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When selling our cash-secured puts, understanding the correlation between stock price and our put premiums is critical to maximizing the success of our trades. For covered call writing, the relationship is direct … if share price increases, so will the value of our call options by its Delta factor. For puts, the opposite is true … if stock value rises, put value falls, providing us with the opportunity to buy back the put option at a much lower price. This is why when we view a put option chain, the stats have negative Deltas.

What is Delta?

One of the 3 definitions of Delta is the amount an option premium will change for every $1.00 change in the price of an underlying security. If we generate $1.00 per share when selling a cash-secured put and the strike has a Delta of -.50 per share or -50 for the contract, and share price changes by $1.00, then put value is reduced (if stock price rises) or increased (if stock price falls) by $0.50.

Real-life option-chain with Chipotle Mexican Grill, Inc. (NYSE: CMG)

• 9/30/2024: CMG trading at $57.30
• 9/30/2024: The 10/18/2024 $55.0 OTM put shows a bid price of $0.70
• 9/30/2024: The $55.00 put shows a Delta of -0.2709
• For every $1.00 in share price increase, the $0.70 premium will reduce in value by $0.27
• If the share price rises enough, we can buy back the option at an extremely reduced price and sell a higher put strike to generate additional option income (rolling-up)

CMG initial put calculations using the BCI Trade Management Calculator (TMC)

• Red circle: If taken through expiration, this is a 19-day trade
• Yellow cell: The breakeven price point is $54.30
• Brown cells: The initial time value profit is 1.29%, 24.76% annualized
• Purple cell: If the put is exercised and shares are put to us, we buy those shares at a 5.24% discount from the price at trade entry (the breakeven price of $54.30-yellow cell)

What are the 20%/10% guidelines for cash-secured puts?

These are exit strategy guidelines which assist us in determining when to buy back our cash-secured puts when the share price accelerates significantly. In the first half of a monthly contract, we enter a buy-to-close (BTC), good-until-cancelled (GTC) limit order of $0.14 (20% of $0.70) after selling the CMG cash-secured put. In the last 2 weeks of a monthly contract, we change the limit order to $0.07, 10% of $0.70. This is also a BTC/GTC limit order. If we can retain 80% – 90% of our original option premium and generate more than $014 or $0.07 by rolling up to a higher put strike, we will have generated an additional income stream or perhaps more.

Discussion

When selling cash-secured puts, we can generate additional income streams by understanding the inverse relationship between share price and put value. Using the BCI 20%/10% guidelines will partially automate the exit strategy process.

Alan Ellman’s Selling Cash-Secured Puts

The purpose of this book is to give the reader the tools to master a conservative stock and option strategy with the goals of generating monthly cash flow and focusing on capital preservation. Selling cash-secured puts is a low-risk strategy that leverages high-quality stocks and exchange-traded funds to accomplish these objectives.

This book will present basic option principles that apply to this system and will walk you through the process of stock and option selection. Additionally, calculating profits and position management will also be critical topics addressed. In other words, every aspect of this strategy will be discussed including the necessary steps to take before, during and after a trade is executed. Examples of real-life trade executions will be shown in conjunction with illustrative charts and graphs, and the rationale for each step behind the trade will be explained using easy-to-understand terminology.

Click here for more information and purchase link.

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