Can You Sell an Option Before Buying it First?

I know I have stated numerous times no trading system is 100%. There are, however, times where a trading process can get on a heater and rattle off a winning streak up to or at 100%. That is what my last 7 tracked trades have done with this strategy of selling cash-secured puts.

The below chart shows the 5 trade alerts I sent out in February have all ended profitable.

Cash Secured Puts

This is a strategy that involves selling-to-open a Put option with the intent for one to keep 100% of the premium sold at expiration of the option.

The reason it is is called cash-secured is because one is to not only write or sell-to-open the put option, but at the same time set aside enough cash to buy the stock if assigned.

A put option is the ‘right to put someone to or sell a security at  specific price on or before a specific date at a set price.’

When I sell-to-open a put option I do it on a stock or ETF I believe is going to either move higher or stay at a price that is above the strike price I am using.

That way at expiration the security is going to be at  higher price than the strike sold, so no one would want to ‘put’ me to or sell me the underlying security for a lower price than the current market price.

Example: XYX stock trading at $36.44. I anticipate it moving higher or at least between now and expiration I see it staying at $36.44 or thereabouts, but NOT moving below $35.

I could sell-to-open a 10-day out until expiration $35 Put for say, $0.50 or $50 per contract. If I sell-to-open 10 contracts I have the chance to realize $500. One takes in the $500 when they ‘open’ the trade, but the account won’t fully realize it until the position is closed, (bought back to close or expiration happens).

At expiration, if XYZ is higher than $35 no one is likely to put me to the stock (assign the account) at $35 when they can sell it at the higher market price, so the option expires and THEN the $500 is realized (meaning I can spend it or withdraw it).

If Assigned a Cash-Secured Put

Here is the inherant risk – one can be assigned or ‘put to stock’.

This means the account was assigned the stock at the strike price sold-to-open. In my example this means I would have to pay for 1,000 shares (10-contracts) at $35.

That brings up my first and foremost concern and choice I have to make.  I have to want tp own the security in the first place.  Because there is a chance I can get assigned the stock, I have to be ok with owning it in the first place.  I also have to like buyinig it at the strike price sold.

If this is a stock you really don’t want to own, DO NOT execute this strategy.

What I like about this strategy of Selling Cash-Secured Puts is if I do  get assigned, I end up getting the stock that I was fine with owning, and I like it at the price (strike price) I sold-to-open, and I want you all to realize I am getting the stock at what I considered a reduced cost basis.

If I took in $0.50 for the sale of the put option and I get assigned, that $0.50 reduces my basis by that amount so I own XYZ now at a basis of $34.50.

And last, now that I own, in this case 1,000 shares at  basis of $34.50 I can now start writing covered calls up to 10-contracts at  time if I want.

Difference Between Cash-Secured Put and Selling Naked Puts

Some of you may be asking, Tom, isn’t this the same thing as selling naked puts?

Similar, yes, but there are key differences. A Cash-Secured Put is where you have enough cash in your account to buy the underlying stock if the option is exercised. This means you are prepared to purchase the stock at the strike price sold-to-open if the ‘option buyer’ decides to exercise their right to sell it to you.

A Naked Put is where you don’t have the cash set aside to buy the underlying stock if the option is exercised. One is taking on more risk because they might have to come up with the cash to buy the stock if the option is exercised.

A person’s account needs to meet certain margin requirements. Discuss those with your broker and know what requirements the account needs to meet to be able to consider this in the first place.

I prefer cash-secured puts that way I don’t have to scramble to come up with the money after the fact, if assigned.

I Have an Alert Service Called Cash Flow Trader

My publishing company Gulfport Analytics Powered by Toms Trading Room LLC is a place where I provide my paid subscribers to an alert publication of this strategy.

I provide the security I am considering this strategy for, the details of the strategy – what I’m selling-to-open, and why, the expiration date and the premium amount I am going for and the exit details when they come around.

On the exit, it is either I m letting the sold-to-open puts expire so I can keep 100% of the premium sold OR I’m taking the stock and will consider holding it, selling it or writing covered calls on it.

For more information our support email is support@tomgentile.com

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