In our last blog publication, 2 put applications were discussed: traditional put-selling and the PCP (wheel) Strategy. In this week’s article, 3 more approaches will be reviewed.
Selling cash-secured puts: Part II methodologies
- Buying a stock at a discount
- Ultra-low-risk strategies
Buying a stock at a discount: A real-life example with Micron Tecnology, Inc. (Nasdaq: MU)
The trade
- 2/21/2022: MU trading at $90.10
- MU is an eligible stock on our premium stock watch list
- No upcoming ER for the contracts expiring on 3/18/2022
- Set a limit order to buy at about $83.00 (example goal)
- Sell a CSP with a breakeven at about $83.00
The option-chain (MU trading at $90.15)
MU: Option-Chain Data
Initial put calculation results using the BCI Trade Management Calculator (TMC)
MU: Initial Trade Structuring Calculations
The 2 possible (non-adjusted) trade results are a 3.09%, 45.15% annualized 25-day return or the purchase of the shares at an 8.54% discount ($90.15 to $82.45)
Ultra-low-risk approaches
Delta
Using a deep OTM put strike with a low Delta (-0.10, as an example) will create an approximate probability of success. For example, using a Delta of -0.10 will create ana approximate probability of 90% that the option will not expire in-the-money or with intrinsic-value and therefore will not be subject to exercise.
Implied volatility
Using a mean or at-the-money implied volatility will allow us to create an approximate trading range for the stock or ETF during a specific a contract cycle.
Using IV to Determine Expected Price Movement Over a Contract Cycle
Since IV stats are based on 1 standard deviation and a 1-year timeframe, the BCI Expected Price Movement Calculator can determine an approximate trading range for a specific contract cycle. In this example with DOW, we would sell a put with a breakeven price point near $54.93 and have an 84% probability that the put will not be exercised.
Discussion
One of the outstanding benefits of selling cash-secured puts (and covered call writing, as well), is that the strategy can be crafted to meet several different strategy goals and appeal to investors of a wide range of personal risk-tolerances. The past 2 blog presentations highlight 5 such distinct pathways.
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:
Dear Alan:
We ordered your book, and it arrived yesterday. We have already initiated your CEO plan and are anxious to see how it works. I handle covered calls but have not found much to invest in of late. The CEO program will fill a very big hole.
We have both been following your covered call program for years. We have foundgood returns and our portfolios have grown.
Thanks for all the work you and Barry put into it. You have lots of good suggestions, many of which we have implemented.
Grateful followers.
Irma & Gil
Upcoming events
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Saturday November 11, 2023
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Alan,
I love the concept of selling puts to buy at a discount. If we want to own the shares sooner rather than later, would it make sense to use in the money strike prices?
Thanks a lot,
Marsha
Marsha,
Yes, it would. This is the main exception to the BCI guideline that, when selling cash-secured puts, we favor out-of-the-money strikes.
We must make sure that the time-value component of the ITM strike premium aligns with our pre-stated initial time-value return goal range.
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 07/14/23-A.
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 members are grandfathered 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
[email protected]
Hello again Alan.
As I have mentioned previously I generally have about 25 positions with monthly expirations.
They all will expire on July 21.
The new weekly stock list only has a few recommended with expiration dates past the monthly expiration dates. I presume this will be the case for awhile. What do you suggest?
Barry R.
Barry,
Earnings season is always more challenging regarding populating our option portfolios, as we seek to avoid the risk of earnings reports. However, we still will have choices that will enable us to continue the cash flow generation. Here are some ideas:
1. The premium stock report breaks down eligible securities by contract month. Consider the handful that are not reporting during the August contracts.
2. Consider the entire list of exchange-traded funds from our premium member ETF Reports. ETFs do not have earnings reports.
3. Note that on this week’s stock report, 22 stocks report during the 1st week of the August contracts. Most of these will be eligible when the reports pass, allowing us to generate 3+ weeks of premium for the August contracts.
4. 15 of the eligible stocks from this week’s report have weekly options associated with them. We can consider all these stocks, using weekly options and skipping the week of the earnings report.
My personal plan is to base my August contract decisions on the upcoming ETF and stock reports.
Alan
Allan,
Looking at TTD for the 8-4-24 expiration date and have a question.
The 90 calls are showing 105 open interest.
Am I reading the option table correctly or should you not place option that close to expiration date?
Seems like low volume or am I reading it wrong and there is an ASK Alan answer to my question?
Jon
Jon,
TTD options, generally, are extremely liquid. Weekly options less so compared to Monthly expirations. Pre-market this morning (Monday), the option-chain shows open interest of 290 contracts.
The BCI guideline is “100 contracts of open interest and/or a bid-ask spread of $0.30 or less”
From the perspective of option liquidity, TTD meets our BCI guideline requirements.
Alan
Hi Alan,
I’m a premium member and have read several books of yours.
I’m currently rereading Stock Investing for Students and couldn’t help but wonder your thoughts on the current yield curve.
We’ve had an inverted yield curve since March 2022 – and as you state in your book, “it has predicted a worsening economy in the future 5 out of 6 times since 1970.”
According to reports, the Nasdaq is largely holding up the Dow.
And based on your thoughts on your most recent report, you’re bullish.
Do you feel a recession is imminent? And what does that look like for the market come 2024, in your opinion?
Also, are you diversified in crypto?
Do you have thoughts on it?
Looking forward to hearing back.
Sincerely,
Chery
Cheryl,
In the past, an inverted yield curve was considered a red flag for a potential upcoming recession. However, we currently are witnessing a myriad of economic reports that are signaling a strengthening economy (low unemployment, decelerating inflation, rising consumer confidence, to name a few). A strong case can be made that the US economy is among the strongest in the world.
It is true that several of the large-cap tech companies have supported the market recently but that seems to be broadening of late.
This is certainly not my area of expertise but, for full disclosure, put me down for someone who does NOT believe that a recession is imminent.
2024? Way too early to make predictions regarding next year, but I am bullish right now as I have been stating in my weekly premium member stock reports over the past several weeks. You will note that IBD and Dr. Eric Wish’s GMI are also reading bullish.
One of the advantages of using our short-term option-selling strategies is that we have the opportunities to re-evaluate our bullish or bearish assumptions multiple times a year and can craft our trades accordingly.
Crypto? I only invest in strategies where I have done my due-diligence and feel confident that I have mastered all aspects of the system. This is not the case with Crypto. I am not an expert on this topic and therefore cannot offer any thoughts one way or the other. I have had so much success with covered call writing and cash-secured puts over the past 2+ decades that there is no reason for me to look elsewhere. There is nothing wrong with others who want to investigate this or other investment vehicles.
Alan
Premium members,
The latest Blue Chip Report of the best-performing Dow 30 stocks is now available on your member site. It is located on the right side of the member page in the “Resources/Downloads” section. Scroll down to “B”.
You will note that, recently, most of the Dow 30 stocks have been under-performing the S&P 500.
Alan & the BCI team
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
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