Selling cash secured put options is one lower-risk strategy that could benefit long term investors hoping to buy a stock at a lower price. I'll explain how to sell cash secured put options, when to use them, and their advantages and drawbacks versus other stock buying methods. Subscribe here for more content: http://bit.ly/SubscribeMichaelJay

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Timestamps
00:00 - Intro
00:47 - Put option basics
01:45 - Selling cash-secured put options (basics)
02:25 - Why sell cash-secured put options?
03:06 - Advantages of writing cash-secured put options
04:01 - Disadvantages of writing cash-secured put options
06:56 - When should one sell cash-secured put options?
07:39 - How can you get approved to sell put options?
08:59 - What factors affect the option premium?
11:18 - My personal cash-secured put option selling strategy
14:34 - Real money examples of cash-secured put sales
14:55 - JPM 90P 8/21/20
16:33 - ULTA 170P 9/18/20
18:39 - ANTM 260P 9/18/20

Why would I want to write a cash-secured put option?

Selling cash-secured put options allows you to generate extra income in the form of option premiums for committing to buy stock at a predetermined price. For stocks that you want to own long term and add to your portfolio, selling put options can be a way to potentially purchase shares at a lower price. Keep in mind that you should only write a put option if the net price (strike price minus option premium) is an attractive price.

My cash-secured put option selling strategy

When selling put options I will only write options on quality stocks that I would want to own in my portfolio long term.

Fortunately, I have two quality stock watchlists, an A-Tier and a B-Tier, with over 100 stocks to choose from. I then take these stocks and value them to determine what would be an attractive long term entry point for each stock. These buy targets are then compared to the stocks’ current prices and are ranked live in my ValueQuant model to help identify the best possible opportunities at the given time. It is usually from the highest ranking stocks in the ValueQuant model that I will pick candidates for writing options.

Once I have a stock selected, I will usually look at the options 30-45 days out. While longer dated options will offer more premium today, I would prefer not to lock up the capital for extended periods of time.

I will then look at put option quotes at strike prices at or below what I would be willing to pay for the stock. Typically these will be strike prices that are out of the money and might be about 8-15% lower than the current price, depending on the stock.

Ideally, I would like to sell a put option at a strike price I would be willing to pay, and at an option premium that yields about 12% annualized return. For a 30-day option contract that would be an option premium of about 1% the strike price.

Additionally, I will never use 100% of my available cash for selling put options as I like always having at least some capital available for future price declines. If all your cash is committed already through cash-secured put options you have written, you wouldn’t be able to access that cash if other opportunities came up (unless you closed the put option position early, potentially for a loss).

By using this strategy, I don’t lock up my capital for longer than 45 days, but during those 45 days, I am earning a 12% annualized yield. If the put option is exercised at the strike price, that is good too, because it was executed at a price that I valued could provide an annual return of 10-12% from owning the stock at that price. So assuming my return assumptions hold true, I will be earning about 10-12% on that capital either way. If the option gets exercised, I own the stock I wanted at a good price. If not, then I can simply write another option and collect the premium.


DISCLAIMER: This video is a resource for educational and general informational purposes and does not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.

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Michael Jay - Value Investing