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
Additional data added to calculator
John added the following 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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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:
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.
Thank you sincerely for these videos.
Haltore
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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 05/10/19.
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Barry and The Blue Collar Investor Team
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
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
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
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
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
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
Good work, Jay.
I know we shouldn’t be political here.
I called Trump Sunday, neither of us were at church, and asked why he raised the tariffs. His response was to ask me who I traded with. I answered Costco, Publix, Longhorns,etc. He asked me how much did they buy from me. I answered, “Zero”. He then informed me that I had a trade deficit with each of those organizations and that I had “lost” all of that deficit amount. I’ll be damned! Were my eyes opened! Of course that upset me and I asked him what I should do. His answer was that I should start a trade war with them and I shouldn’t purchase anything from them until they bought more from me than I did them.
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
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
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
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
“Those who are about to die salute you”
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
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
Alan’s “All Stars of Options” seminar in Las Vegas this morning.
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Alan and the BCI team
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
1.42×90=1.28, this is the buy back premium amount Am I correct?
Thanks
Love your articles
John
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
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.
Thanks in advance for all your help!
Kossila
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