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: A real-life example with Micron Tecnology, Inc. (Nasdaq: MU)
- 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)
Initial put calculation results using the BCI Trade Management Calculator (TMC)
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)
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.
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.
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.
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:
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.
Irma & Gil
1. Orlando Money Show Live Event
October 29th – October 31st
Details to follow.
2. AAII Orange County, California Chapter
Saturday November 11, 2023
Details to follow.