trade and make a final determination.
Alan
Alan,
Quick question about our Expected Price Movement Calculator- in the ATM implied volatility box- is it the IV of the current ATM price or the implied volatility at the strike price and expiration date?
Thanks,
Bob
Bob,
Use the ATM strike IV or some vendors offer a mean IV of all calls and puts.
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 available for download in the “Reports” section. Look for the report dated 11/19/21.
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
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Alan,
I’ve watched your beginner’s corner series of 8 videos. They are well done and informative but I have a question about ETFs. You mentioned that if ones budget is small or not quite large enough to properly diversify one should consider using ETFs. Where can I find quality ETFs listed?
Also, are there any BCI vetting standards similar to the ones I would use for my stock picks from IBD?
Thank you for your help and for the education resources.
Bob S
Bob,
Each week, the BCI team provides a report to our premium members of eligible ETFs for option-selling. It requires these securities to have out-performed the S&P 500 in both 1 and 3month time frames with additional requirements. Here is the description of the screening process found in these reports:
“Each week the BCI Team will screen ETFs (which also have options) from all asset classes and locate the top-performers over the past 1 and 3-month periods. All selected ETFs have RS ratings of 60 or better over the past 3 months (unless otherwise stated). 1-week returns are not part of the screening process but available as additionalinformation.RS rating is in the context of all securities with minimum trading requirements. We also screen the S&P 500 Sector ETFs as well as publish the data on 4 inverse ETFs. ETFs with low trading volume (less than 250k/day) and leveraged ETFs are eliminated (with the exception of inverse ETFs to be used only in extreme bear markets). We also screen for adequate open interest at the time of the screening (100 contracts or more of OI and/or a bid-ask spread of $0.30 or less for near-the-money strikes).”
The Select Sector SPDRs divide the S&P 500 into 11 categories. Here is a link to a free site that provides data on these securities:
https://www.etfscreen.com/s_selects.php
Alan
Hi Alan,
Just completed my first trades using 75% probability OTM to determine strike Price using QQQ 19NOV21 puts.
Fri (11/12) (1) STO 388 PUT @ 1.50
Tue (11/16) (1) STO 393 PUT @ 1.05
Thu (11/18) (1) STO 396 PUT@ 0.71
(1) BTC 388 Put @ 0.05 rolled to 398 PUT
(1) STO 398 PUT @ 0.55
Fri (11/19) (1) BTC 396 PUT @ 0.04 rolled to 403 PUT
(1)BTC 398 PUT @ 0.065 rolled to 403 PUT
(2)STO 403 PUT @ 0.44 expired
QQQ closed at 403.99
One mistake I feel I made was not rolling out and down to the 26NOV21 contracts late Friday afternoon.
I’m not sure what my strategy should be when selling calls. Your ultra low risk strategy, OTM strikes using 75% probability, or a combo based on ITM calls but at 75% rather than 90%.
Thanks
Fred
Fred,
Congratulations on your diligence in actively managing your trades.
You can mitigate some of the risk by entering your trades on Monday morning to avoid weekend risk. Most market-makers factor in weekend Theta (time-value erosion) on Friday so there will be little or no loss of time-value premium.
As far as which Delta to use to determine probability of expiring in-the-money, that will reflect the investor’s personal risk-tolerance. There is no right or wrong here. It could be 90% or 75% or some other percentage. I use 90% when I’m using Delta and 84% when using implied volatility.
Keep up the good work.
Alan
Hi Alan,
Another fantastic month. $2563 profit for the Expiration Cycle ending on 11/19!
I do have a question regarding the 10/20% Option Exit Guideline and the 7% Stock Exit Guidelines.:
While I have my GTC orders in place for the 20% option exit, is it possible to also include the 7% Stock exit in the same order with a (1st triggers sequence)? I use Think or Swim and I can enter a first triggers sequence with the 20% option order. If that fills, then a conditional Market order to close the stock will take effect and the close order will kick in if the stock drops by 7%. Does this make sense? There are times when I may not be able to access my account and I do want to make sure that if the stock drops by 7% that I sell it.
Thanks Again for your terrific service. The Weekly Stock Screener along with the BCI Elite-Plus Calculator have proven to be invaluable.
Bruce
Bruce,
I’m so pleased to learn of your success.
Setting up an OTO (One-triggers-other) order does make sense especially when you can’t access your computer. If the short call is closed and the stock hasn’t reached the 7% threshold, we may roll-down or look to “hit a double”
If we execute an exit strategy maneuver, we will need to reset the OTO order.
Keep up the good work.
Alan
Thanks for response Alan. Good point about hitting a double.
Have a Happy Thanksgiving!
-Bruce
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
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Happy Thanksgiving to one and all,
Alan and the BCI team
BCi Community,
If you have been following the market today, you have seen a sharp drop in market prices. As of Noon today, the S&P 500 was down approximately 2.8%, the worst drop for the year. This drop impacted the entire market and was due to the reports of a Covid new variant found in South Africa. Virtually all stocks were impacted by this news. Since very little is known about this new variant, it is hard to make any informed investment decisions at this point.
While this is concerning to all investors, we have to step back and get a sense of what the impact might be. Since this is a holiday-shortened trading week and light trading volumes today, making specific trading decisions is difficult. From a historical perspective, chasing a rally or selling into a sharp decline is rarely profitable, but panic selling is still happening today. A more informed evaluation can be made early next week when trading volume normalizes. Until then, we must stay focused on non-emotional and structured investing.
Best,
Alan, Barry, and The Blue Collar investor Team