SMB CAPITAL OPTIONS TRAINING PROGRAM

SESSION FOURTEEN CASH SECURED PUTS

CASH SECURED PUTS PROGRAMS VERY SIMILAR ECONOMICALLY TO COVERED CALLS. MECHANICS VERY DIFFERENT HOWEVER. STARTING POINT IDENTICAL TO COVERED CALLS— SELECT LARGE CAP MATURE EQUITIES, LIQUID OPTIONS CHAINS WHERE INVESTOR HAS BULLISH BIAS. NAKED PUTS SOLD OVER AN EXTENDED PERIOD OF TIME (12 MONTHS OR MORE) FOR THE SAME EQUITY. CAPITAL EQUALS 100 x STRIKE PRICE OF PUT SOLD BECAUSE TRADER WILL BE ASSIGNED STOCKS FREQUENTLY DURING THE PROGRAM.

Trade Structure—Cash Secured Puts SELECT LARGE CAP STOCK WHERE TRADER HAS BULLISH BIAS. MONDAY AFTER EXPIRATION SELL PUT WITH HIGHEST TIME PREMIUM—It is possible that the put will be slightly in the money. ALLOW PUT TO EXPIRE. IF THE PUT IS IN THE MONEY ALLOW THE STOCK TO BE ASSIGNED.

If stock is flat or rallies…. Put expires worthless. Pocket the premium—you win. Move onto next Monday after expiration and sell next month’s put, with the greatest time premium.

If put expires in the money …. You are now long stock. Sell Straddle with greatest time premium on Monday after expiration (allows substantial time premium to repair loss from sell-off). This straddle will be in the money on one side or the other. Allow that straddle to expire. If stock rallies, call side of straddle will expire in the money and long stock will be called and your trade will involve no long stock for the time being. Short side will expire worthless. However, if stock has sold off further, you will be assigned a second lot of long stock….

Once assigned the second long lot…….. Begin each Monday after expiration to sell 2 lot calls with greatest time premium against the long stock. Eventually stock will rally and the calls will expire in the money causing them to be assigned and the long stock will be removed from you portfolio. At that point, return to the monthly process of selling long puts with highest time premium on the Monday after expiration. This program over time will often outperform a long stock portfolio. Remember, this is a bullish trade. If trader is not correct about the portfolio’s overall prospects, the returns may be inadequate or negative.

COSTCO Cash Secured Put Program

Initiate with short ATM put

Put expires ITM………….

…..so stock is assigned

ATM straddle sold

Stock will be called as short call portion of straddle expires ITM

With stock assigned, new short initiated ATM.

New short expire ATM

Next cycle begins.

Put expires ITM, stock to be assigned.

With stock assigned, next month’s straddle initiated

Second level adjustment triggered.

Second lot assigned, double short call position initiated ATM

Long shares to be called

Trade concluded after six months

CASH SECURED PUTS Economically a cash secured put IS a covered call so the same bullish mindset should be present when entering either trade. Good idea to diversify stocks as you won’t be right about all of the equities. Might, for example, separate capital equally between 10 stocks you like weighting them equally from a capital standpoint. Use your favorite bullish indicators to decide portfolio and stick with it for a year—Best 10 of IBD 100, Value Line, various technical indicators and so forth . Pick max loss and stick to it--25% is recommended. If trading with 10 stocks and you are assigned a second lot of stock, delete one stock from remaining 9 stocks for succeeding month so total capital level is not increased. Many who trade with this technique have experienced enhanced returns and less risk than a simple buy and hold approach.

Homework Utilizing Optionvue’s backtrader module, select any large cap stock in any January over the last five years that could have reasonably been considered at the time to be a “buy” (even if it later proved to be a loser). Undertake a cash secured put program for that stock as laid out in this session. Set up an account in Optionvue for that trade and compare the final twelve month results to simply owning the shares outright. Do the same for two other stocks, starting two different years.