Exit Strategy Choices After Exercise of a Cash-Secured Put: A Real-Life Example with Etsy, Inc. (Nasdaq: ETSY) – June 21, 2022
How do we manage our trades after allowing exercise of a cash-secured put? This gameplan must be in place prior to entering the put trade. In this article, I will compare 2 strategy choices, writing a weekly covered call or implementing the stock repair strategy. I will be highlighting a real-life trade taken from one of my option-selling portfolios.
Initial weekly put sale with ETSY
On 1/3/2022, with ETSY trading at $213.55, I sold 2 x 1/7/2022 $195.00 cash-secured puts generating $160.00 in time-value premium. On 1/5/2022, the Fed announced a hawkish approach to interest rate policy and that caused a severe market decline. ETSY declined to $185.85, and I allowed the $195.00 puts to be exercised. On Monday, 1/10/2022, the market was extremely volatile, so I decided to wait another day before making a trade decision with ETSY.
Exit strategy considerations after exercise of a cash-secured put
- Retain the shares in a longer-term buy-and-hold portfolio
- Sell the stock at a capital gain/loss
- Write covered calls
- Use the Stock Repair Strategy to lower the breakeven price point
This article will detail the last two. I ultimately decided to write covered calls
Writing a weekly covered call resulting in an annualized return of 23.5%
Price chart of ETSY in early January 2022
What is the goal for the stock repair strategy?
We want to lower our breakeven price point ($195.00 for this ETSY trade) without adding additional cash to the trade. This is accomplished by purchasing 1 near-the-money call option and funding that debit by selling 2 out-of-the-money covered calls.
ETSY option-chain for the stock repair strategy
- Buy 1 x $185.00 call at $4.45
- Sell 2 x $190.00 calls at $2.32
BCI Stock Repair Calculator results
The breakeven price point was reduced from $195.00 to $189.91 per-share (red arrows) without adding additional cash to the trade. As a matter of fact, we received a $19.00 per-contract net credit (green arrow).
Discussion
After exercise of a cash-secured put, we have several exit strategy opportunities. Our plan must be in place prior to entering the initial trade. Of course, that plan can change if new information comes out. In the case of ETSY, my plan was to write covered calls if the put trade was exercised. If the $195.00 call is exercised, I will have generated a nice 2-week return on the option side.
Author: Alan Ellman