Using the BCI Expected Price Movement Calculator to Sell Weekly Cash-Secured Puts – December 18, 2023
When selling cash-secured puts, a common strategy goal is to avoid exercise and having shares put to us. This means selling out-of-the-money (OTM) strikes that have a low probability of exercise or expiring in-the-money (ITM) or with intrinsic-value. One way to quantify an expected trading range of a security is to incorporate its implied volatility (IV). IV stats are based on 1 standard deviation and an annual price movement. There needs to be an adjustment formula to generate a trading range for a specific contract expiration. This article will utilize a real-life example with Crocs, Inc. (Nasdaq: CROX) to establish a trading range and select and calculate initial returns for a weekly put option sale.
CROX on the BCI Premium Stock report on 7/21/2023
- Weekly options are available (brown cell)
- The next earnings report is on 8/3/2023 (yellow cell)
- The at-the-money (ATM) IV is 39.7 (purple cell)
CROX projected trading range between 7/21/2023 and 7/28/2023 using the BCI Expected Price Movement Calculator (available for free to BCI premium members and for sale in the BCI store.)
- After entering data from the BCI Premium Stock Report into the white cells, calculations appear in the yellow cells
- The low end of the range is $117.85 (our target strike price)
- Based on a standard deviation bell curve, the probability of success (avoiding exercise) is 84%
- Initial calculations must meet our pre-stated initial time-value return goal range
CROX put option-chain on 7/21/2023
- The $118.00 put strike aligns with our $117.85 strike price
- The option-chain shows a bid price of $3.10
- Expecting high initial returns due to the high IV (39.70%)
CROX initial trade calculations using the BCI Trade Management Calculator
- The initial 8-day time-value return is 2.70%, 123.10% annualized (brown cells)
- The breakeven price point is $114.90 (yellow cell, red arrow)
- The discounted purchased price, if exercised is $114.90 or a discount of 8.45% (purple cell)
Discussion
Weekly put options can be sold, generating significant annualized returns, while still crafting high probability of success trades using IV. This can be applied to longer-dated options as well. The BCI Expected Price Movement and Trade Management Calculators will be extremely helpful in crafting and calculating these trades.
Author: Alan Ellman