Cash Secured Puts

This is just like selling a covered call, but the opposite. In reverse.

If this looks familiar, then good. Especially if you’re a new investor and you’re able to look at basic charts and immediately interpret the data. It’s a good feeling, isn’t it?

So what is a PUT? (You can skip this section if you just want to know which buttons to press).

A put is a contract representing 100 shares of stock, granting the owner of the contract the right to sell those shares at a specific price, on or before a specific date. (It’s a lot like Futures). The cost of the put, the premium, is derived from a set of variables, with volatility being the most significant. High volatile stocks will have higher premiums. Blue chip stocks have very low premiums.

iExample!

NOK is trading at $4.14 as of market close Friday. I suspect the price is going to be back down to $4.00-4.05 late Tuesday or early Wednesday. So on Monday, April 19th 2021, I’m going to buy puts at a $4.50 strike price and….what?

Strike Price is price you agree to sell your shares at.

Okay, so…no you didn’t need to buy any shares yet. Because if you’re just going to resell them…yeah, exactly.

So on Monday you buy puts at a $4.50 strike. The premium is $0.34 (this will change fast when the market opens, so it’s important to have our orders queued up ahead of time). So I could spend $414 for 100 shares, OR spend $34 for the Put option contract.

The primary difference at this point, is that we could lose the $34. Technically, we did lose it. It’s gone forever. So why not just buy the shares? I understand the confusing part. Buy the shares and sell them for $4.50. But that can’t happen because the price went down. But if the price goes up, your option contract becomes worthless. Your total risk on this trade is $34, whereas your risk would be potentially infinite. In this example it would only be about $9-10 … that’s dumb unless…. yep, but that’s shorting and we’re not doing that today.

I got you fam. So we put in the $34. When the price of NOK drops to our $4.00 target, we’ll sell the contract for probably $50. NOK doesn’t have a lot of volatility, and our expiration date is this Friday.

So we make $16. That’s just shy of a 50% gain. And we didn’t even need $25,000 to unlock margin trading.

When would someone sell a put? And then do you buy it back?

You actually can buy back contracts, and there’s reasons you might want to. Say maybe the price goes up (you want the price to go up this time) but not all the way to the strike. You really don’t want the shares, so you buy back the contract. So instead of $16 you made $12 or something. The range in which you can utilize this tactic obviously depends on the price spread you’re playing in.

Spreads are a thing. Not doing them right now.

Okay so this might sound counter-intuitive, but to sell a put, you need to put up some money. Some collateral. So that if the price moves below the strike at expiration, or you get assigned, the buyer of the contract will be able to sell their shares represented by the put secured with cash,

The Cash Secured Put!

Pick a stock you would like to own, or wouldn’t mind owning . If you sell a $1300 put, and the price goes to $8.00/share, you will have paid $12.10 or so per share (I’m just guessing at what the premium would have been). If you don’t want the shares, you have decisions to make. I’d say just write OTM calls until the price comes back, but anyway.

Let’s buy some WKHS. The current price is $13.13. I’m cool with paying $13, and I’m confident the price is going up. I put down $1300, sell the put, and collect a $0.70 premium. Come Friday the option expires, and my $1300 is returned to me. Not bad, not bad.

But we can do better.

RIOT is closed on Friday at $44.13. It’s safe to assume the price is going to rise. The premium on put options expiring 4/23 is $3.30. Some platforms don’t let you queue up options orders before market open. Surprisingly, Robinhood does. So we put in $4400, collect $330, and get our money back on Friday.

The only real risk we’re taking is that RIOT rises more than $3.30/share. Which is likely.

What if we want more time to work with, so we can exit our position if things start looking rough? We just pick an expiration further out. If we change our expiration to 4/30, we the premium goes to $4.90

Not bad, not bad. But I would rather just do $3.30 this week and $3.30 again next week.

How about CMRE? $10.04 on market close Friday. Nice. Options trading monthly, We’re confident on $10 being the new normal for this stock, so we go ahead and put up $1000, collect $60 premium. The price would have to drop to $9.40 before we lose money on the shares (unless we already spent the $60). Most likely we’re just going to take the 6% return for the month.

TLDR

Open Robinhood

Find CMRE

Trade

Trade Options

(highlight Sell, Put, May 21. These should all be White).

Confirm Trade

Monday you’ll collect your 6% return.