Selling Cash-Secured Puts: Part II – July 17, 2023
In our last blog publication, 2 put applications were discussed: traditional put-selling and the PCP (wheel) Strategy. In this week’s article, 3 more approaches will be reviewed.
Selling cash-secured puts: Part II methodologies
- Buying a stock at a discount
- Ultra-low-risk strategies
- Delta
- Implied volatility (IV)
Buying a stock at a discount: A real-life example with Micron Technology, Inc. (Nasdaq: MU)
The trade
- 2/21/2022: MU trading at $90.10
- MU is an eligible stock on our premium stock watch list
- No upcoming ER for the contracts expiring on 3/18/2022
- Set a limit order to buy at about $83.00 (example goal)
- Sell a CSP with a breakeven at about $83.00
The option-chain (MU trading at $90.15)
Initial put calculation results using the BCI Trade Management Calculator (TMC)
The 2 possible (non-adjusted) trade results are a 3.09%, 45.15% annualized 25-day return or the purchase of the shares at an 8.54% discount ($90.15 to $82.45)
Ultra-low-risk approaches
Delta
Using a deep OTM put strike with a low Delta (-0.10, as an example) will create an approximate probability of success. For example, using a Delta of -0.10 will create ana approximate probability of 90% that the option will not expire in-the-money or with intrinsic-value and therefore will not be subject to exercise.
Implied volatility
Using a mean or at-the-money implied volatility will allow us to create an approximate trading range for the stock or ETF during a specific a contract cycle.
Since IV stats are based on 1 standard deviation and a 1-year timeframe, the BCI Expected Price Movement Calculator can determine an approximate trading range for a specific contract cycle. In this example with DOW, we would sell a put with a breakeven price point near $54.93 and have an 84% probability that the put will not be exercised.
Discussion
One of the outstanding benefits of selling cash-secured puts (and covered call writing, as well), is that the strategy can be crafted to meet several different strategy goals and appeal to investors of a wide range of personal risk-tolerances. The past 2 blog presentations highlight 5 such distinct pathways.
Author: Alan Ellman