Many option traders who sell cash-secured puts prefer not to take possession of the underlying shares. Typically, when a trade is structured, the strike is out-of-the-money (OTM- lower than current market value). Exercise will occur when the share price moves below that (once) OTM put strike, rendering it, now, in-the-money (ITM). During the contract, if share price declines significantly, we have an arsenal of exit strategies to mitigate potential losing trades. This article will focus in on real-life examples taken from one of my portfolios on 6/15/2023 when 2 of the strikes were near-the-money and I didn’t want to take possession of the 2 Select Sector SPDR exchange-traded funds (ETFs).
Real-life examples with SPDR Health Care (XLV) and SPDR Consumer Staples (XLP)
- 5/15/2023: STO 1 XLV 6/16/2023 $131.00 put at $1.22 (XLV trading at $132.19)
- 5/15/2023: STO 4 XLP 6/16/2023 $74.50 puts at $0.67 (XLP trading at $76.28)
- 6/15/2023: Prior to the market closing the day before expiration, both positions were closed at net option credits
Brokerage screenshot on 6/15/2023 showing BTC trade executions
Trade Management Calculator (TMC) showing initial and final calculations
- Section #1 shows initial trade setups
- Section #2 shows breakeven price points (yellow cells), initial & annualized 33-day returns (brown cells)
- Section #3 shows post-adjusted total dollar ($312.00) and % returns (0.86% and 0.68%- purple cells)
Rationale for action taken the day prior to expiration
To avoid potential exercise, 5 contracts were closed late in the afternoon for a total cost of $81.30. I could have waited until Friday and paid a lower time-value premium to close but there, also, would have been the risk of paying a higher intrinsic-value component if share price declined deeper ITM.
If avoiding exercise is an inherent requirement in our cash-secured put strategy (it may not be for some of us), exit strategy management is critical and may include buying back the put options as exercise approaches. When this strategy is executed, it will be at a net option time-value credit.
Alan Ellman’s Selling Cash-Secured Puts
Using stocks and stock options to develop a low-risk, wealth-building strategy for retail investors. Selling puts is a strategy similar to, but not precisely the same as, covered call writing. Mastering either strategy is a huge opportunity for retail investors to secure our financial futures. Mastering both will allow us focus in on the best investment choices depending on market conditions and personal risk tolerance.
FOR ADDITIONAL INFORMATION AND PURCHASE LINK, CLICK HERE.
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 and Barry,
As I’m going through the Ask Alan videos, they have been very useful. You’ve covered a lot of questions I had. It’s a great teaching tool and you’re a great teacher!Thanks,
1. Mad Hedge Investor Summit
December 5 at 11 AM ET – 12 PM ET
Tuesday December 5, 2023
11 AM ET – 12 PM ET
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
Investing with Stock Options
Hosted by Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Selling stock options is a proven way to lower our cost-basis and beat 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 option-selling 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 beat the market on a consistent basis while focusing on capital preservation.
Registration link to follow.
2. Long Island Stock Traders Meetup Group
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Details to follow.
3. Las Vegas Money Show & Stock Traders Live In-Person Event
February 21 – 23, 2024
Details to follow.