SPY, DIA and IWM Can Be Lower-Risk Income Sources for Sellers of Cash Secured Puts

By Donald E. L. Johnson

Cautious Speculator

• The strategy is to every week sell one or more contracts of DIA, SPY, IWM and other ETF’s cash secured puts that expire in 14 or 15 days.

• To limit the risk of having the puts assigned (sold to you), trade low delta strikes with 75% to 88% probability of expiring out of the market (OTM).

• ETFs give investors highly diversified portfolios even if a investor owns only three to five of them.

• To reduce risk further, trade more equities instead of investing in only one or two.

A fairly easy way to generate income from available cash is to sell cash secured puts (CSP) options on index exchange traded funds like DIA, IWM and SPY. That’s what I try to do every week.

Today, with DIA at $334.60, I sold 8.26.22 $322 strike puts for $1.03. Return on risk in 15 days will be about 0.31%, or 7.49% annualized. Delta =.15. The probability of the puts expiring out of the money is about 84%. DIA is pegged to the Dow Jones Industrials 30-stock index. The margin of safety is only 3.77%. MOS equals stock price minus strike price.

With IWM at $197.36, I sold 8.26.22 $186 strike puts for $0.77. Return on risk in 15 days will be about 0.39%, or 9.5% annualized. Delta = -.08. Probability of OTM is about 90%. IWM is pegged to the Russell 2000 small cap index. Margin of safety is about 5.76%.

With SPY at $420.88, I sold 8.26.22 $402 strike puts for $1.42. Return on risk in 15 days will be about .336%, or 8.181% annualized. Delta = -.14. Probability of OTM is about 84%. The margin of safety is about 4.49%. I’m hoping the market rally will continue.

The returns on these ETFs generally aren’t as high as they are on individual stocks’ cash secured puts or puts on some sector ETFs like XLE, the energy ETF. This is because they’re not as risky or as volatile as the other equities are.

For more on this strategy, check out Mike’s blog at Covered Calls, Cash Secured Puts, and More. He’s been doing these trades for years. He also recently published a nice piece on selling cash secured puts in a bear market.

LINKs:

Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.

How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.

Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.

Ways to use StockRover.com to analyze stocks

Calls vs Puts Options: What’s the Difference?

How to trade the wheel.

A video on how to place options trades on Think or Swim.

Beware. Like all investing, trading stocks and options is risky. 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. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I own and/or have options positions on IWM, DIA and other equities. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content nor for any links.

@realDonJohnson. Because I don’t want to litter subscribers’ in boxes with emails, I write only one or two newsletters a day. I’m active most days on twitter where I tweet about stocks, options trades and other topics.