Selling Cash-Secured Puts: Multiple Applications: Part I – July 10, 2023
Selling cash-secured puts is a low-risk option-selling strategy where the seller undertakes the contractual obligations to buy shares at the strike price, by the expiration date. In return for undertaking this obligation, an option premium is collected. There are many ways these trades can be crafted, and this article will provide an overview of several of these applications. This is part I of a 2-part series which will be concluded in the next blog publication.
Practical applications of selling cash-secured puts
–Traditional put-selling
–PCP (wheel) strategy
–Buy a stock at a discount instead of a limit order
–Ultra-low-risk put strategies
- Delta
- Implied volatility
Traditional put-selling
After selecting an elite-performing stock (or ETF), an out-of-the-money cash-secured put is sold, agreeing t buy the shares at the lower strike by the expiration date. Here are the option-chain and initial trade entries & calculations using the BCI Trade Management Calculator:
- Yellow cells: Breakeven price points
- Brown cells: Initial 29-day returns and purchase discount amount, if exercised
The PCP (Put-Call-Put or “wheel”) Strategy
Strategy protocol
- Sell an OTM cash-secured put
- If no exercise at expiration, use the freed-up cash to then secure another cash-secured put
- If the put is exercised, write a covered call, ITM for a defensive posture or OTM for a more aggressive position
- If the covered call is not exercised at expiration, write another covered call for the next contract cycle
- If the covered call is exercised, use the cash from the stock sale to then secure another put sale
Graphic representation of PCP
Discussion
There are multiple ways we can implement selling cash-secured puts. This article provided an overview of 2 such applications. In our next publication, buying a stock at a discount and 2 ultra-low-risk methodologies will be discussed.
Author: Alan Ellman