Then that should work for you. Good luck.
Cash secured puts - Stocks or ETFs
- Thread starter danjuma
- Start date
I frequently trade cash secured puts on high yielding funds that I want to own in my IRA. The return is low on the less volatile funds, but I’m always okay with being long the fund at a discount while collecting the dividend. I focus on extrinsic value when choosing which strike to buy, which is often ITM. And as soon as I get assigned I’ll turn around and sell covered calls against it. The key is you want to own the underlying, long term.
Not saying it’s bad or anything but just throwing this out here:
People who sell those 5-10 delta puts saying that they wouldn’t mind owning the stock at a ”discount”, well let’s say you sell those 30-90 DTE puts with deltas around 10. Shit hits the fan and your puts go ITM or hell even DITM. Now something smelly has really hit the fan since in such a short amount of time (short for investors atleast) your company has lost significant amount of it’s marketcap. So taken this new info the market has now absorded, do you really think you got the shares at a discount? Do you still really want to own the company?
People who sell those 5-10 delta puts saying that they wouldn’t mind owning the stock at a ”discount”, well let’s say you sell those 30-90 DTE puts with deltas around 10. Shit hits the fan and your puts go ITM or hell even DITM. Now something smelly has really hit the fan since in such a short amount of time (short for investors atleast) your company has lost significant amount of it’s marketcap. So taken this new info the market has now absorded, do you really think you got the shares at a discount? Do you still really want to own the company?
Well sure but you can say that about any investment. Anything you buy could tank the next day. Selling a cash secured put and getting assigned is equivalent to being long 100 shares of the underlying and they share the same risks.
Say I really wanted to go long and purchase 1000 shares of XLU with the plan of holding until retirement. XLU is trading at 64. I could buy 1000 shares for $64,000 right now. Or I could sell 10 ITM 65 puts 30 days out for $2 each, putting you long 1000 shares for $63,000. If XLU tanks to 30 overnight, you’re losing a lot of money either way since the plan is to hold until retirement. You could manage your risk with stop losses if you choose to, but the point is you want to own the underlying, even if the price goes down from where we are today.
Selling a cash secured put and getting assigned isn’t equivalent to owning the underlying. Sure you can figure that out without me having to explain that. But I understand what you mean by that, and that’s why I said in the first place I have nothing against this strategy. But after taking everything in account, it’s best to sinply go long the underlying imho, if you think it’s going up. Why? Missing out when you were right hurts twice as much as losing, atleast that’s how I feel.
Thus, (and since CSP and covered calls are mathematically equivalent) wouldn't this make covered calls the preferred strategy since you can pick the price you buy at?
Or you can just sell the CSP in the money or DITM. It just needs to have extrinsic value.
Both you and the following post are asking me to answer a question that I can not, as both are based on a faulty premise. That there is some advantage to selling extrinsic value.
Having acknowledged that I would be entering a zero expected value transaction based on all available information at this instantaneous moment. My preference always has, and always will be to buy the option.
Last edited:
This has been beaten to death, but it has been shown that there is some risk premium in options due to the concave utility curve of virtually all market participants. This is the volatility risk premium.
It is constantly changing, and the premium may be small. but selling volatility generally has a positive expectation.
Took a few decades for that to get built in, but yes... 'generally,' 'small,' and 'constantly changing,' are the keywords, particularly the 'constantly changing.' I'd also add in 'by questionable accounting.'
But thinking in pure game theory, of a game where most outcomes are neutral. When you are correct, you win by drips and I take a paper cut. An almost equivalent amount of times, I am correct and win by drips while you take a paper cut. BUT there will be a few times when I am correct and you get eaten alive by a pack of hungry wild hyenas while the riches of Solomon are bestowed upon me. - I just want to play a game, and in the above game, I'll take the long side.
We can also add in, although out of context (but not to me), that the market prices IV closer to HV, and dynamically hedging short vol tends to result in hedge losses that more approximate to range vol.
We can also add in, when you are correct you will have to carry it to expry because that utility curve will remain/or 'more-likely' increase until the last day.