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  • Using Delta to Create Low-Risk/ High-Return Put-Selling Trades: A Real-Life Example with ETSY, Inc. (NASDAQ: ETSY) – May 24, 2021

    When selling cash-secured puts, our strikes are selected based on our initial time-value return goal range and personal risk-tolerance. In the BCI methodology, we use only out-of-the-money (OTM) cash-secured puts unless our objective is to purchase a stock at a discount and have those shares put to us sooner rather than later. There are times when market conditions are such that we want to take extreme defensive positions while still having the goal to beat the market significantly. This is the approach I took shortly after the initiation of the COVID-19 crisis in the US that began in March 2020.

    Defensive put-selling strategy

    We select an elite-performing security based on fundamental, technical and common-sense parameters. We then look to deep OTM puts that have Deltas of 10 or less (Delta is negative for puts). We then sell put strikes with a target annualized return of 10% – 15% based on initial time-value return. Delta can be defined in multiple ways. For this article, it will be defined as the percent chance the option will expire in-the-money (ITM) or with intrinsic-value. Stated differently, our trades have a 90%+ chance of not being exercised.

    Bullish Price chart of ETSY on 12/14/2020

    Price Chart of ETSY on 12/14/2020

    1: Bullish exponential moving average trends

    2: Bullish MACD histogram trend and momentum

    3: Bullish stochastic oscillator momentum

    4: Average volume

    Option-chain for ETSY on 12-14-2020

    ETSY: Put Option-Chain

    The $150.00 (Delta of -0.05) and $152.50 (Delta of -0.08) strikes show bid prices of $0.31 and $0.44 respectively.

    ETSY calculations with the BCI Put-Selling Calculator

    ETSY: Calculations with the BCI Put Calculator

    The annualized returns for the $150.00 and $152.50 strikes are 15.12% and 21.12% respectively.

    Discussion

    Significant annualized returns can be realized by employing an ultra-conservative put-selling strategy where Delta will allow us to create a low-risk/high-return strategy. Keep in mind that this a low-risk, not a no-risk strategy so our position management arsenal must be mastered and implemented when indicated.

    Author: Alan Ellman

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