Cash Secured Puts Options Income Trades on SPY, QQQ, IWM Are for Bullish Investors
I cover what I’m trading and how I’m looking at stocks and options. I can’t predict markets, stock prices or interest rates. Nobody can. All we can do is trade and manage risks.
By Donald E. L. Johnson
Independent Speculator
Trading puts on index ETF funds is a low-risk, lower-return strategy.
Selling cash secured puts requires cash and is simpler than selling covered calls.
CSP and covered calls trades are considered similar income strategies.
This strategy lowers risks during earnings season when “surprises” can turn individual stocks’ options trades into disappointments.
ETFs own dozens of stocks and several ETFs combined own most stocks, good and bad. So this is a diversified portfolio.
Covered Writer weekly posts his cash secured puts (CSP) trades on index exchange traded funds on his free web site.
Please click on the image and zoom in.
As the CSP name implies, you need cash to margin the puts you sell. Those margins usually are pegged to the puts’ strike prices. The margin on 100 shares of a put that has a strike of $50 will be about 100 shares x $50 equals $5,000, depending on your broker.
Selling cash secured puts is a bullish strategy for cautious income traders who like the simplicity of doing the Covered Writer’s relatively low risk, 14-day trades weekly. This intra-day chart shows that the DIA, or Dow Jones 30 Industrials, is below the 200-day moving average, which is bearish. DIA is over sold, and it can go lower.
Here is a three year DIA chart:
Except when there is a big potential market moving news event expected and when the market looks terribly bearish, he trades most of his ETF funds weekly. At any given time, he has two CSP one-option contract positions in each of his ETF’s. Once and awhile, he will drop an ETF like AARK and XLE. My XLE calls will be called tomorrow. I’ll probably sell puts on them Monday.
The beauty of following and doing Covered Writer’s trades is that ETFs are much less risky than individual stocks. ETFs don’t report earnings, so bad news from one stock in an ETF’s portfolio doesn’t have a lot of impact on the ETF’s price. But if the markets or a sector suddenly changes as they have recently, traders have to manage their risks. That sometimes taking small losses and doing the next trade when it feels right.
SPY, DIA, IWM, QQQ and XLE are very liquid and deep options markets for traders of covered calls and cash secured puts. Because their options aren’t very active or liquid, I seldom trade XLI, XLK, XLV or XLY. Instead of doing all the trades, to achieve my target income, I may trade more puts options on SPY, DIA and other index ETFs.
Note that the probability that these CSP will expire worthless and out of the money is between 85% and 89%. In other words, there is about a 11% to 15% probability that they will expire in the money and will be assigned, or sold, to the sellers of those puts. The goal is to do trades that expire OTM and worthless, not in the ITM. I’ve had IWM and XLE expire in the money, which is why I’ll write covered calls for them at the money (ATM) until they’re called.
My DIA 2.21.22 $354 strike puts will expire in the money and be assigned to me tomorrow. On Monday, I’ll write covered calls on DIA. The markets have dropped more than we were expecting when I did the trade. DIA was at $369.39 when I did the trade for $0.93 per contract. That means I’ll buy the stock at a net debit of $353.70, or a 4.166% discount from DIA’s price on Jan. 5.
Then I’ll sell puts on them again. This process is called the wheel. Sell puts until the stock or ETF is assigned, or sold, to you. Then collect dividends and sell covered calls until they are called, or bought from you. Repeat.
This lower risk strategy produces lower annualized returns on risk (RoR) than more aggressive strategies that involve individual stocks. The annualized returns on investment (AROI) on this week’s trades range from 7.1% on the XLV puts to 14.69% on the IWM puts.
Covered Writer and I started trading covered calls about 15 or 16 years ago. We used to discuss stocks and options on morningstar.com's then wonderful message board. It’s not so great now and I no longer use the service.
On Covered Writer, you can join his service. He emails his trades and answers questions that members email to him.
Why do I promote a “competitor”? We have our niches and strategies. If we help each other we both benefit and so do our subscribers. We know our subscribers use several services, which is the smart thing to do.
LINKS:
8 Stocks for a $25,000 Diversified Covered Calls Watch List
Eight Stocks for a $25,000 Diversified Puts Portfoio
SOFI Surges: Buy? Sell Covered Calls? Sell Cash Secured Puts?
Stock Futures Flat; Time to Sell Short Duration Puts?
CNBC.com
Coveredwriter.blogspot.com
OptionsPlay.com
SeekingAlpha.com
StockRover.com
Yield Busting Corner , https://join.slack.com/t/yieldbustingcorner/shared_invite/zt-11zpzo9au-r~L1jh8Jpte0XVgv5i0ibg
Beware. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. I reserve the right to trade any of the listed stocks at any time. Disclosure: I own and/or have positions in DIA, IWM, QQQ and XLE.