Selling In-The-Money Cash-Secured Puts to Buy a Stock at a Discount – April 29, 2024
When we sell cash-secured puts, we have 2 possible outcomes. If unexercised, we generate cash flow or, if exercised, we buy the underlying security at a discount. This article will provide a blueprint as how to craft our put-selling trades, if we want to own the underlying stock or exchange-traded fund sooner rather than later, using in-the-money (ITM) put strikes.
Real-life example with DocuSign (Nasdaq: DOCU)
- 12/26/2023: DOCU trading at $60.66
- 12/26/2023: Sell 1 x 1/19/2024 (ITM) $62.00 put at $2.94
- Pre-stated goals (as an example) is 2% – 4% for both initial time-value return and potential share purchase discount
DOCU option-chain on 12/26/2023
The ITM $62.00 strike displays a bid price of $2.94.
DOCU initial calculations using the BCI Trade Management Calculator (TMC)
- The spreadsheet shows a 25-day trade, if taken through contract expiration (red circle)
- The initial unexercised return is 4.98%, 72.68% annualized (brown cells)
- If exercised (share price moves above the $62.00 strike), the purchase discount is 2.64% (pink cell)
- Exercise is more likely when using ITM strikes compared to ATM and OTM strikes
Discussion
Selling cash-secured puts results in 1 of 2 outcomes. Either the trade will generate cash flow or shares will be purchased at the agreed upon sales price, at a discount from the original price when the trade was initially executed. ITM put strikes are more likely to be exercised, compared to ATM and OTM strikes.
Author: Alan Ellman