With the recent plunge in the equity market, traders are often puzzled with what to do next. One strategy to employ, if you wish to get long a stock, is to sell cash secured puts or put verticals below the market at a price that you wish to buy the stock.
This is a good way to collect premium and perhaps acquire a stock at a low price.
Let’s go through an example. NFLX over the recent months has been on a meteoric rise up until it’s split a couple of months ago.
Since then it has settled steadily above 100 dollars, except for the large down move day that took it down into the 80’s intraday.
The stocks then bounced back up over a 100 where it has been since.
With NFLX trading around 100 dollars per share today, a trader looking to get long at a lower price may wish to consider selling puts at the Oct. 80 strike.
The further out in time you sell this put, the more premium you would take in. Currently the trader could take in premium around $3.50 for selling the October 80 put strike that is 43 days away.
If you sold one Oct 80 put contract for $3.50 you would effectively be able to buy Netflix for $76.50 if you were assigned the stock. To be assigned, Netflix would have to trade below 80.
If Netflix does not trade below 80 between now and the October expiration you keep the premium you collected. Of course, if NFLX plunged much lower than 80 you could have a loss.
One way to cut margin and minimize losses is to sell a put vertical instead where you may for example sell one 80 Oct put for $3.50 and buy one Oct 60 put for $1, there by taking in $2.50 in net premium but also limiting your losses if NFLX were to go below $60 a share.
The cash secured put strategy is applied whenever you are bullish a particular stock or would be if it dipped to a certain price.
Sometimes when there are large market down moves, many stocks go lower just because the market went down and not because of any inherent problems of their own.
If you have stocks that you like, you may wish to scan them and see if any are nearing an attractive entry point where you could use the cash secured or put vertical strategy.