Cash Secured Puts

[wackochicken]

I am thinking through my first cash secured put trade and had a question:

I want to offset some losses in my account and establish a new position in NVDA closer to its current, approximate 50-day moving average (~$400) using a cash secured put. I have sufficient funds to cover the entire purchase if exercised. If I write the put for a far dated expiry like Dec 2023, and it is exercised prior to that date, I will collect the current ~$3k bid premium and own 100 shares of the underlying at ~$400.

If one of my goals is to offset losses, why wouldn't I just write the put for an even further expiration and collect an even bigger premium? What am I missing? Am I making a huge assumption that the long put holder will exercise if NVDA falls to ~$400? (Won't the option be automatically exercised if it is ATM or ITM?) Or, am I incorrectly assuming that the premium I receive will reduce my losses when in reality it would only reduce my cost basis of the assigned 100 NVDA shares (100 NVDA @ $400 - 3,000 premium = 37,000)

Thanks!

 

[SteveH]

The fear/greed index is at 81 (extreme greed). If your real goal is to keep the premium but you'll take the stock if it dips long enough below your strike then ideally you should be selling puts when the fear/greed index has an extreme fear reading. You'll get much higher premiums then as the VIX will be in the upper end of its range. It works much better if you ladder into the cash secured puts so that your chances of some expiring worthless and others being exercised increase so, overall, you'll own some shares at a great cost avg.

I think this is the wrong time to be selling puts, cash secured or otherwise. In the meantime, consider buying a nice 13 or 26 week T-Bill offering a 5.3% annual yield.

 

[The_Krakenite]

Unless I'm overly complicating things, you are asking overly-simple questions on stock that is priced at $400. So you will have to pay up $40K per contract!

Since you haven't done anything similar before, I highly suggest you do a few options trades on penny stocks first or something... for a while.

I am not so sure your plans are going to end well...

If your real goal is to keep the premium but you'll take the stock if it dips long enough below your strike then ideally you should be selling puts when the fear/greed index has an extreme fear reading.

Ideally can be a key-term here... and subjective. Simply shorting vol because the premium went higher is often a recipe for disaster. There is often a very valid reason for this, and there is no such thing as a free-lunch. Unless you consider diversification as the lunch.

 

[Sergio123]

It's a good introduction strategy as long as you are able and willing to eat the shares at the price. It seems like free money, but you are picking up pennies in front of bulldozers. But I hope that you learn a full arsenal of option strategies and techniques instead of quitting when things go bad....And they will.
Personally, I would start with SOXL instead of NVDA to get your feet wet on selling puts.

 

[Phil318]

I am thinking through my first cash secured put trade and had a question:

I want to offset some losses in my account and establish a new position in NVDA closer to its current, approximate 50-day moving average (~$400) using a cash secured put. I have sufficient funds to cover the entire purchase if exercised. If I write the put for a far dated expiry like Dec 2023, and it is exercised prior to that date, I will collect the current ~$3k bid premium and own 100 shares of the underlying at ~$400.

If one of my goals is to offset losses, why wouldn't I just write the put for an even further expiration and collect an even bigger premium? What am I missing?

Am I making a huge assumption that the long put holder will exercise if NVDA falls to ~$400? (Won't the option be automatically exercised if it is ATM or ITM?) Or, am I incorrectly assuming that the premium I receive will reduce my losses when in reality it would only reduce my cost basis of the assigned 100 NVDA shares (100 NVDA @ $400 - 3,000 premium = 37,000)

Thanks!

The profit is realized when the option is closed, not at time of sale.
If assigned it reduces your cost basis. Profit or loss comes when you sell the shares.
If the option expires or you buy it back, there is your profit.