When we sell cash-secured puts (CSPs), we are getting paid to undertake the contractual obligation to buy the holders shares at a price that we (the sellers) determine, called the strike price, by a date that we determine, called the expiration date. In the BCI methodology, we favor out-of-the-money (OTM) CSP strikes, which are lower than current market value.
Since we are agreeing to buy the option buyers shares and understand that exercise can occur at any time during the contract (although early exercise is rare), it makes sense to favor securities that we would otherwise not mind owning in our portfolios. This is why we do such meticulous due diligence when screening our stocks & ETFs.
Given this type of CSP trade structuring, there are 2 major favorable outcomes, with the understanding that there is inherent risk in all trades that seek to generate more than risk-free returns.
What are the 2 favorable outcomes?
Let us set aside the critical skillset exit strategy intervention and focus on the 2 major potential outcomes.
Unexercised: If the price of the underlying security does not drop below the OTM put strike at expiration, the option will expire worthless, and we will have realized our initial time-value return. The cash previously utilized to secure that put is now freed up to secure another put in the next contract cycle.
Exercised: If share price declines below the (once) OTM put strike, the share will be “put” to us on the Saturday after expiration Friday at a cost basis of (put strike – put premium). This represents a discount from the original price of the underlying, given the strike was OTM plus the put premium credit. Since this is a security we wouldn’t mind owning, aside from the options aspect, this represents another potential favorable outcome.
Dividends: If there is an ex-dividend date during the contract cycle, we will add the dividend amount to the premium for final calculations
Real-life example with Toll Brothers, Inc. (NYSE: TOL)
- 7/3/2023: Buy 100 x TOL at $79.07
- STO 1 x 8/4/2023 $77.00 OTM put at $1.40
- 7/6/2023: Capture $0.21 dividend (ex-dividend date)
- Option premium + dividend = $1.61
- Calculate unexercised & exercised results
Option-chain for TOL on 7/3/2023
TOL calculations without dividend: 2 favorable outcomes
- Initial time-value 33-day return is 1.85%, 20.48% annualized (brown cells)
- Purchase discount price, if exercised is 4.39% (purple cell)
- Calculations accomplished using the BCI Trade Management Calculator
TOL calculations with dividend: 2 favorable outcomes
- Initial time-value 33-day return is 2.14%, 23.82% annualized after adding the $0.21 dividend to the option premium (brown cells)
- Purchased discount price, if exercised is 4.65% (purple cell)
- Calculations accomplished using the BCI Trade Management Calculator
When selling out-of-the-money cash-secured puts on securities we would otherwise want to own, there are 2 favorable outcomes. Either we purchase the shares at a discounted price (from the time of trade entry) or we get paid not to buy the shares. It is important to recognize the fact that the risk in the trade is the price of the underlying dropping below the breakeven price points (yellow cells) when we can start losing money. This is where our exit strategy arsenal must be activated.
For more information on selling cash-secured puts
Selling Cash-Secured Puts Basic And Advanced Principles
Selling Cash-Secured Puts is a 6-part Video Series + downloadable workbook. All aspects of Put-Selling, including stock selection, option selection and position management. A huge section on exit strategies and a deeper dive into ultra-low risk approaches to selling cash-secured puts have been added to previous versions of this course. The Companion Workbook contains 111 all-color pages of all charts, graphs and slides. Download Table Of Contents (PDF)
This course contains 6- parts in the video course:
Section I: Option basics (definitions and foundational information)
Section II: Traditional put-selling (stock & option selection + position management)
Section III: PCP (wheel) strategy (adding covered calls to selling cash-secured puts)
Section IV: Buy a stock at a discount instead of a limit order (buy a stock at our target price or get paid not to buy the stock)
Section V: Ultra-low-risk put/Delta strategy (High probability, low-risk trades)
Section VI: Ultra-low-risk put/implied volatility strategy (High probability, low-risk trades)
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:
The power wrapped in a simple user experience…. This calculator was a must have for me to dive deeper into the BCI methodology.
I have a greater understanding of my trades.
Mixing more in the money calls and having even more success.
All winning trades so far using my new powerful tool.
Appreciate what you continue to do for my investing education.
1. Mad Hedge Investor Summit
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.
2. BCI-Only Webinar: Portfolio Overwriting
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
- Brief review of covered call writing
- Option basics
- What is an option-chain?
- Option selection
- Calculating covered call returns: Real-Life examples
- Portfolio overwriting defined
- Pros and cons of portfolio overwriting
- Why early exercise is so rare
- Rolling options
- Role of dividends
- Locating ex-dividend dates
- How to avoid early exercise
- Real-life examples with calculations
- BCI Portfolio Overwriting Calculator
- BCI Trade Management Calculator
Details & registration link to follow.
3. Long Island Stock Traders Meetup Group (private investment club- Part I)
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Club members only.
4. Las Vegas Money Show & Stock Traders Live In-Person Event
February 21 – 23, 2024
Details to follow.
5. Long Island Stock Traders Meetup Group (private investment club- Part II)
Thursday March 14, 2024
7:30 PM ET – 9 PM ET
Club members only