We have all read that when we sell a cash-secured put, the maximum return is the put premium. Is that true 100% of the time? Enter our exit strategy arsenal. On 9/27/2021, Richard shared with me a series of put trades he executed with ZIM. It involved an initial put sale plus 2 BTC and 2 more STO trades. This resulted in 3-income streams from 9/2/2021 – 9/27/2021.
Richard’s trades
- 9/2/2021: ZIM trading at $52.53 (#1 in chart)
- 9/2/2021: STO the 10/15/2021 $48.00 put at $2.25 (#1 in chart)
- 9/16/2021: ZIM trading at $60.65 (#2 in chart)
- 9/16/2021: BTC the $48.00 put at $0.50 (#2 in chart)
- 9/22/2021: ZIM trading at $55.00 (#3 in chart)
- 9/22/2021: STO the 10/15/2021 $48.00 put for $1.00 (#3 in chart- “hitting a double)
- 9/23/2021: ZIM trading at $58.90 (#4 in chart)
- 9/23/2021: BTC the $48.00 put at $0.50 (#4 in chart)
- 9/27/2021: ZIM trading at $55.10 (#5 in chart)
- 9/27/2021: STO the 10/15/2021 $50.00 put at $1.30 (#5 in chart- rolling-up to hit a triple)
Price chart showing Richard’s trades
ZIM: Price Chart Reflecting the 5 Steps of the Put Trades
Initial calculations
ZIM: Calculations with the BCI Elite Put Calculator
- The initial 43-day time-value return is 4.92%; 41.75% annualized (red arrows)
- If exercised, shares are purchased at a 12.89% discount from when the trade originated
- If the put had been exercised, ZIM would be purchased at a 12.89% discount (blue arrow)
Total premium including exit strategy execution
($2.25) – ($0.50) + ($1.00) – ($0.50) + ($1.30) = $3.55
Time-value return as of 9/27/2021
[$3.55/ ($50.00 – $3.55)] = 7.64%
As of 9/27/2021, the time-value return moved up by 2.72% (7.64% – 4.92%) as a result of exit strategy executions.
Discussion
Management of our put-selling trades will allow us to mitigate losses and, in many situations, achieve higher than initial premium returns.
For more information on selling cash-secured puts
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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:
{YouTube comment}
Dr. Ellman and BCI are the best and most complete authority on the strategy of making money on selling covered calls and cash secured puts. While I have actually performed this “rolling-in” strategy ion the past, Alan Ellman’s discussion and his and his team’s putting together a detailed precise strategy is something that I never would have done. Kudos! My experience with equity options now spans 5 decades. Excellent job Alan and thank you.
Ronald
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1.Mad Hedge Summit: Free Zoom presentation
Tuesday March 15th at 11 AM ET
Selling Cash-Secured Puts: 4 Practical Applications
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to multiple applications which will align with various goals and personal risk-tolerances. Topics included in the webinar include:
- Option basics
- The 3-required skills
- 4-practical applications
- Traditional put-selling
- PCP (Put-Call-Put or wheel) Strategy
- Buy a stock at a discount instead of setting a limit order
- Ultra-low-risk put/Delta strategy
Real-life examples along with rules, guidelines and calculations are included in this presentation.
Registration link to follow.
2.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
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How to master all aspects of this low-risk option-selling strategy
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Alan,
Would appreciate an explanation for following situation:
Own SBLK (Starbulk Carriers) . Sold 29 call strike with 3/18 expiration.
Goes ex-divi 3/2 ( next Tuesday).
Dividend $2.00
Price close today 31.76
Option price 2.78
What will determine if called away on Monday, please?
Much thanks if you find the time to explain.
Bob
Bob,
Early exercise is rare but the main reason for early exercise is, in fact, an ex-dividend date, Tuesday 3/1 in this case. If our shares are sold, it will occur the day prior to the ex-date or this Monday 2/28/2022.
Because the time value of the premium ($2.78 – $2.76 or $0.02) is significantly less than the dividend distribution ($2.00), retail investors may be motivated to exercise on Monday.
Factors against exercise include:
1. The contract expiration (3/18) is far from the ex-dividend date (3/1).
2. Option buyers generally do not want to be share owners; they want to be option sellers.
3. The stock price will drop by the dividend amount ($2.00) on the ex-date (other factors play a role in share price but a minus $2.00 is factored into the equation), as will the option value (perhaps not as much depending on the Delta factor), so option holders may want to hold the option and evaluate over the last 18 days of the contract.
Bottom line: Exercise is possible but still unlikely. If it occurs, your trade return will be maximized, and you will have cash back to then use for a second income stream in the same contract month. Unless you absolutely want to retain these shares, a case can be made that early exercise should be embraced rather than avoided.
Here is a link to one of the articles I published on this topic:
https://www.thebluecollarinvestor.com/early-exercise-due-to-dividend-capture-theoretical-and-practical-applications/
Alan
Much appreciated
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 02/25/22.
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
barry@thebluecollarinvestor.com
Alan,
In your book, Selling Cash Secured Puts, on page 144, you show an example of rolling an ITM put option with a 1 month return of 4.2%. My question is how to calculate the first month final return. Is it the same as the initial return (3.1%).
Thanks,
Lew
Lew,
Yes, you are 100% correct. Regarding the example on page 144, there is a 3.1% return for the current month as the cost-to-close ($0.50 in this example) the 1st month short put is moved the next contract cycle. Since the next month short put generated $2.50, the net option credit of $2.00 ($2.50 – $0.50) is entered into the next month’s trading log.
Alan
Alan,
Will your new trade management calculator work for the pmcc strategy?
Thanks,
Tom
Tom,
The formulas we use to calculate initial and adjusted returns are different for the PMCC strategy so the Trade Management Calculator cannot be used.
However, we have created a calculator specific for the PMCC strategy (BCI PMCC Calculator) with the appropriate formulas for both initial trade structuring as well as trade adjustments (exit strategies). The exit strategy tabs are located at the bottom of the spreadsheet.
Alan
Premium Members,
There has been an update to the 02/25/22 Weekly Report. The ER date for EC has been updated to 03/01/22 instead of the previously reported date. This new date has been published on the NASDAQ site but has not been confirmed on the EarningsWhispers.com website. The updated report is available on the Premium Member site. Look for the report dated 02/25/22-RevA
Best,
Barry
Hi Alan,
Question: In this very crazy market of swings in both directions up and down, and also with the market in correction territory I would like some total market protection on my investments. Example, I am thinking of selling cash secured SPY puts about 8 % below the market or would it be best to sell calls about 8% below the current price. SPY is currently trading at $437.
As you can see I am looking for a fairly safe way to capture premium in a very questionable market.
Hoping to hear from you
William
William,
You have identified 2 of the ways we can negotiate volatile market conditions by using deep OTM puts or deep ITM calls.
We can also use Delta and implied volatility to define our risk, using these ultra-conservative approaches to option-selling. Here is a link to an article I published explaining one such approach:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-establish-reliable-trading-ranges-for-our-option-contracts/
We can also combine the 2 strategies into 1 multi-tiered option-selling strategy:
https://www.thebluecollarinvestor.com/reversing-delta-with-the-pcp-strategy-a-real-life-example-with-etsy-inc-nasdaq-etsy/
Another way to reduce risk, but at the cost of lower returns, is to add a protective put to our covered call trades. This is known as the collar strategy:
https://www.thebluecollarinvestor.com/protective-puts-selecting-the-best-strike-price/
Bottom line: There’s plenty of adjustments we can undertake to mitigate volatile market conditions as we wait for more normal activity to resume.
Alan
Thank you for the advice. I will be checking and studying the links you sent me >> much appreciated
William
Premium members:
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The mid-week market tone is located on page 1 of the report.
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Alan and the BCI team
Alan,
I ran across your #65 podcast on the 10%/20% rule.
Do you ever use a buy stop to close a cash secured put position if the premium begins to run away from you? If so, what might the parameters be?
Thanks,
Harley
Harley,
Yes, in the BCI methodology, we have the 3% guideline. This is where we close our put sale trade if share price drops 3% or more below the put strike. This is based on a monthly expiration with a 2% – 4% initial time-value return goal range. If the time-value return goal range is less or more, we can adjust the guideline accordingly but 3% would have general application.
Alan