Thoughts on Cash Secured Puts, Part 2

Last week in this post I wrote about the strategy of using Cash Secured Puts (CSPs) in Rescue My IRA to augment the five-year track record I have in that account with covered calls.  The post referred to the Options Industry Council (OIC) web page, summarizing the information there into an overview of CSPs:

…the risk profile of a CSP trade, while significant (as with any option strategy), is essentially equal to the risk of a covered call trade.  Both trades are focused on the prospect of owning the underlying security, which has market and equity value, rather than trading on the value of the financial instrument represented by the option.  

 

My plan for this second and final post in this introductory series about CSPs is to document what I’ve learned about these options so far, since I began trading them in June 2016.  So far, I’ve sold these options against eight underlying securities:  MOS, VLO, CMI, IP, SKX, FLR, TGT, and SPY.  For the record, my experience with MOS and VLO have already resulted in a refinement of the strategy:  never sell a CSP on a stock or fund that you don’t care to own!

My approach so far has been slightly contrary to the concept outlined on the OIC page.  Instead of using the CSP to discount the eventual price of owning shares, I’ve sought to avoid assignment and to collect premiums for a net gain, essentially trading the CSP as a security in its own right.  This means combining sell-to-open (STO) and buy-to-close (BTC) trades following the old stock market maxim of buying low and selling high, except in reverse.

Still, I’ve had my VLO and TGT trades result in assignment.  These price of these stocks dropped quickly in the days just before my CSPs expired, leaving my options in-the-money, so the shares were assigned.  Although I was able to quickly close those positions at a gain, it reminded me that I still have to do my due diligence research on these trades, and I have since then.

For future CSP assignments, my plan is to simply convert the trade into a covered call situation, writing new options against the same strike price.  In these cases, the CSP premium can be considered a discount, so being called away at the original strike will actually result in a stock gain in these trades.  The takeaway for me is that this is exactly what the OIC described.

Since August, most of my CSP trades used the exchange traded fund SPY as the underlying security, and I’ve evolved to using weeklies in the process.  The contracts were never assigned.  Here is the September record of the SPY trades:

• Three weekly CSPs at strikes between $212.50 and $216.00
• Net option premiums (includes STO/BTC trades and commissions and fees):  $274.00
• Absolute return against highest strike price:  1.26%
• Annualized return based on 21 days invested:  21.98%

Thus, at least for the month of September, I was able to achieve the investment goal that Rescue My IRA uses as a guideline:  seek an annualized return of 12%.  Some of my colleagues on the Yahoo Just Covered Calls board write about their goal of 24% annualized.  That goal seems feasible to me, although achieving it probably will require more research and experience than I have so far.

My way forward is to continue with these trades and build on my experience of 12 or so trades to date.  I do use the portfolio concept of holding 12 to 16 positions as a way to mitigate the risk of trades going extremely south, and it’s inevitable that I will take some hits, but my sense of it is that by combining the due diligence approach I use with covered calls and limiting my picks to stocks I wouldn’t mind owning otherwise will make that risk manageable.

When I have cash sitting in reserve, that capital's return is negligible.  So these CSPs should lead to an improvement in that situation, and improve the annual results for Rescue My IRA in the process.