Over the course of this week, I will be going over several different strategies for SPX in this Volatile Market, and a cash secured put is the first that I will discuss in this post.
Even with the rally Friday (Jan 23), the markets are still down considerably in the last 4 weeks. SPX closed Friday at around 1907, up around 37 points for the day! Dec 29, SPX closed at 2078.
We are still 171 points away from the Dec 29 close. That’s about 8 ½ % from those lofty levels. With that as perspective, I think cash secured puts might be attractive here in certain stocks.
Cash secured puts are the same strategy as covered writes, but not as popular. SPY closed Friday at $190.52 up an amazing $3.83 or 2% for the day. I will use the February expiration in my example.
I will sell 1 Feb 180 put for $1.50. If SPY closes above $180 by February expiration, Feb 19, I collect the entire premium of $180.
If SPY closes under $180 by February expiration, I obligate myself to buy the SPY ETF at the short strike of $180 minus the premium of $1.50 or $188 ½.
That’s about 6% lower than the current SPY price. As of Friday’s close, we are already down about 8 ½% in SPY since Dec 29.
This Strategy Accomplishes 2 Objectives
Income and accumulation of ETF’s and Stocks at discounted prices. This strategy is for those who like the market or certain stocks over the next 6 months to 1 year.
The way I chose the strike for this example was to sell a strike with a 20 delta.
What does that mean?
It means that there is only a 20% probability that SPY will be under $180 by February Expiration, which is Feb 19. That also means there is an 80% probability I will collect the premium of $1.50 I sold.
Many stocks have been down 8-20% in the last 4 weeks. Make a shopping list of stocks and ETF’s that you like at the current levels.
Then go and look at an approximately 30 day option expiration and evaluate a 20 delta put for a possible cash secured put.
What does the term cash secured put mean? It simply means you have enough capital in your account to buy the stock if you get assigned on the short put.
Cash Secured Puts
What’s the downside to cash secured puts? If the stocks or ETF’s immediately soar, the premium on the short put won’t equate with the appreciation you could have had by just buying the ETF or Stock.
I like this an long term Income and stock accumulation strategy and would recommend selling cash secured puts in stocks on a regular monthly basis.
Is it scary to sell puts after a correction? Absolutely, but that is when some of the best opportunities arise.