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How to Enter & Calculate Rolling-Out-And-Down Cash-Secured Put Trades: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ)

When selling out-of-the-money (OTM) cash-secured puts, we calculate our initial time-value returns with this formula:

% return = Put premium/ (put strike – put premium)

When incorporating into our strategy, we must properly enter these adjustments into our spreadsheets such that the calculations will be accurate and properly archived.

 

What is rolling-out a cash-secured put?

This is where we buy back the short put as expiration is approaching and immediately sell the same strike put option in the next contract cycle. We, typically, roll-out an in-the-money (ITM) strike.

 

What is rolling-out-and-down an OTM strike?

This is where we roll an OTM cash-secured put to a lower strike in the next contract cycle. This is a tactic we rarely take but it was one shared with me by a BCI member and I felt it would have educational value regarding how to enter and calculate such trades.

 

Rolling-out-and-down with QQQ

  • 7/11/2022: QQQ trading at $290.00
  • 7/11/2022: STO 1 x 7/13/2022 $283.00 OTM put at $1.22 (3-day trade)
  • 7/13/2022: QQQ trading at $285.00
  • 7/13/2022: BTC the (still OTM) $283.00 put at $1.50
  • 7/13/2022: STO 1 x $280.00 7/15/2022 OTM put at $2.32 (rolled-out-and-down- another 3-day trade)

 

How do we enter and calculate these trades using the BCI Trade Management Calculator?

 

QQQ: Rolling-Out-And-Down Entries & Calculations

On the screenshot (top-to-bottom):

1. Enter the initial trade
2. On 7/13, when rolling out-and-down, exit the put with an initial and final return of 0.43%, 52.68% annualized based on a 3-day trade.
3. The adjustment section for the initial trade only shows the date of closure and the current value of QQQ. Yes, the put is still OTM, but we can use the ITM exit strategy from the dropdown since we usually do not roll-out an OTM strike. A note to this effect can be entered in the Trade Management Journal on the far right (example: “Rolled-out an OTM put”).
4. The final return for the 1st trade is the same as the initial return as the trade was originally structured.
5. The rolling-out aspect of the trade is entered as a separate trade either on the same spreadsheet or a new one dedicated to the new expiration date (this is how I do it). This is shown as the 2nd trade at the top of the screenshot.
6. Note that the put premium for the rolled-out trade is the net credit from closing the 1st trade and opening the 2nd ($2.32 – $1.50 = $0.82).

7. The initial returns of the rolled-out put trade are 0.29%, 35.74% annualized based on a 3-day trade and a purchase discount of 2.04%, if exercised.

 

Discussion

Since this series of trades has 2 different expiration dates, the best way to enter, calculate and archive the trades is to finalize the first trade with the initial and final calculations being the same and entering the 2nd expiration put trade on a different line or spreadsheet using current market value and the net option credit as the premium.

 

Premium Member Benefits Video

This is a great time to join our premium member community with its and educational (over 200 videos) benefits. We offer more benefits than ever before. For information, click here.

For video explanation, click here.

 

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,

Thanks again for sending me that article on negotiating with the Market Makers.  I read the article night and this morning successfully accomplished a 1.70 fill instead of the 1.64 I would normally gone for.  I paid for my Wendy’s lunch…LOL

Brian

 

Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

 

1.Wealth365 Investors Summit

January 17, 2023

4 PM ET – 5 PM ET

The Put-Call-Put (PCP or wheel) Strategy 

Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow – Investing with

Selling stock options is a proven way to lower our cost-basis and the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.

The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI Trade Management Calculator (TMC). This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to the market on a consistent basis while focusing in on capital preservation.

Register free here

 

2.Long Island Stock Traders Meetup Group 

Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

Go to www.meetup.com/listmg

Click on join to become a member (Free membership)

Then click on RSVP (meeting is free) to obtain the ZOOM link.

 

3.NYC & Long Island Stock Traders Investment Groups

Thursday March 16th, 2023

7:30 – 9 PM ET

Topic related to selling cash-secured puts.

Details to follow

 

Alan speaking at a Money Show event

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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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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.

14 Responses to “How to Enter & Calculate Rolling-Out-And-Down Cash-Secured Put Trades: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ)”

  1. Barry B January 7, 2023 10:56 pm
    #

    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 01/06/23.

    We were successful in implementing our system backup and recovery procedures to address our earlier systems issues.

    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

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. JP January 8, 2023 7:39 am
    #

    Alan,

    Hope all is well.

    Are you leaning more to ATM or ITM Calls or Cash Secured Puts now?

    Best,

    JP

    • Alan Ellman January 8, 2023 8:42 am
      #

      JP,

      My current portfolios lean bullish, favoring OTM call strikes 2-to-1 over ITM strikes.

      For premium members, I publish my planned strike ratios the weekend prior to the start of all monthly contracts in our Premium Member Weekly Stock Screen and Watch List. It is located in the market tone section on page 1 of the report between the 2 charts as shown in the screenshot below (12-16-2022 report).

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  3. Bruce January 9, 2023 11:00 am
    #

    Hi Alan,

    It was great meeting you and your team in Orlando!

    Based upon my recent performance with covered calls and cash secured puts over the last year, I would like to ramp up the number of trades per month; I am sure that this is scalable using your strategies.

    The question I have is does it make sense to place a trade with less than an average of 30 days/expiry. Obviously I want to make certain that the position meets your selection criteria such as expected ROO %, earnings avoidance, minimum open interest and bid/ask spread <= $.30.

    Should I consider a mid-month trade if all the criteria is met or should I stick with the 30 days/expiry and use weekly’s when necessary.

    Thanks again for everything that you and your team do!

    Regards,

    Bruce

    • Alan Ellman January 10, 2023 6:37 am
      #

      Bruce,

      Yes, weekly options are a viable alternative to monthly expirations.

      Although I prefer monthly expirations, I do have several of my option portfolios dedicated to weekly expirations. One example is our 10-Delta weekly put strategy as I archived in this article:

      https://www.thebluecollarinvestor.com/using-delta-to-create-low-risk-high-return-put-selling-trades-a-real-life-example-with-etsy-inc-nasdaq-etsy/

      By the way, since publication of this article, we developed the Trade Management Calculator which is now my go-to spreadsheet for both covered call writing and selling cash-secured puts. When I use multiple expirations, I dedicate 1 spreadsheet per expiration, but this process can be managed however the user feels comfortable.

      Bottom line: Our portfolios can consist of multiple contract expiration cycles as long as we organize these trades in a manner that is practical and user friendly.

      I hope to see you again at one of my future live events.

      Alan

  4. Barry January 11, 2023 1:23 am
    #

    Hello Alan.

    Hope you and your family had happy and healthy new year.

    What do you think of the following approach? Buying stocks with relatively high Betas and selling calls at the first 2 in the money strikes dividing them equally.

    I have noticed this will generally get about 2-4% monthly.

    Of course it is even more imperative that exit strategies be done properly in this volatile environment.

    As always thank you.
    Barry

    • Alan Ellman January 11, 2023 7:32 am
      #

      Barry,

      Let’s assume that we made a decision to take a defensive posture with our covered call trades and use only ITM strikes. Let’s also assume an initial time-value return goal range of 2% – 4% per month.

      The next question is whether we should limit our security selection based on beta. I understand your thought process but would prefer to focus in on quality of the underlying stock or ETF.

      Now, since you are a premium member and have access to our reports, all the securities meet our standards, so you are good to go if selecting only from these lists.

      If your idea is to use the beta stats in our stock reports to locate securities more likely to return that 2% – 4% monthly range, that makes sense. However, we must not forget about our diversification requirement. For example, if internet stocks are having a strong month and all have high betas, we would not want a portfolio dominated by internet securities.

      Bottom line: Select the high-quality securities that will result in a diversified portfolio and use the option-chains to determine if ITM strikes meet the stated initial time-value return goal range. It is okay to use multiple ITM strikes that fall into that range.

      Keep up the good work.

      Alan

      • Barry January 11, 2023 10:45 am
        #

        Alan,

        Thanks so much Alan. By the way. I am referring only to stocks on your list.

        Barry

  5. Bruce January 11, 2023 11:24 am
    #

    Alan, thank you for the quick response.

    I do have another quick question and I am quite sure I know the answer: I was considering a covered call on an expensive underling (AVGO at $568). This would require a capital investment of $56K. The return looks excellent; however, am I putting too many eggs in one basket? Would this be considered too risky and similar to selecting multiple underlying’s in the same industry segment?

    Just wanted to get your opinion.

    Thanks Again,

    Bruce

    • Alan Ellman January 12, 2023 6:28 am
      #

      Bruce,

      Good point regarding diversification and cash allocation.

      Let me give you 2 examples; 1 where this would be appropriate and 1 where it is not:

      1. We have a portfolio with $75k cash available. dedicating $56k to 1 position means that 75% of the portfolio is dominated by AVGO and therefore way too risky.

      2. We have a portfolio with $1 million cash available (making a point). This would allow the investor to select about 20 different securities allocating about $50k per position. In this case, we can absolutely consider AVGO.

      Bottom line: In addition to meeting our screening requirements of fundamental and technical analysis, our stock selection process must also include the common-sense principles of diversification and cash allocation.

      Alan

      • Bruce January 12, 2023 11:06 am
        #

        Thanks again Alan.

        Your explanation really makes sense.

        Looking forward to your Wealth 365 presentation next Tuesday.

        -Bruce

  6. Alan Ellman January 11, 2023 5:17 pm
    #

    Premium members:

    This week’s 5-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    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

    Alan and the BCI team

  7. Paul January 12, 2023 12:08 pm
    #

    Hello Alan.

    Happy new year!

    Is using a trailing stop a viable exit strategy for a cash-secured put when a trade starts out strong but then turns against me? If you think so, how might you structure it?

    Thanks,
    Paul

    • Alan Ellman January 12, 2023 4:56 pm
      #

      Paul,

      The BCI guideline as when to close the short put, is the 3% guideline. This relates to monthly puts with target initial time-value return goal ranges of 2% – 4%. It states to buy back the short put when share value declines 3% or more below the put strike.

      This guideline can be crafted to other time frames and return goal ranges by closing at the breakeven price points.

      Let’s say we sold the $50.00 put for $1.50. We BTC at $48.50 or lower. We must watch the stock price. If the brokerage offers an alert service where notification will be given when prices reach our stated thresholds, that will automate the process. Otherwise, we must check our portfolios periodically.

      Alan