| StockFetcher Forums · General Discussion · Discussion: Selling Cash Secured Puts | << >>Post Follow-up |
| four 5,087 posts msg #134730 - Ignore four modified |
3/4/2017 3:54:52 PM What else should be considered? --- http://www.optionsplaybook.com/rookies-corner/cash-secured-puts/ --- Cash-secured puts on Stock you want to buy What if you could buy stocks lower than the current market price? And what if you could make money when you’re wrong about the direction of the market? If either of those scenarios sounds appealing to you, then perhaps you should consider selling a cash-secured put. When to run this strategy You’re long-term bullish on a stock, but you don’t want to pay the current market price for it. In other words, if the stock dips, you wouldn’t mind buying it. You might consider entering a limit order at the price you’d like to pay for the shares. But selling a cash-secured put gives you another method of buying the stock below the current market price, with the added benefit of receiving the premium from the sale of the put. How to do it Sell an out-of-the-money put (strike price below the stock price). You may want to consider choosing the first strike price below the current trading price for the stock, because that will increase the probability the put will be assigned, and you’ll wind up acquiring the stock. In order to receive a desirable premium, a time frame to shoot for when selling the put is anywhere from 30-45 days from expiration. This will enable you to take advantage of accelerating time decay on the option's price as expiration approaches and hopefully provide enough premium to be worth your while. But what you consider a good return is up to you. Once you’ve chosen your strike price and month of expiration, you’ll need to make sure there’s enough cash in your account to pay for the shares if the put is assigned (hence the term “cash-secured” puts). Ideally, you want the stock price to dip slightly below the strike price, and stay there until expiration. That way, the buyer of your put will exercise it, you will be assigned, and you’ll be obligated to buy the stock. The premium received from selling the put can be applied to the cost of the shares, ultimately lowering the cost basis of the stock purchase. Let's look at some examples of what might happen Imagine stock XYZ is trading at $52 per share, but you want to pay less than $50 per share for 100 shares. You sell one put contract with a strike price of $50, 45 days prior to expiration, and receive a premium of $1. Since one contract usually equals 100 shares, you receive $94.40 ($100 minus $5.60 commission). If the put is assigned, you’ll be obligated to buy 100 shares of XYZ at $50. In order to be cash-secured, you’ll need at least $5000 in your account. Since you’ve already received $94.40 from the sale of the put, you only need to come up with the additional $4905.60 ($5000 minus $94.40). How might this trade pan out? Let’s examine four possible outcomes. Scenario 1: The stock dips slightly below $50 This is a great scenario. Let’s say the stock is at $49.75 at expiration. The put will be assigned, and you will buy 100 shares at $50 per share. However, since you already received a $1 per share premium for the sale of the put, it’s as if you paid net $49 per share. Since the stock is currently trading for $49.75, you achieved a savings of $75 before commissions ($0.75 x 100 shares). Huzzah. Scenario 2: The stock rises Now imagine the stock rises, and ends up at $54 at expiration. That means there’s some bad news, but there’s some good news too. The bad news is you were wrong about the short-term movement of the stock. Since it didn’t come down to the strike price, the put won’t be assigned and you won’t get the stock at $50 per share. If you had simply bought the stock at $52 instead of selling the put, you would have already made $2 per share: double the $1 premium you received. On the other hand, you did receive a $1 premium, or $100 total for being wrong — even when you subtract out commissions, there’s nothing wrong with that. Plus, the cash you used to secure your put will be available to you for other trades. So there’s a silver lining to this otherwise cloudy trade. Scenario 3: The stock dips slightly further than you anticipated What if the stock is at $48 as the options expire? The put will be assigned and you will pay $50 per share. Subtracting the $1 put premium received (less commissions), it is as if you paid about $49 per share. You may be tempted to curse and think you overpaid for the stock by $1 per share. But look at the bright side. If you hadn’t used this strategy, you might’ve simply entered a limit order at $50 and not even received the put premium. That would be worse, right? Plus, now that you own the stock, it might make a rebound. Let’s hope you’re a good long-term stock picker. Scenario 4: The stock completely tanks This is obviously the worst-case scenario. Let’s hope your forecasting would never be this wrong. But what if the stock does completely tank? There are a couple of things you can do. First, you can accept assignment and pay $50 per share, irrespective of current stock price. In this case, you’d be hoping your long-term forecast is correct, and the stock will bounce back significantly. If you doubt the stock will make a recovery, your other choice is to close your position prior to expiration. That will remove any obligation you have to buy the stock. To close your position, simply buy back the 50-strike put. Keep in mind, the further the stock price goes down, the more expensive that will be. This scenario demonstrates the importance of having a stop-loss plan in place. If the stock goes beneath the lowest point where you’re comfortable buying it, a stop order should be placed to buy back the 50-strike put. This is much the same concept as a stop order you might have on stocks in your portfolio. The recap on the logic Selling cash-secured puts is a substitute for placing a limit order on a stock you wish to own. You receive a premium for selling the puts, and if the options are assigned, the premium can be applied to the purchase of the stock. If the stock doesn’t dip below the strike price by expiration, the puts will probably not be assigned, and you won’t have the opportunity to buy the stock at the strike price. However, the options will expire worthless and you’ll get to keep the premium. And that’s a good thing. Just remember, only sell puts on the number of shares you can reasonably afford to buy. And have a stop-loss plan in place, in case the stock goes completely in the tank. |
| mahkoh 1,065 posts msg #134736 - Ignore mahkoh modified |
3/4/2017 7:17:47 PM Selling CSP's has been my primary trade for some 5 years now. I do not sell the put because I want to own the stock, I want about 40 % of the premium to evaporate before buying it back. I like stocks that are in an uptrend, have pulled back to support and are not too far from a strike price so that I can sell an at the money put for decent premium. I use premium received divided by margin required as a metric. For options 4 to 6 weeks out I want this to be between 9 and 15 %, depending on how much time there is left until expiration. As mentioned before I will take profits if the option has lost 40 % of its value. I usually have 2 to 5 positions open and sell up to 10 % of capital on margin per trade. Is it a profitable strategy? Yes, over 90% of the trades are closed out profitably. Do I get burned sometimes? Definitely. But on average this strategy has returned well over 15 % on capital annually. What else to consider: I avoid stocks where earnings are due within 20 days. There is elevated premium to be received, but it comes with elevated risk. Check dividends. Premiums may seem attractive but be aware that the underlying will trade lower when it goes ex-div. The writer of the article mentions use of a stoploss. There is a problem with that. Once the option moves out of the money the spread tends to widen considerably. Furthermore the stock may hit the stop price during the first ten minutes after market open when spreads on most options are relatively wide. This may result in an undesirable fill. An alternative is to short the stock if your stop hits. If it does not recover you'll avoid assignment. If it does recover you can get out of the trade easier once the option returns at the money. I usually let the stock get assigned and sell covered calls until it gets called. If it has really tanked there is the problem that you will receive little premium for selling a call that is way out of the money. The alternatives are going out a few months further or selling a lower strike and securing a loss on the trade if it gets called. One last note from personal experience: If the position goes seriously underwater and recovers to a point where you can take a manageable loss, do not hesitate to accept that gift. |
| four 5,087 posts msg #134743 - Ignore four |
3/5/2017 1:06:32 PM thank you for your thoughts and quick response |
| gmg733 788 posts msg #134744 - Ignore gmg733 modified |
3/5/2017 2:05:59 PM All this is covered at tastytrade. Sell 45-60 days out Preferably on high IV Rank or a nice down day (i use 63 days unlike tastytrade who uses 252 look back) Manage around 50%, I usually do around 40% If at 21 days and you are not at 50% of credit received or on the wrong side of the trade, roll out in time to decrease your delta exposure and gamma risk or close the trade if you'd like On ETFs this is a cash cow and you can do it at any time Avoid earnings, vol creeps up towards earnings and you'll have vega and theta fighting you (and no buying before earnings doesn't work either) Only use on options that are highly liquid As mahkoh says, this is highly profitable 80% plus mark. Keep it small. Do not trade too big. I took a page out of JPs hand book and out of my swing trade hand book and lately I'm in trades for a few days instead of two weeks. And no you can't back test this. Options trading is about volatility and managing the trade. |
| mahkoh 1,065 posts msg #134746 - Ignore mahkoh |
3/5/2017 2:45:32 PM You're welcome, four. To elaborate a bit on how I select my candidates: As a first crude selection I use a minorly adjusted version of Kevin's filter from "trading divergences on the S&P". I run this against a pool of stocks where the spread of at the money options generally is less than 1% of the underlying price. Currently this pool consists of some 1000 stocks. This usually returns somewhere between 50 to 350 candidates. I copy the first 200 results into a spreadsheet where I can filter out those where earnings are due and find the first in the money put strike. The result gets copied into a another spreadsheet which is connected to my broker through an API where I can request real time bid/ask prices. Next I select those where premium received divided by margin required and the option spread meet my requirements. I paste this final selection into sharedlist "filter". If I update the sharedlist it's usually after 13.00.. This is the filter I use to rank the sharedlist: |
| c1916 77 posts msg #134758 - Ignore c1916 |
3/5/2017 9:30:18 PM FWIW, I'm also utilizing this plan. As the market has grown stretched to the upside, I sold stocks that were overextended in my opinion. This created a pile of cash which I used to sell puts against those shares that I was interested in getting back into at prices that I deemed more reasonable. Did I lose out on some gains by selling "early?" Sure. But, I'm comfortable waiting for a correction or bear market and taking scalps in the form of put premiums in the interim. These are all "singles" though...no home runs here. |
| four 5,087 posts msg #134832 - Ignore four |
3/9/2017 10:09:27 PM Thank you, all |
| four 5,087 posts msg #134923 - Ignore four |
3/14/2017 2:32:07 PM Which scanner do you use and criteria? thanks |
| StockFetcher Forums · General Discussion · Discussion: Selling Cash Secured Puts | << >>Post Follow-up |
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