A 6-Income Stream Monthly Cash-Secured Put: A Real-Life Example with InMode Ltd. (Nasdaq: INMD) – March 21, 2022
Is it true that when we sell cash-secured puts, our maximum return is the initial put premium? Come on now, we’ve all heard and read that statement. This article will demonstrate how I generated a 6-income stream series of trades by executing, and then managing, a 10-Delta Monthly cash-secured put with INMD from 9/20/2021 through 10/15/2021.
What is a 10-Delta Monthly cash-secured put?
When we sell a cash-secured put, we are agreeing to buy the option holder’s shares at the strike price by the expiration date. In return, we are paid a cash premium. The broker will require us to place a certain amount of cash [(put strike – put premium) x # shares] into our cash account in the event that the option is exercised.
10-Delta means the strike is deep out-of-the-money (lower than share price) and approximates a 90% probability of not being exercised… it is a defensive approach to option-selling,
Exit strategies for cash-secured puts
There is a myriad of exit strategy opportunities that may arise during our contracts, and we must be prepared to act, when appropriate. During this particular contract, INMD appreciated in value significantly and also completed a 2-for-1 stock split.
Rolling-up and still retaining the 10-Delta status
The Delta of puts is signified with a minus sign because the put value is inversely related to share value. As share price rises, put value declines. This means that we can frequently buy back the short put at a lower price and re-sell a higher strike for a net credit while still retaining our required 10-Delta status.
Broker screenshot of a rolling-up trade with INMD on 9/20/2021
The put was sold for $95.00 per-contract and then rolled-up for an additional net credit of $47.00 per-contract.
Summary of rolling put trades generating 6 income streams
Post exit strategy calculations
- Total option credits = $1050.00
- Total option debits: $530.00
- Net option credit: $520.00
- Last cash required amount (4 contracts): $29,480.00 –[($75.00 x 400) – $520.00]
- 1-month return: $520.00/$29,480.00 = 1.8%
- Annualized return: 21.1%
- Exit strategies doubled initial annualized returns (10.5%)
Discussion
- Selling deep OTM cash-secured puts with Deltas of 10 or less creates an ultra-conservative approach to option-selling
- 10-Delta strikes approximate a 90%+ probability of success
- Returns will be lower than traditional put-selling in exchange for greater downside protection
- Exit strategies remain an integral part of the strategy approach
- Rolling-up while still retaining our 10-Delta status is a viable exit strategy when share price accelerates
Author: Alan Ellman