When we sell cash-secured puts, we are seeking to generate cash flow or to buy securities at a discount. It is generally written that the maximum return for these trades is the put premium. This article will demonstrate how multiple income streams can be achieved by implementing our exit strategy arsenal and, thereby, achieve higher returns than the initial put premium.
What is rolling-up a cash-secured put?
When share price accelerates, the out-of-the-money (OTM) put can be bought back (closed) and a new OTM strike opened at a net option credit, creating an additional income stream. In this article, rolling-up is accomplished 2 times during the 24-day trade.
Real-life 24-day trade with ETSY (July 2022 contracts)
- 6/22/22: ETSY trading at $74.20
- 6/22/22: STO 1 x 7/15/22 $66.00 OTM put at $2.65
- 7/6/22: ETSY trading at $85.04
- 7/6/22: BTC 1 x 7/15/22 $66.00 put at $0.27
- 7/6/22: STO 1 x 7/15/22 $75.00 put at $0.95 (roll-up #1)
- 7/8/22: ETSY trading at $88.75
- 7/8/22: BTC 1 x 7/15/22 $75.00 put at $0.28
- 7/8/22: STO 1 x $80.00 put at $0.69 (roll-up #2)
- 7/15/22: ETSY trading at $82.50 at expiration as the $80.00 put expires OTM and worthless
Graphic representation of ETSY initial and rolling-up trades
Initial unrealized time-value returns on 6/22/2022
Using the BCI Trade Management Calculator, the red arrow shows a cash return of $265.00 per-contract or 4.18% initial, 63.62% annualized based on a 24-day trade. The exercised or breakeven price point is $63.35.
Final realized returns after contract expiration
- Realized cash returns increased from $265.00 per-contract to $374.00
- 24-day return increased from 4.18% to 4.70%
- Annualized returns increased from 63.62% to 71.48%
Any disadvantages of rolling-up cash-secured puts?
- As we roll-up to higher strikes, there will be a need to add additional cash to the trades to secure those higher strike puts
- There will be less protection to the downside so we must be sure we still roll to an OTM put strike
The statement that the maximum return when selling cash-secured puts is the initial put premium is a myth as debunked in this article. We must be prepared for all exit strategy opportunities when share price changes significantly and understand the pros & cons of these trade executions.
For our best online course for selling cash-secured puts click here.
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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:
I am a recently retired factory worker living off Social Security and a small pension. I also have a small 401K that I saw decline in value by 25% this year. After reading one of your books, I decided to take back control from my financial advisor and become CEO of my finances.
I’m happy to say that by applying your methodology, I have stopped losing value in my 401K and have started building back up again. Thank you for providing a great product and excellent customer service. I hope to meet you one day to shake your hand and thank you in person.
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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 Stock Options
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 in on capital preservation.
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 $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.
Topics included in this webinar:
What are the Select Sector SPDRs?
How to establish a covered call writing portfolio
What is the role of diversification?
What is the role of cash allocation?
Calculating initial returns
Analyzing each trade in the monthly contract
Go to www.meetup.com/listmg
Click on join to become a member (Free membership)
Then click on RSVP (meeting is free) to obtain the ZOOM link.
3.NYC & Long Island Stock Traders Investment Groups
Thursday March 16th, 2023
7:30 – 9 PM ET
Details to follow
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This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 12/30/22.
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Barry and The Blue Collar Investor Team
Hello Alan and Barry,
A few weeks ago I was informed by a friend that in case of my death, the US government automatically charges my heirs up to 40% on all my investments in equities that exceed US$ 60,000.00. (I was not aware of this risk)
This tax applies to all foreigners who are not living in the US, except those from a few countries that have a tax agreement.
Brazil is not on that list, and therefore I have decided to liquidate most of my positions and transferred the cash to my local account.
I am not afraid of death, (but I was contaminated by Covid two weeks ago), and I must protect my wife and kids from the eventuality.
I will be placing small trades within the 60K range from now on.
happy new year to you and all members – Roni
The BCI community has a significant number of investors from countries outside the US who trade on US exchanges. I had not heard about this tax before. Is this confirmed by a tax expert? If yes, are there ways to mitigate?
Thanks for sharing.
Happy New Year to you and the entire BCI community.
yes, unfortunately, this procedure is confirmed by both local tax experts and Schwab personnel.
I do not have the exact rate limits which vary from 18% to a max. 40%, but I know that if you have one million dollars invested, your heirs would be charged 40% on 940K.
I am willing to risk up to 100K, which would get charged on a reasonable 40K, but when I tested positive for Covid, I retrieved all the exceeding investments before I left my computer.
My symptoms were very unpleasant with fever and a bad sore throat, but I was not hospitalized, and after a few days of rest and medication, I am now fully recovered, and my wife was fortunately not contaminated.
The latest Omicron variant XBB 1.5 seems to be expanding in the US, so please be careful… all of you – Roni
I hope you have a great New Year.
I just read your latest email, ” Rolling-Up Our Cash-Secured Put Trades: A Real-Life Example With Etsy, Inc. (Nasdaq: ETSY)” with great interest. Two things stick out. One is the second roll-up. You did not wait until the premium dropped to 10% of the $.95 to buy back. You sold at $.95 and bought back at $.28 (around 30%). The other is the use of ETSY. I do not think ETSY was on the premium stock list at that time and I see you like to use ETSY in some other real life examples. What is special about ETSY?
2 excellent questions.
Let me premise my responses by telling you that this series of trades was inherent in a PCP (put-call-put or wheel) strategy. This is where we enter a covered call trade by selling out-of-the-money cash-secured puts and, if the covered call is exercised, write another cash-secured put. It represents a longer-term commitment than traditional put-selling or call writing (see the screenshot below). I should have stated this in the 1st paragraph of the article.
The trades shown in this article are part of a series of trades I have been executing for the past 7 months that is archived in a file which I may ultimately turn into a new webinar, online video course or, perhaps, a new book.
That said, my responses:
1. The 20%/10% guidelines, as they relate to put-selling, guide us as to when to close a put trade and enter a new one with a different underlying security. We consider implementing this approach when we have a short-term interest in the underlying security and will (typically) sell the security (if owned) prior to an earnings release. One exception is when we use the 10-Delta put strategy (see Chapter 25 in my new book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”). In this approach, we plan to roll-up and retain the shares as long as the 10-Delta requirement is maintained.
In this ETSY example, we have a longer-term commitment and closing the short put when share price accelerates significantly, results in a rolling-up exit strategy, retaining the same shares.
2. ETSY is a stock that has been on our “eligible” list in the past, not currently. The reasons I frequently use this stock for educational articles and videos include:
– Adequate average trading volume.
– Adequate option liquidity.
– High, but not overly dangerous, implied volatility.
– Has weekly options which allow for easy circumventing of quarterly earnings week.
The blog articles I provide to our BCI community are not specific recommendations. They are for educational purposes only. My hope is that the information will benefit a majority of our members. Not every single strategy approach will apply to 100% of our members.
So, let’s keep PCP and rolling-up put trades in our arsenal of exit strategies, and take advantage of these opportunities when they surface and meet our trading style and strategy goals.
Thanks for these questions, giving me the opportunity explain my motivation for this article.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Thank you for your detailed answers.
Happy New Year! My best wishes for all BCI community in this 2023.
I was reading one more time the section of “Collar strategy” of your book Covered Call Writing Alternative Strategies. Do you think Collar which has a defined limited risk may have been more useful in the bearish markets like in certain months of 2022 instead of PCP strategy? Although the PCP provides a cushion, the drawdowns were very significant. Thanks again for everything.
The collar is certainly another viable approach to challenging market conditions.
The collar strategy is a lower-risk approach to covered call writing. We exchange higher returns for a defined risk to the downside.
I would consider both the collar and PCP ways of mitigating declining market conditions. Which of these 2 strategies will result in the highest returns in specific markets, is best determined by looking back.
There are other defensive approaches to bear and volatile markets that have been archived in BCI articles, videos and books. Here are several more:
Deep ITM calls
Deep OTM puts
Low IV securities
Establishing trading ranges based on implied volatility (BCI Expected Price Movement Calculator)
At BCI, our goal is to provide the information that will give our members the opportunities to make the most appropriate selections based on personal risk tolerance and strategy goals.
Hi Alan –
Can you help me to understand what the trade adjustment amount was and how you arrived at it to get the 4.70% return? Thanks.
Here are the 3 option income streams depicted in this article:
$2.65 + ($0.95 – $0.27) + ($0.69 – $0.28) = $3.74
The last (highest) capital requirement to secure the $80.00 put with a premium of $0.69, was $79.31.
$3.74/$79.31 = 4.7%
To make the Trade Management Calculator data accurate, we needed to enter a capital adjustment of $6335.00 as shown in the screenshot below. This figure comes from the 1st trade, where a $66.00 put was sold for $2.65, requiring a cash amount of $6335.00 per-contract to secure that put sale.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Hi Alan –
When I use the same stock to write calls each week, what price do I use as the “Trade Entry Price?” I know the instructions say use the price at the time of the trade. This isolates that trade but I also want to know what is the cumulative net P/L after multiple weeks of trading with the same stock. That requires tracking the stock’s cost basis which changes every week.
Seems to me if I want to see the cumulative net P/L I need to have a TMS dedicated to just that one stock? Is there another way? Am I missing something?
The TMC does have the flexibility to track 1 specific security over multiple expiration cycles.
To do so, we would have to dedicate a specific spreadsheet for that stock and use the capital adjustment section every time a new line is populated in the spreadsheet. This would allow us to calculate the results for each trade and trade adjustment over time and have a total cumulative dollar and percentile calculation result.
We cannot combine this spreadsheet with other stocks and trades in our portfolio as the final portfolio returns would reflect all trades made in the defined time frame.
Bottom line: Yes, the TMC can calculate 1 specific security over time, but, no, it cannot do so in a single spreadsheet with multiple other securities.
The Collar trade is a great trade…it is one of my personal go-to trades. It is a defined risk trade that allows you to define your max gain or max loss prior to entering the trade. Whether you use the Collar is a function of your trading style, personal risk tolerance, and your personal view of the market (both strategic and tactical). I use the Collar in this market.
Thanks Barry. I am checking if the Collar strategy will provide a positive risk reward ratio. I will do some exercises with ETF and stocks with low and high Implied volatility.
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Alan and the BCI team