When selling cash-secured puts, our strikes are selected based on our initial time-value return goal range and personal risk-tolerance, states Alan Ellman of The Blue Collar Investor.
In the BCI methodology, we use only out-of-the-money (OTM) cash-secured puts unless our objective is to purchase a stock at a discount and have those shares put to us sooner rather than later. There are times when market conditions are such that we want to take extreme defensive positions while still having the goal to beat the market significantly. This is the approach I took shortly after the initiation of the COVID-19 crisis in the US that began in March 2020.
Defensive Put-Selling Strategy
We select an elite-performing security based on fundamental, technical and common-sense parameters. We then look to deep OTM puts that have Deltas of 10 or less (Delta is negative for puts). We then sell put strikes with a target annualized return of 10%-15% based on initial time-value return. Delta can be defined in multiple ways. For this article, it will be defined as the percent chance the option will expire in-the-money (ITM) or with intrinsic-value. Stated differently, our trades have a 90%+ chance of not being exercised.
Bullish Price Chart of Etsy Inc. (ETSY) on 12/14/2020
Price Chart of ETSY on 12/14/2020
1: Bullish exponential moving average trends
2: Bullish MACD histogram trend and momentum
3: Bullish stochastic oscillator momentum
4: Average volume
Option Chain for ETSY on 12-14-2020
ETSY: Put Option-Chain
The $150.00 (Delta of -0.05) and $152.50 (Delta of -0.08) strikes show bid prices of $0.31 and $0.44 respectively.
ETSY Calculations with the BCI Put-Selling Calculator
ETSY: Calculations with the BCI Put Calculator
The annualized returns for the $150.00 and $152.50 strikes are 15.12% and 21.12% respectively.
Discussion
Significant annualized returns can be realized by employing an ultra-conservative put-selling strategy where Delta will allow us to create a low-risk/high-return strategy. Keep in mind that this a low-risk, not a no-risk strategy so our position management arsenal must be mastered and implemented when indicated.
Learn more about Alan Ellman on the Blue Collar Investor Website.
