Cash Secured Puts for Monthly Income. (Lesson 3)

The boat has left the dock. Next comes selling a cash-secured put.

I am an income investor that prefers to invest in good companies that pay a good dividend. In Lesson 1 I shared my investment philosophy. If you have not read it, you might want to go back. Here is the link Getting Started with Dividend Investing (Lesson 1). Next, I added selling covered calls to my investment arsenal. Lesson 2 discusses my strategy for selling covered calls and helps you sell your first contract. If you have not done this yet, then please go to Getting started Trading Options by Selling a Covered Call (Lesson 2).

Now let us discuss cash-secured puts. Before starting my easy investing income journey, I did not know anything about cash-secured puts. In a way, they work a lot like covered calls. Meaning you must have cash to cover any contracts you want to sell. However, I think they might be one of the least risky option strategies. Here is how it works.

If you want to purchase an investment like KO, you can sell an option contract on it. For instance, if KO is trading at $50 you could sell a KO Put option with a strike price of $45 and make some premium. When I made my first trade I was amazed that someone would pay me for the opportunity to sell me shares of a stock.

If the price of KO goes below the strike price the shares can be assigned to you. Most of the time the shares are only assigned on the expiration day. However, you have choices to make when you get near expiration. If the strike is way out of the money, then just let it expire. If it is close to or in the money you can close or roll it. I have sold numerous contracts and have been able to manage most of them without assignment. Looking back, I sometimes wonder if should have taken a bit more risk and let more get assigned. I missed some chances to get shares at a really good price.

Selling a put contract that is cash-secured works a lot like selling a covered call. You can work with the strike price and expiration to identify contracts that pay a good premium. You again can use Delta to manage the probability of a trade. I suggest that you take a bit less risk than Covered Calls and use a 85% probability or a -.15 Delta. For puts, Delta is signified with a negative value, but it works the same. A -.15 Delta is 85% Probability that the stock will stay out of the money.

Next, choose your expiration based on premium and Delta. A reminder that the further you go out with the expiration the more risk you are taking. Try to keep in the 30 – 90 day range. Here are the actual steps I would take to sell a cash-secured put. You can follow these instructions when you make your second trade. Your first trade should have been the covered call in Lesson 2. The steps should be similar for most brokerages.

From the broker research page, enter the desired ticker symbol.
The system should display investment information. (Charts, Summary, News, Ratings, …)
Click on Options on the tab menu on Schwab. Trying to get to the options chains.
I expanded the options to show the expirations that I wanted to see.
I identified the contracts that were near a -.15 Delta. (Select Greeks on the Options Chain Page.)
I clicked on Trade for the option I wanted.
I entered the “Sell to Open”, number of contracts (1), and selected market trade.
I verified my selections on the screen and then clicked the Review Order button.
I checked everything to be sure the order was correct and then clicked submit to process the order.
Since this is a market order, I get an immediate order status that showed that it was processed. I prefer market orders because I do not want to be constantly trying to get a better price. I am typically good with the market order premium. This allows me to minimize the amount of time I spend trading.

You can see the steps are almost exactly like the covered call steps. I executed a trade on XOM on April 20^th, 2021. It had a Delta of .204 with a strike of 50 expiring on May 29^th, 2021. I gained a premium of $77 for the trade. Not too bad considering that this is an order I have done many times. I think I spent 5 minutes making the trade. How many hours would it take to earn this driving Uber? Most likely the entire day. I also have a video showing how to sell a cash-secured put on YouTube. It is the Exxon Mobile trade discussed above. You can find it below.

My next lesson discusses how to Manage option trades.(Lesson 4). It discusses some key strategies to work with your existing positions.

Thanks for tuning in!

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