Selling cash-secured puts is a low-risk option-selling strategy where the seller undertakes the contractual obligations to buy shares at the strike price, by the expiration date. In return for undertaking this obligation, an option premium is collected. There are many ways these trades can be crafted, and this article will provide an overview of several of these applications. This is part I of a 2-part series which will be concluded in the next blog publication.
Practical applications of selling cash-secured puts
–Traditional put-selling
–PCP (wheel) strategy
–Buy a stock at a discount instead of a limit order
–Ultra-low-risk put strategies
- Delta
- Implied volatility
Traditional put-selling
After selecting an elite-performing stock (or ETF), an out-of-the-money cash-secured put is sold, agreeing t buy the shares at the lower strike by the expiration date. Here are the option-chain and initial trade entries & calculations using the BCI Trade Management Calculator:
ETSY Put Option-Chain
ETSY: Trade Entries into the Trade Management Calculator
ETSY: Initial Trade Calculations
- Yellow cells: Breakeven price points
- Brown cells: Initial 29-day returns and purchase discount amount, if exercised
The PCP (Put-Call-Put or “wheel”) Strategy
Strategy protocol
- Sell an OTM cash-secured put
- If no exercise at expiration, use the freed-up cash to then secure another cash-secured put
- If the put is exercised, write a covered call, ITM for a defensive posture or OTM for a more aggressive position
- If the covered call is not exercised at expiration, write another covered call for the next contract cycle
- If the covered call is exercised, use the cash from the stock sale to then secure another put sale
Graphic representation of PCP
The PCP Strategy
Discussion
There are multiple ways we can implement selling cash-secured puts. This article provided an overview of 2 such applications. In our next publication, buying a stock at a discount and 2 ultra-low-risk methodologies will be discussed.
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Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
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July 11th 10 AM ET – 11 AM ET
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Presentation time: This Tuesday, July 11th 10 AM ET.
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Alan,
As always, your article is great.
My issues with CSPs are the following:
If I buy a stock that I like and sell an OTM call instead, I am buying it at a discount and will get additional profit if exercised, which seems to be a better risk/reward proposition.
On the other hand, if I sell a CSP on that stock, I am limited to the strike amount and will be holding a loser if exercised.
Of course, there are the exit strategies in both cases, but I feel they are more effective when buy/writing.
Is there something wrong with my reasoning?
Roni
Roni,
Every strategy has its pros & cons.
One important similarity between covered call writing and selling cash-secured puts is that both have multiple exit strategy opportunities that assist in mitigating losses.
I prefer covered call writing in normal (market up 8% – 10% per year) and bull market environments, which allows us to sell out-of-the-money calls and have 2 income stream potentials (option premium + share appreciation up to the OTM strike).
I favor cash secured puts in bear and volatile market conditions which will allow for cash flow even when share price declines down to the OTM put strike.
We can also integrate both strategies in bear and volatile markets using OTM puts and ITM calls (PCP strategy):
https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/
I have multiple option-selling portfolios. Each month I use both calls and puts, Monthlys and Weeklys.
Whichever strategy approach we take, that 3rd skillset (position management) must be an integral part of our system.
Alan
Thank you Alan for your clear explanation.
Roni
Alan,
I am new to options and see you have a lot of information on covered call writing and cash secured puts. Can you point me to the best place to get started.
Thank you.
Elliot
Elliot,
I am a firm believer that options education should start with covered call writing. In my humble opinion, it is the most intuitive strategy for beginning retail investors, low risk and eligible for self-directed IRA accounts (many also allow cash-secured puts).
If you haven’t read any of my books or watched any of my online video courses, start with our free beginner tutorial for covered call writing:
https://www.thebluecollarinvestor.com/beginners-corner/
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Alan
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