In this article, I gonna introduce the "sell cash-secured put"-- an important profit method in options-- by using practical cases.
I will analyze this term by starting with the basic "sell/short put".
1. What is short put?
A short put means you are bullish on a stock and youritherearn the option premium or buy 100 shares at the strike price.
Specifically,
- if the stock doesn’t fall below the strike price on the expiration date, you earn the premium;
- if the stock falls below the strike price on the expiration date, you buy the stock at the strike price.
For example, I short put $ Tesla (TSLA) at $ 200 expiring in this December. It means I either earn $480 per contract or spend $20,000 to buy $Tesla Motors(TSLA)$ at $200.
So far, it earns 40% profit.
The win rate for "short put"is very high and you can often earn the happy premium in the most cases. But when the market crashes and it can cause huge losses.
So we need to be Cash-secured.
2. What is Cash-secured?
It means you have enough money to buy 100 shares when stock falls below the strike price.
The cash-secured amount of mony = strike price * number of contracts * number of shares per contract (usually 100).
Example 1: sell $Nasdaq 100 ETF(QQQ)$ puts
Note: you are not advised to use leverage when you sell put of qqq because the risk is very high.
Let's say you sell 1 put expiring after one month with the strike price of $250, you need to prepare $25,000.
Based on the price of 20 July, you can earn $78.
- According to the margin, the annualized return is 78/3867*12 = 24.2%
- According to the "cash-secured amount", the annualized return is: 78/25,000*12 = 3.74%
This operation is suitable for people with a light position and enough free dollars.
Example 2: sell $Pinduoduo Inc.(PDD)$ puts
Photo from Duan Yongping's post
Duan Yongping, known as China Warren Buffett, sells 7000 contracts of $Pinduoduo Inc.(PDD)$ puts with a strike price of $50 last year.
Based on our formula, the cash-secured = 50*7000*100 = $35 million.
His gain is 4.9*7000*100 = $3.43 million.
He did so on the premise that
a. he is willing to buy $Pinduoduo Inc.(PDD)$ at $50;
b. more importantly, he had $35 million to buy it when market crashes.
If you are also bullish on $Pinduoduo Inc.(PDD)$ in the medium to long term, you can follow his order and short put with the same strike price and date, but remember you can't buy the same amount as he did.
Conclusion
1, Sell cash-secured puts has a high win rate. You can also use this strategy to buy the shares at a price that you are satisfied with.
2, Ask yourself 2 questions before you sell: 1) Are you really willing to buy the shares even if it plunges? 2) Do you have enough money?
3, Cash-secured means enough money.
4, How to start? Choose a long-term bullish subject, and choose the proper strike price, you can sell 1 put per week.
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