Cash secured put

The best opportunity to own a growth stock is when the company’s share price is suffering a deep dip but fundamental unshaken. If we consider using wheel strategy by doing sell-put options using deep- OTM (Strike Price= Current price - 20%)  and setting a short-term expiration date(7- 60 days); collecting upfront premium while waiting share price drop below strike price assigned to buy the stock at the discounted price but if the stock price still above the price we can continue to restart sell put and collect upfront premium again.

How option price derived:

An option’s price (premium)= Intrinsic value + Time value (Extrinsic Value)

As a seller direction:

  •        Extrinsic value= Theta (Time Value) + Implied Volatility
  •       Strike price less than Stock price is Out-Of-The- Money (OTM) (No intrinsic value)
  •       Sellers: Generate income from selling

Time value

Time value affects the premium of the option

Selling put options with zero intrinsic value, their value is solely based on Time value. These are referred to as Out-of-the-money options. The further the expiration date the more time value. Time value decay (Theta), time is the friend of option sellers. Time decay speeds up in the last 30 days, especially the final week before expiration. At-the-money options experience the fastest time decay, while in-the-money and out-of-the-money options decay more slowly.

If Theta = -0.1, it means the time value decreases by -0.1 per day, including weekends.

We choose 30 -45 days of expiration days because options decay fastest this period.

Type of relationship on assignment:

  •        Choose OTM if collect premium, less chance to get assigned
  •        Choose DEEP OTM if collect premium, lesser chance to get assigned 
  •        Don’t worry about assignment if part wheel system choose ATM
  •       Want to be assigned choose ITM

Implied Volatility (IV)

Implied volatility is the valuation of an option, IV represents the market’s expectations of future volatility which directly determines how highs or low the time value is’ IV directly affects an option’s price

High IV: High Premium for sellers

IV percentile: equal or above 70%  favor selling strategies

Historical Volatility (HV)

Is the past 30 days average

IV/HV

We can compare IV to HV to gauge the stock blooming

IV Crush

When impiled volatility drops sharply, it usually happens after earnings announcements. When IV "crushes" post-event, those puts deflate in value, letting us buy them back cheaper or let them  expire worthless.

Sell put before crush, not during and after. When IV is peaking is a signal to sell 

Premium 

Premium= strike price x 2% 

Why above 2%? Compounding 2% for a year will be 24%  which pretty good return income. If the stock was assigned, we had set a deep OTM of "20%+ 2%" of income received to off-set predetermined strike price. To improve the chances of not getting called,  we have to use time decay and delta below 30%.

Delta 

We can use delta to find the probability that the selling put is not assigned. we must look for  delta below 0.30  (OTM) means the chance of getting assigned is below 30%.

Gamma

Gamma measures how much Delta changes. Sell put is a negative gamma usually delta neutral which is sensitive to either the volatility  of the underlying contract (either a positive or negative gamma) or to changes in implied volatility (either a positive or negative vega)

What is the relationship for option sellers:

  • Sell ATM is highest Gamma risk if the stock nears the strike triggered Delta acceleration, especially at the closest expiration. 
  • Sell OTM resulted low Gamma risk, but if the stock nears the strike, Gamma will rise and accelerate 
  • Selll ITM is low Gamma , but high directional risk 

Profit-taking 

I always practice profit-taking before expiration  at the range 70- 95% and don't wait till expiry. 

Risk management: Get your fund ready if the stock price fall below your contract since we using deep OTM to buy at a discount price. We can do a roll-in to take loss of this contract avoiding buy the whole shares. Choose a stock that we wish to hold for the long term and keep in mind sell-put is a method to bargain and keep income in advance. 

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