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  • Rolling-Up Our Cash-Secured Put Trades: A Real-Life Example with Etsy, Inc. (Nasdaq: ETSY) – January 3, 2023

    Jan 03, 2023 Uncategorized Comments Off on Rolling-Up Our Cash-Secured Put Trades: A Real-Life Example with Etsy, Inc. (Nasdaq: ETSY) – January 3, 2023

    When we sell cash-secured puts, we are seeking to generate cash flow or buy securities at a discount. It is generally written that the maximum return for these trades is the put premium. This article will demonstrate how multiple income streams can be achieved by implementing our exit strategy arsenal and, thereby, achieve higher returns than the initial put premium.

    What is rolling-up a cash-secured put?

    When share price accelerates, the out-of-the-money (OTM) put can be bought back (closed) and a new OTM strike opened at a net option credit, creating an additional income stream. In this article, rolling-up is accomplished 2 times during the 24-day trade.

    Real-life 24-day trade with ETSY (July 2022 contracts)

    • 6/22/22: ETSY trading at $74.20
    • 6/22/22: STO 1 x 7/15/22 $66.00 OTM put at $2.65
    • 7/6/22: ETSY trading at $85.04
    • 7/6/22: BTC 1 x 7/15/22 $66.00 put at $0.27
    • 7/6/22: STO 1 x 7/15/22 $75.00 put at $0.95 (roll-up #1)
    • 7/8/22: ETSY trading at $88.75
    • 7/8/22: BTC 1 x 7/15/22 $75.00 put at $0.28
    • 7/8/22: STO 1 x $80.00 put at $0.69 (roll-up #2)
    • 7/15/22: ETSY trading at $82.50 at expiration as the $80.00 put expires OTM and worthless

    Graphic representation of ETSY initial and rolling-up trades

    Initial unrealized time-value returns on 6/22/2022

    Using the BCI Trade Management Calculator, the red arrow shows a cash return of $265.00 per-contract or 4.18% initial, 63.62% annualized based on a 24-day trade. The exercised or breakeven price point is $63.35.

    Final realized returns after contract expiration

    ETSY: Final 24-Day Returns
    • Realized cash returns increased from $265.00 per-contract to $374.00
    • 24-day return increased from 4.18% to 4.70%
    • Annualized returns increased from 63.62% to 71.48%

    Any disadvantages of rolling-up cash-secured puts?

    • As we roll-up to higher strikes, there will be a need to add additional cash to the trades to secure those higher strike puts
    • There will be less protection to the downside so we must be sure we still roll to an OTM put strike

    Discussion

    The statement that the maximum return when selling cash-secured puts is the initial put premium is a myth as debunked in this article. We must be prepared for all exit strategy opportunities when share price changes significantly and understand the pros & cons of these trade executions.

    Author: Alan Ellman

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