How to Enter & Calculate Rolling-Out-And-Down Cash-Secured Put Trades: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ) – January 09, 2023
When selling out-of-the-money (OTM) cash-secured puts, we calculate our initial time-value returns with this formula:
% return = Put premium/ (put strike – put premium)
When incorporating exit strategies into our strategy, we must properly enter these adjustments into our spreadsheets such that the calculations will be accurate and properly archived.
What is rolling-out a cash-secured put?
This is where we buy back the short put as expiration is approaching and immediately sell the same strike put option in the next contract cycle. We, typically, roll-out an in-the-money (ITM) strike.
What is rolling-out-and-down an OTM strike?
This is where we roll an OTM cash-secured put to a lower strike in the next contract cycle. This is a tactic we rarely take but it was one shared with me by a BCI member and I felt it would have educational value regarding how to enter and calculate such trades.
Rolling-out-and-down with QQQ
- 7/11/2022: QQQ trading at $290.00
- 7/11/2022: STO 1 x 7/13/2022 $283.00 OTM put at $1.22 (3-day trade)
- 7/13/2022: QQQ trading at $285.00
- 7/13/2022: BTC the (still OTM) $283.00 put at $1.50
- 7/13/2022: STO 1 x $280.00 7/15/2022 OTM put at $2.32 (rolled-out-and-down- another 3-day trade)
On the screenshot (top-to-bottom):
1. Enter the initial trade
2. On 7/13, when rolling out-and-down, exit the put with an initial and final return of 0.43%, 52.68% annualized based on a 3-day trade.
3. The adjustment section for the initial trade only shows the date of closure and the current value of QQQ. Yes, the put is still OTM, but we can use the ITM exit strategy from the dropdown since we usually do not roll-out an OTM strike. A note to this effect can be entered in the Trade Management Journal on the far right (example: “Rolled-out an OTM put”).
4. The final return for the 1st trade is the same as the initial return as the trade was originally structured.
5. The rolling-out aspect of the trade is entered as a separate trade either on the same spreadsheet or a new one dedicated to the new expiration date (this is how I do it). This is shown as the 2nd trade at the top of the screenshot.
6. Note that the put premium for the rolled-out trade is the net credit from closing the 1st trade and opening the 2nd ($2.32 – $1.50 = $0.82).
7. The initial returns of the rolled-out put trade are 0.29%, 35.74% annualized based on a 3-day trade and a purchase discount of 2.04%, if exercised.
Discussion
Since this series of trades has 2 different expiration dates, the best way to enter, calculate and archive the trades is to finalize the first trade with the initial and final calculations being the same and entering the 2nd expiration put trade on a different line or spreadsheet using current market value and the net option credit as the premium.
Author: Alan Ellman