Selling Cash Secured Puts Recent Emphasis and Popularity

[Ready-4-ER-at-14]

A little dark topic but I have noticed a barrage of make money by selling cash secured puts offers lately and I have also noticed a lot of people here on this site doing it. Also a lot of us are anxious to get back in the market for a hoped for relatively quick recovery. And getting a high return on idle money is a very attractive idea to me.

My thought was if the serious players like the fed are really going to sell off a lot of their stock might this be a good means for them to do it, ie pre buy index puts and then flood the market with sell orders for index contained stock. I suppose the individual bank trading units could then buy back right about when the fed quit selling unless there are specific rules against that.

I was taught to sell puts buying even further out of the money puts or further out in time further out of the money puts to hedge the potential loss. I have no knowledge of any shenanigans nor am I suggesting anything is amiss i just wonder if this is riskier than it seems especially if the market went into a free fall just as your option obligations came due. I am not sure you can buy put options to close positions if a market lock down occurs.

I hope this black swan event never occurs. Just want people to consider and know what worst case scenario might be on any trade. And if I don't understand the risk properly I am open to learn.

 

[Sunset]

A little dark topic but I have noticed a barrage of make money by selling cash secured puts offers lately and I have also noticed a lot of people here on this site doing it. Also a lot of us are anxious to get back in the market for a hoped for relatively quick recovery. And getting a high return on idle money is a very attractive idea to me.

My thought was if the serious players like the fed are really going to sell off a lot of their stock might this be a good means for them to do it, ie pre buy index puts and then flood the market with sell orders for index contained stock. I suppose the individual bank trading units could then buy back right about when the fed quit selling unless there are specific rules against that.

I was taught to sell puts buying even further out of the money puts or further out in time further out of the money puts to hedge the potential loss. I have no knowledge of any shenanigans nor am I suggesting anything is amiss i just wonder if this is riskier than it seems especially if the market went into a free fall just as your option obligations came due. I am not sure you can buy put options to close positions if a market lock down occurs.

I hope this black swan event never occurs. Just want people to consider and know what worst case scenario might be on any trade. And if I don't understand the risk properly I am open to learn.

I look at selling cash secured PUTs as a way to buy stock, when I think the price is higher than I want to pay.

There is danger in this in varying ways for me.
I sell the PUT and the stock goes up and sure I get some $$ but don't own the stock, some would consider that a win, but I'm still "stuck" with the cash.
The other danger is what most folks think: I sell the PUT, the stock falls and I'm the new owner of stock.
This just happened to me.

I sold a 2 day PUT QQQ Feb 25 2022 337 Put at $4.25 as the day I sold it I didn't really want to pay $337 for the stock as I was unsure if $337 was a good price.
I considered the $337 - $4.25 as a good price as its like saying should it fall below $337 I have some cushion to the price I paid.
I'll be the new owner at an effective $333.75 / share, which is better than having paid $337.

If a market lockdown occurs, due to freefall, I'd rather have the put (stock) at $333.75 , than the stock at $337. Both won't be able to be sold.

 

[Ready-4-ER-at-14]

Thanks for a response sunset. I had looked at possibly selling puts against some large liquid index ets like QQQ or DIA. In fact I found several funds that are called put selling funds and they seem to sell monthly at or near the money puts. One I chose to use was QYLD which specializes in selling puts on QQQ.

All the put selling etf or funds I found seemed to offer a huge monthly dividend but many times the cash value of the fund which sort of represents the free cash to secure the put often declined over time. and then seemed to soar for a bit when the trades were cash cows.

I took the cowards way out perhaps by buying some of that fund.

Per memory it seems that put selling funds generate a bit more income than call selling fund. I assume it varies some since volatility increases in down markets more so than in up markets.

One specific question about your final statement though:
"If a market lockdown occurs, due to freefall, I'd rather have the put (stock) at $333.75 , than the stock at $337. Both won't be able to be sold."

I don't remember reading specifically what happens to option settlements in the characteristics of options thing we need to have read to get options approval in extreme situations but it may be there if the stock market were closed for a couple of days.
Supposedly in the money options are exercised automatically if I remember right per brokerage contracts even if they are just marginally in the money . Maybe the compliance offices sells stuff or bill customers but seem to remember it is at their discression as to how to protect themselves and the clearing firm and other person with the option ownership. In other words they could sell ibm instead of xerox to cover the margin loss. What i don't know is could they sell ibm and xerox at the very bottom for $1 before using the cash sitting there. I would hope not. Contracts with many pages scare me a little.

 

[Sunset]

I always have the cash available to pay for the PUT stock, as I am too timid/careful to do naked PUT's because of my fear of a free fall and the forced liquidation of my stocks.

My belief, is if I have cash to pay for the PUT stocks, the broker has to use the cash. They cannot sell my stock holdings to raise cash, as long as I have enough already present.

I also don't have open Margin, so there is no issue of a margin call combining with the PUT action.

 

[Ready-4-ER-at-14]

Thanks for a thoughtful reply and the exact situation of your selling put options, I have a margin account although I never use the margin. I'd be curious how others deal with this or maybe I am the only one concerned about seemingly unlikely scenarios.

 

[jldavid47]

I'm not sure why you consider this a "dark topic." Selling cash secured puts is a legitimate strategy for accumulation shares of stock. If the option never gets assigned then you have still earned more on the tied-up cash than you would have otherwise.

If the stock declines beyond the price you were willing to pay you can always do a horizontal roll to bring in a bit more premium and lower your ultimate net purchase price. I've been doing this on big cap dividend paying stocks for a couple of years.

My advice is to pick a price and live with it. Roll when it makes sense and take the stock when it makes sense. One thing to remember is selling a cash-secured put has exactly the same risk profile as a covered call, but one thing nice about selling cash secured puts is that if you do it on a day of expanded volatility (like this morning) you can get more premium (due to more "fear" - i.e. implied volatility) and if the stock rises volatility will fall and you can realize your gains on the put faster. If the market keeps declining, well, then it starts to work against you but you have that extra buffer because of the jacked-up premium.

 

[pb4uski]

...My thought was if the serious players like the fed are really going to sell off a lot of their stock ...

The Fed doesn't own common stock.

https://www.federalreserve.gov/monetarypolicy/files/balance_sheet_developments_report_202111.pdf

 

[maestro]

The Fed doesn't own common stock.



https://www.federalreserve.gov/monetarypolicy/files/balance_sheet_developments_report_202111.pdf

Agree, but do they "indirectly" own (control) stock that they can sway through their "clients"? With the market move we saw today, one not seen but twice before in history, something tells me the Fed is 'involved' with equity markets. Call me a conspiracist.

 

[Sunset]

Agree, but do they "indirectly" own (control) stock that they can sway through their "clients"? With the market move we saw today, one not seen but twice before in history, something tells me the Fed is 'involved' with equity markets. Call me a conspiracist.

I don't see any gov't hand in the market movement even today.

Today's dramatic market movement of a severe drop in the beginning totally understandable as WAR just started. After so much talk about it being possible, it happened in a BIG way.

So the drop/opening market made sense.

Later, the rise was caused by many factors, a couple are:

1. People eager to buy on a dip, figuring it is in correction range, so will be higher in 6 months.
2. While WAR is bad for Ukraine, and threatening in various ways to Europe, it really has zero immediate to medium long term effect to many/most folks over here. We don't need Russia Oil/Gas, or any of their Grains.

 

[pb4uski]

Agree, but do they "indirectly" own (control) stock that they can sway through their "clients"? With the market move we saw today, one not seen but twice before in history, something tells me the Fed is 'involved' with equity markets. Call me a conspiracist.

I think you have too much time on your hands.

 

[Ready-4-ER-at-14]

Why I considered this a dark topic:

I was questioning a popular investing technique that I thought could have unforeseen risks in weird situations.

Any talk about market manipulations by what ever source is controversial although it is common knowledge that interest rates (fed). silver (hunt brothers), gold (price fixing then confiscation), crude oil (releasing reserves, buying for strategic reserve during shortages), cost of goods and income (wage and price control), cost or rent/ housing (rent control)

I do appreciate learning that the fed does not directly own stock. I have heard and read numerous mentions of the fed owning securities in its portfolio and I though of that in the generic inclusive manner. Certainly affecting lending rates affects PE's and moves stock prices.

Semantics is important but also is cause and effect. A person moves a lever, the lever moves a chain, the chain moves a flapper up. Did that person not flush the toilet?

I was educated by your link about the fed ty for that. They are into numerous things I did not know about. They are both secretive and perhaps paranoid as well.

I say this as my son had to take pictures of various columns for a project in grade school maybe 25 years ago. The teacher gave a list of building with specific types of columns.
Not like you could do a google search and print off a pic back then.

We parked across the street so he could take a picture of the front of the building from across the street and were chased off by a very angry armed guard screaming saying we could not take a picture of the building. No offense but f**k him and his employers. Don't own an opulent palace prominently displayed in the center of a city that mere mortals should not gaze upon even if they have special federal powers and are private autocrats. So I suppose it is easy for me to assume they manipulate anything they can. What they can manipulate legality I haven't a clue but with enough exceptions and rules any one or any organization can do what others would be jailed for.
Think of soldiers, cops, judges, lawmaker inside trading, home land security detention rules. Not saying any of this is bad intended, it is just complex enough to get messy in the real world and I'd rather not come under the exception rules as to human decency in treatment.

 

[Sunset]

Thanks for a thoughtful reply and the exact situation of your selling put options, I have a margin account although I never use the margin. I'd be curious how others deal with this or maybe I am the only one concerned about seemingly unlikely scenarios.

Just for fun, here is the play-by-play with icon expressions for my QQQ PUT option:

On Wed QQQ was about $337.25 when I sold a 2 day PUT QQQ Feb 25 2022 337 Put at $4.25.
By end of Wed QQQ was $329.42 (Turned out a bad time to have sold PUT).

Thursday: Russia invades, I look at the market in day QQQ opened at $318 (REALLY bad to have sold the PUT).
Thursday: End of day QQQ is $340.49 (Now won't get the stock, just keep the $425, ).
Friday: QQQ is up more, ~$345 (Would have been better to buy the stock directly as that would be Twice as enriching).

I won't close out the PUT, as it would cost me $34 due to left over value, will just let it expire. Some danger there that QQQ could suddenly fall $12 and leave me over-paying for QQQ.

But I can't watch it all day, and that is an issue I have with doing options. I don't want it to turn into W*rk...

 

[Ready-4-ER-at-14]

Good job! If I do this I would likely do QQQ or SPY . Any reason for picking the 2 day put to sell rather than the 7 day? Assume you did some yield per day analysis and as I remember time decay is most pronounced at the very end of the contract.

 

[aja8888]

With all this volatility, it's crazy to sell options. I like it when the markets are calm.

 

[foxfirev5]

I've PUT my money in the equity market and let it grow. My timeline extends beyond my life. What I need for expenses is allocated in CD's, Strips, I Bonds and TIPS. Works out to be about 50/50 with no room or time for options or other gyrations.

 

[NW-Bound]

With all this volatility, it's crazy to sell options. I like it when the markets are calm.

But, but, but people pay more when it's crazy.

It's just scary.

 

[Sunset]

Good job! If I do this I would likely do QQQ or SPY . Any reason for picking the 2 day put to sell rather than the 7 day? Assume you did some yield per day analysis and as I remember time decay is most pronounced at the very end of the contract.

I picked the 2 day instead of picking the 1 day as the 2 day gave a much higher return for the same strike price.
I didn't want to go longer like 5 days or more as that was over the weekend. Things are so volatile I'm totally avoiding long periods.

Lastly, it only turned out OK (but not great) as the stock went up. However I would have made more just buying the stock.

 

[NW-Bound]

Just for fun, here is the play-by-play with icon expressions for my QQQ PUT option:

On Wed QQQ was about $337.25 when I sold a 2 day PUT QQQ Feb 25 2022 337 Put at $4.25.
By end of Wed QQQ was $329.42 (Turned out a bad time to have sold PUT).

Thursday: Russia invades, I look at the market in day QQQ opened at $318 (REALLY bad to have sold the PUT).
Thursday: End of day QQQ is $340.49 (Now won't get the stock, just keep the $425, ).
Friday: QQQ is up more, ~$345 (Would have been better to buy the stock directly as that would be Twice as enriching).

I won't close out the PUT, as it would cost me $34 due to left over value, will just let it expire. Some danger there that QQQ could suddenly fall $12 and leave me over-paying for QQQ.

But I can't watch it all day, and that is an issue I have with doing options. I don't want it to turn into W*rk...

I do things a bit differently than you do.

First, my options are further out-of-the-money than your example (337 strike price when the stock is at 337.25). My strike price is usually 1 to 2% OTM, and one to two weeks out.

Secondly, I am prepared to get the option assigned. I am OK with selling the stock at 1 to 2% higher, and OK with buying the stock at 1 to 2% lower.

Because of the above, if I cannot monitor my portfolio due to travel or any reason, it's still OK. I can accept whatever outcome. I usually sell options in the morning, then look at them at market close or the next morning.

Thirdly, I only look at the options that I already sold for an indication of what I should sell next. What is done is done. If a stock advances more than I originally anticipated, I may ladder another covered call option at an even higher price. I do this when I have accumulated too many shares of this stock and want to lighten up this position.

Or I may sell a put at the next expiry to buy the shares back at the same price, if I believe in having this stock for a long-term position and this position is getting light and I want to buy it back.

 

[Sunset]

^^^ This QQQ PUT option was not normal, I actually wanted to buy the stock, normally I do price the option quite a few dollar off the current price, and take a lower premium.

 

[NW-Bound]

OK. I understand.

I much prefer each of my contracts covers about $5K worth of stock or cash. This means stocks priced at about $50/share, or less than $100/share, so that a round lot is of a reasonable value. This means Pfizer, Freeport McMoran, Schlumberger, Intel, etc...

I occasionally write contracts on high-priced stocks such as ASML which goes as high as $870. Having one contract on that, either call or put, makes me pay more attention to that single contract than the rest, and rightfully so. I really don't like that, as it detracts my attention from other things.

I much prefer to make many smaller bets and collect money from as many of them as possible. The problem is that many companies do not do stock splits like they used to. With Costco at $500/share, and Home Depot at $300+, each contract covers the value of a new car. It does not take many contracts before you are talking real money.

Perhaps not too many retail investors buy individual stocks anymore, hence the companies do not bother to split stocks. When everybody just buys the index, they do not care.

 

[pb4uski]

Agree, but do they "indirectly" own (control) stock that they can sway through their "clients"? With the market move we saw today, one not seen but twice before in history, something tells me the Fed is 'involved' with equity markets. Call me a conspiracist.

No, most banks don't own a lot of common stocks, maybe you should do a little research to determine the facts before you post absurd assertions.

 

[jr6035]

In this market, I don't want to add anything unless it's at my price. I have been doing weekly CSP's on HD and AAPL. I already own AAPL, and I have CSP open for $147 expiring this Friday. My HD strike is at $297. Good prices to own those two at. And good premiums also. I have a lot of cash, so my puts are easily covered. Looking at BRK-B next.