Selling Cash-Secured Puts to Lower Cost basis

Selling cash-secured puts can be used to generate monthly cash flow and to buy a stock at a discount. It can also be used to lower the cost-basis of shares already owned. In November 2018, John shared with me a trade he was in with Halliburton Company (NYSE: HAL) using precisely this strategy. This article will highlight John’s trades and how he incorporated the information into the BCI Put Calculator.

John’s trades with HAL as of 10/31/2018

• John’s portfolio currently has 100 shares of HAL at a cost-basis of \$46.02
• Current price of HAL is \$35.31
• 10/31/2018: Sell 1 out-of-the-money cash-secured \$33.50 put for \$0.64

Calculations with BCI Put Calculator

HAL Put Calculations with Cost-Basis Data

• F6 (Yellow cell at top): Portfolio account number
• F35 (Yellow cell on bottom): Total cost-basis of 100 shares currently owned
• F36 (Pink cell): Cost of 100 shares if put is exercised (also cell F22)
• F37 (Green cell): Average cost-per-share for 200 shares if put is exercised

Strategy benefit

By selling out-of-the-money cash-secured puts, the cost-basis per-share is lowered from \$46.02 to \$39.44, if exercised. If the put remains out-of-the-money and expires worthless, a 1.95%, 30-day return has been generated.

***The stock repair strategy is another approach to lowering cost-basis when share value declines in a stock-only portfolio.

Discussion

Selling cash-secured puts has many applications including generating monthly cash flow, buying stocks at a discount and the strategy highlighted in this article, lowering cost-basis per share.

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Alan,

First of all, I want to thank you for your wonderful, simple and clear videos on covered calls and cash-secured puts on your YouTube channel. Your slow-paced, clearly-explained videos were God sent to me to understand the mechanics.

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Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

20 Responses to “Selling Cash-Secured Puts to Lower Cost basis”

1. Barry B May 11, 2019 10:06 pm #

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 05/10/19.

Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

Also, we have uploaded the Blue Chip Report for June 2019 contracts. You can find it in the Resources/Download section of the Premium Member site.

Best,

Barry and The Blue Collar Investor Team

2. Dietmar May 12, 2019 3:12 am #

Alan,

I went through your beginners coverd call option videos. Very interesting and thanks for the information.

Now I wonder if I could use your premium memebership with the covered call inforation you give ther even on European stocks I am holding. I tried to find some of ther tickers on the various options screeners, but could not find them. I will give you a few examples: SIXT, Bollore S.A., Schindler Holding AG, Fiat Chrysler Automobiles.

Thank you very much for your attention.

Kind Regards
Dietmar

• Alan Ellman May 12, 2019 7:04 am #

Dietmar,

Our premium member stock and exchange-traded funds reports apply to stocks that trade on US exchanges. Now, there are many European companies that do trade on US exchanges. For example, from the stocks you mentioned, Fiat Chrysler Automobiles trades on the NY Stock Exchange under the ticker symbol FCAU.

Most brokerages do allow international clients to trade on US exchanges where there may be many more cash-generating opportunities.

Alan

3. Barry B May 12, 2019 5:33 pm #

Good afternoon BCI’ers,

Just a quick note to let you know that Schwab has enhanced its’ StreetSmart Edge (SSE) platform recently. It now has some very competitive options trading features. The key update was the addition of:
– the % probability of a strike price closing OTM
– the % probability of a strike price closing ITM
– the % probability of touching a strike price

If you are a user of SSE, these are great additions. I was an external beta tester of SSE, so I have a lot of experience using the platform and can help you as needed.

Best,

Barry

• Federico May 13, 2019 1:25 am #

Hi Barry

i m a Schwab user on SSE platform, can you kindly navigate me throw this new addition?

Do I have to update SSE to a new version?
Thanks
Federico

• Barry B May 13, 2019 8:23 pm #

Federico,

Yes…you will have to upgrade to the latest version of StreetSsmart Edge. After you update, you will have to go to the “All-In-One Trade Ticket”. Once there, click on the “Actions” tab just above the actual options chain. In the drop-down menu, go to the “Columns & Settings” menu item. Scroll down to the “Probability” section to select the specific probability items you want to add to your options chain.

Best,

Barry

4. Jay May 12, 2019 8:51 pm #

Hey friends,

I love selling cash secured puts (CSP’s) in a variety of situations. If I am bullish I sell them on a down day and use the proceeds to buy calls on either the same or a different stock. If it works there is leverage and if I am wrong, oh well, I am wrong! Plus there are myriad other uses of CSP’s as Alan articulates.

When Trump did his China Tweet a week ago it did not take Karnac or Monk to figure out it was going to be a tough week. I did OK buying puts and selling calls.

Regardless of one’s opinion of Trump it is clear he has changed the game. He must drive Technical Analysts who rely on charts absolutely crazy :)? – Jay

• Hoyt T May 14, 2019 8:20 am #

Good work, Jay.

I know we shouldn’t be political here.

I am trying to figure out how to do that and to decide who to buy my necessities from that will buy from me.

Anyway, I slept better Sunday night after have been enlightened. It sure helped, the sleep, for I sure needed the respite come Monday morning.

Hope this helps, 🙂

Hoyt

• Jay May 14, 2019 1:24 pm #

Hoyt,

Thanks, that is really funny and I am glad you have the Prez on your speed dial :). I hope he listens more to you than some of the other buffoons in his circle! I am just afraid the only coach that poor guy listens to is his mirror.

Markets bouncing nicely as I write this. Not too hard to see coming after all the oversold readings and VIX bounce so I switched to calls at the close yesterday using house money from the puts. I’m a bit lost from here. Will get cash long and see in a few hours.

These downturns present quizical times. CC protection gets over run but you keep good stocks. CSP’s get triggered at a loss but, again, you have good stocks. Panic never made anyone a dime and I see no reason to do it now. – Jay

• Hoyt T May 14, 2019 8:47 pm #

Jay,

Right on.

Not sure sure how to read the fade into the close. I wish I had Art Cashin on my speed dial. He is about the only one left in whom I have any confidence. Haven’t seen him near the close in a long time. Hope he is ok.

Do you remember his quote to, NYSE Chairman at the time, John Phelan just before the market opened on Black Monday 1987 when Art was floor manager for PaineWebber. He approached Phelan, put his right arm across his chest and said, “Morituri Te Salutamus Esse”. Phelan nodded without a smile.

Art has been on the floor for over 50 years now.

His thoughts now would be illuminating.

Hoyt

• barry B May 15, 2019 12:12 am
#

Hoyt,

I totally agree with you that Art Cashin is the only person on TV to trust. What he said that day was totally appropriate…

Best,

Barry

• Terry May 15, 2019 6:05 am
#

“Those who are about to die salute you”

• Hoyt T May 15, 2019 7:13 am
#

Thanks Barry.

As Art tells the story, after all the bad news over the weekend, Art was having coffee and kept seeing aides coming and going and giving Phelan small scraps of paper and he, Art, could see a pall over the table were Phelan was seated.

We probably will not see Cashin’s like again.

Thanks for all you do.

Hoyt

• Hoyt T May 15, 2019 7:20 am
#

Terry,

Exactly.

Art is an honorable man. He doesn’t let people put words in his mouth nor does he feed off their emotions.

He also, as floor manager for UBS, he knows the the order book on what is to be bought or sold at the close. That number is a very important indicator of where the market will be the next day after the humans have adjusted, if necessary, the mistakes of the machines overnight and early morning. I used to use it to buy either puts or calls at the close.

Good luck today.

Hoyt

5. Alan Ellman May 13, 2019 3:38 pm #

Alan’s “All Stars of Options” seminar in Las Vegas this morning.

Click on image to enlarge and use the back arrow to return to blog.

6. Alan Ellman May 15, 2019 9:21 pm #

This week’s 8-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 as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:

https://www.thebluecollarinvestor.com/membership.shtml

Alan and the BCI team

7. John May 16, 2019 4:07 am #

Morning Alan,

On your “BCI PORTFOLIO OVERWRITING CALCULATOR” on page 8 figure 6 of the instructions.
In the MSFT column where you have the short call strike premium at 1.42. At the bottom where you have the buy back at 20%, you have .28. So your calculations; 1.42x.20=.28. This is a little confusing to me as it is not the correct buy back amount, it may be the amount that it drops by.

The correct should be 1.42x.80=1.14. So when the premium drops to 1.14 that is the buy back point.

The same with the 10% buy back amount

Thanks

John

• Alan Ellman May 16, 2019 8:06 am #

John,

The 20%/10% guidelines state that we buy back to short call when the option price drops TO (not “by”) 20% or 10% of the original premium we generated. This allows us to retain 80% to 90% of the original premium generated.

In the case of MSFT, we sold the call for \$1.42 so we buy-to-close in the first half if premium value drops to \$0.28 or less (20%) and \$0.14 or less in the latter part of the contract (10%).

Keep in mind that these are guidelines so we have some flexibility if the premium is “in-the-ballpark” for these percentiles.

Alan

8. Kossila May 16, 2019 5:55 am #

Hi Alan,

I have a quick question:

I have 100 Shares of BNO (ETF) on my Daughter account that i bought on 3/29/2019 for \$19.20 per share. I also sold BNO May 17 2019 19.00 Call the same day for \$0.85 ( no fees since free trades for 90 days). potential of 3.4 % profit.

Yesterday evening 5/14/2019 I got notice of assignment and i am no longer have the shares. I just wanted to understand why it happen. I am also assuming no dividend involved.

My plan was to let the option expired in few days then lose the shares but is there any ideas on how i could managed the situation much better and make more money ( Roll up…etc)

I wanted to understand so i can manage the situation better especially with more shares and expensive stocks/ETFs.

Kossila

• Alan Ellman May 16, 2019 8:28 am #

Kossila,

The only aspect that I would look to change regarding this trade is your post-trade reaction. You realized a 3.4%, 19-day return. Annualize that!

You managed this trade perfectly. No exit strategy action was indicated. If you wanted to retain the stock in your next-month portfolio, rolling the option when (and if) the time value approached zero may have been considered.

Now, why early exercise? My guess is that an option holder wanted to take control of the shares and the time value component was approaching zero. If there was some time value left on the premium, the option holder would have been better off selling the option and then buying the stock at market.

Alan