Is It Difficult To Sell Deep In The Money Put Options
Selling Cash-Secured Puts is a strategy similar to, but non precisely the same as, covered call writing. It is generally used to generate cash-flow as a standalone strategy but as well can be implemented to buy a stock at a discount or used in conjunction with covered call writing (PCP strategy). During the COVID-19 crisis in September 2020, interest rates were most null as the x-yr Treasury yielded well below 1% and 1-year CDs were well-nigh 0.1%. This article will highlight a low-risk put-selling strategy that tin can be used to generate an eighteen% annualized render.
Selling cash-secured puts to generate cash flow
Nosotros select an elite-performing stock and sell out-of-the-money (OTM) puts. Our broker will crave a certain amount of greenbacks available to complete the trade should the put-buyer exercise the choice and the shares are put to us. The amount of cash required is set by this formula:
[(put strike – put premium) 10 100 x # contracts]
Put-sellers looking to generate greenbacks period by and large practice non want to be share owners but must be willing to take the shares if the options are exercised and then can either keep the shares, write covered calls or sell the shares. The options can also be bought back (buy-to-close) to avoid practice and assignment.
Strategy proposal: A real-life instance with Apple Inc. (NASDAQ: AAPL)
Apple Reckoner has been a top-performer in 2020 and nosotros will look to sell weekly deep OTM puts to generate an 18% annualized return. We volition circumvent the 4 weeks of earnings reports. We will look for strikes with Deltas below -0.10 creating scenarios where at that place is less than a x% probability of the options expiring in-the-money.
AAPL put choice-chain on 9/xiv/2020
AAPL: Put Option-Concatenation on 9/14/2020
Annotation the following:
- With AAPL trading at $112.01, the deep OTM $101.25 put generated a bid price of $0.38
- The Delta of the $101.25 strike was -0.0999
- Length of merchandise is 5-days
Calculations to run across strategy goals
Permit'due south assume we sell v contracts. The banker greenbacks requirement formula is:
[($101.25 – $0.38) x 100 x 5] = $50,435.00
The time-value dollar return for the 5 contracts is:
$0.38 10 100 ten 5 = $190.00
The 1-calendar week percentile return is $190.00/$50,435.00 = 0.376%
This annualizes to a 48-week return of 18.08%
Delta considerations
With the Delta less than 10%, exercise is possible but unlikely. We still must have a plan in place if share cost declines below the put strike.
Position management considerations
If share toll moves beneath $101.25 by expiration, we tin can take the post-obit deportment:
- Buy dorsum the put (could represent a gain or loss)
- Ringlet the put to the post-obit week
- Let consignment and retain the stock for the long-term
- Allow consignment and sell the stock
- Allow assignment and write a covered call
Notation: AAPL closed at $106.84 on expiration Friday as the puts expired worthless, freeing upwardly the greenbacks to secure additional puts on Monday September 21st.
Discussion
Option-selling strategies tin can be crafted to meet a myriad of trading goals and personal risk tolerances. Past selling weekly deep OTM cash-secured puts on elite-performing securities, we create low-risk opportunities to generate significant annualized returns. This can be particularly useful in low-interest charge per unit environments. The office of Delta must be understood and reasonable exit strategy plans must also be in place.
For more information and tools for selling cash-secured puts
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Source: https://www.thebluecollarinvestor.com/selling-deep-otm-weekly-cash-secured-puts-to-generate-substantial-annualized-returns/
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