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.
Discussion
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,
John
Upcoming events
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.
Allan,
When you sell puts, do you have an easy way to decide on which strike price to use?
Thank you.
Paula
Paula,
Yes. In our BCI methodology, we almost always use out-of-the-money (OTM) cash-secured puts. We also must pre-state our initial time-value return goal range for the specific contract in question. Let’s say it’s 2% – 4% per-month.
With this in mind, we now go to an option-chain and check OTM strikes that generate 2% – 4%. We look closer to the 2% strikes to be more defensive (deeper OTM); a closer to the 4% to be more aggressive (closer to at-the-money), but still OTM.
Once we determine our return goal range and the degree of risk we are willing to take, the rest is easy.
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 11/10/23.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked 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
Alan,
I watched your webinar on Thursday about puts. It was great and i became a premium member that night. I have a question about the stock report that came out last night.
There are a lot of stocks on this list. I assume its because the market has been up lately. Should I limit my choices to the “bold stocks” or consider all?
Thanks for all you do.
Stuart
Stuart,
All stocks in the white cells are eligible for option-selling, as long as there is adequate option liquidity (see the OI column).
Now, when the list is robust, as is the current one, many of our members will start with “bold” stocks (best technical charts) and perhaps with stocks that are industries ranked A or B.
There is a myriad of ways of utilizing our premium stock reports.
Over a short timeframe, you will find the best approach that works for you.
Alan
Alan and Stuart,
I also use the dividend column and try to also capture a dividend from that contract. So premium + dividend + any increase in stock price.
Good luck.
Susan
Morning Allan,
If you don’t mind sharing, please tell me why you chose to enter either of the trades you documented in this article,
How To Manage Near-The-Money Put Strikes As Expiration Approaches.
I’m asking, not to be impertinent, but because I have a tendency to hold back on opening positions if the technicals are mixed, even if the stock is on the weekly premium report.
XLV looks like this. I would have shied away from this because a) the short moving average is declining, b) the MACD is sinking, and C) the Stochastic are sinking and BELOW 20 and D, the trade is made in week 3 of the May cycle, and is closed in the following month.
So it’s very instructive, quite wonderful in fact, that this ended well. But I wouldn’t have had the sense to even start it here. This is actually my biggest learning hurdle, as the technicals seem to me to be poor, so it’s like a bearish trade for a put AND the market is falling. It’s quite a wonderful example of how the MACD seems to give some guidance that this IS going to work.
Also, the initial ROO is less than 1%, so the reward for the risk seems lower than the 2-4 % targets you try for typically.
Again, I’m being critical in any way, just trying to learn so my POV will be better and better :-).
Thanks,
John
Click on image to enlarge and use the back arrow to return to blog.
John,
I’m glad you asked these important questions:
1. WHY XLV?:
I have multiple active option portfolios. At least 1, sometimes 2, are dedicated to analyzing new approaches I can share with the BCI community, if I can develop improved techniques.
A few months ago, BCI introduced the CEO Strategy, a streamlined approach to covered call writing. I am now evaluating a similar approach with cash-secured puts.
The trades in this article are from that portfolio. This means that, at the time of the trade, XLV was one of the top-performing Select Sector SPDRS, based on 1-month price performance.
In my 9th book, “Covered Call Writing: A Streamlined Approach”, I give a detailed blueprint as to ETF selection based on price-performance and sector rotation.
2. Why accept a return of less than 1%?: I use 2% – 4% as a guideline for my stock selection underlying security returns for 1-month contracts. Return goals for ETFs will almost always be lower because they are baskets of stocks with some going up and some going down. Generally (not always), ETFs have lower implied volatility and, therefore, lower premiums. For ETFs, I set goals of 1% – 3% per-month.
Alan
Alan,
I understand all of what you wrote – and I thought this might be related to the start of CEO, which I’ve been following as well.
I had a question within a question 🙂
When you collect data from Friday’s close and publish the premium report Sunday evening, time has passed. Monday morning, a new day starts and sometimes there are degradations in the technical over that 2-3 day period. IOW, normal volatility kicks in and the technicals can look poor.
So, do you re visit the technicals before you enter a trade on Monday? It could be a stupid question, because the close of Friday is subject to the same volatility.
I think what you’re trying to say is that when using CEO, the selection criteria is biased in that it’s comparing a point in time ( Friday’s close) to the 1 and 3 month S&P, and it’s good enough to base a trade on that much info, so re visiting technicals isn’t critical?
So, in fact, is revisiting the technicals on stocks on the premium report ever called for? If a stock is on the report and meets my targets and is something I’d like to own long term, then is the normal market volatility relevant at all?
Regards,
John
John,
Most price charts are based on data during normal market trading hours. After-hours trading is on extremely light volume and not critical to our investment decisions. Of course, if unexpected bullish or bearish news comes out over the weekend regarding a specific stock or the overall market, we must factor that in. In general, no, it’s not essential to review price charts on Monday morning. BCI updates technical analysis on all eligible securities on a weekly basis.
The CEO strategy is a covered call writing-like strategy, with specific trading protocol. It is targeted for investors with challenging time restraints. I encourage members to read my 9th book, “Covered Call Writing: A Streamlined Approach”, and decide whether this strategy is best for you and your family. It certainly worked well for me in 20222, as documented in the book. That said, I still favor traditional covered call writing and selling cash-secured puts.
It is important to avoid getting emotionally involved in the day-to-day market volatility. It’s simply what the market does and has done for decades. Mastering stock selection, option selection and being prepared with our huge arsenal of exit strategy opportunities will bode quite well for our overall investment results.
Alan
Premium members,
The new Blue Chip (Dow 30) Report for the best-performing Dow 30 stocks, for the December contracts, has been uploaded to your member site.
Look on the right side (“Resources/Downloads”) and scroll down to “B”.
Alan & the BCI team
2 New Reports:
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
The Blue Chip (Dow 30) Report has also been uploaded to the member site (right side).
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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