Put Options Put Cash to Work

Yesterday our son stopped by on his way home from dropping one of our granddaughters off at Camp Fairwood. He asked me to show him how I traded options. It didn’t take him long to see how there were income opportunities from judicious options trading. Until recently, most of my options trades were covered calls. A covered call is a contract agreeing to sell shares I own if the price reaches the price per share specified in the contract by the contract end date. The end dates are always Fridays.

Cash Covered Puts Put Cash to Work

As I thought about our conversation, I decided to review my year-to-date options trades. I discovered that my cash covered put sales were probably a better strategy for income than covered calls. So far this week I have completed eighteen options trades. Nine of those have been puts. I received about $820 for my nine put contracts that took about 1 hour to complete.

Review: What is a Put?

A cash covered put is a contract that is for 100 shares of a stock or ETF that you would be willing to buy at a set price with a predetermined contract end date. The end date is always a Friday. For example, in the following image -HPQ210806P27.5 is a contract where I am obligated to buy 100 shares of HPQ on August 6, 2021, if the price per share falls to or below $27.50. HPQ closed yesterday at $28.48. If the price per share remains above $27.50 at Friday’s close, August 6, then I don’t have to buy the shares. Someone was willing to pay me $22 for this downside protection. There is only about a 27% probability that this will happen. If I do buy the shares, I will hold them, as I view HP Inc as a good investment.

Most of the income is from Cash Covered Puts for Week 30.

How To Set Dates and Prices for Cash Covered Puts

The logical question is, therefore, “what is a good contract?” The answer may depend on your perspective, but here are my three primary criteria: willing to own, upward bound and cash on hold.

1.    WANT TO OWN: I won’t enter a contract for shares that I don’t want to own. Therefore, because I want to add shares of VYM and SCHD, I enter contracts for those ETFs. I’m willing to own CAG, HPQ, INTC, MSFT, ORCL, PFE, TECK, TRTN, and WMT. Some of these are just adding to existing positions. For example, we already own shares of CAG, INTC, MSFT, PFE, and TRTN.

2.    UPWARD BOUND: I generally want to sell a cash covered put on a stock or ETF that is moving up in price. That reduces the likelihood that I will be buying the shares. The advantage I see in that is that I can repeat this process weekly and may never have to buy the shares but continue to get income from cash that would otherwise be doing nothing. So far this year I have realized about 4% on my unworking cash. That is more than $4,500 just from trading puts.

3. CASH ON HOLD: I have to be willing to have my cash “locked up” until the contract expires. So, for example, the PUT I sold for MSFT that earned me $350 requires that I have $28,500 in cash allocated if the price of the MSFT shares falls to $285 by Friday, July 30. Realize this: If the $28,500 was just sitting in the money market mutual fund, it wouldn’t earn more than a few pennies per month. To get $350 is a real deal.

Setting Up Options Trading

At Fidelity, you cannot trade options unless you submit a request. This may take 2-3 weeks to process. Level 1 options trading is available for brokerage, traditional IRA, and ROTH IRA accounts. Level 1 is “beginner level.” Level 2 gives you more flexibility, but also greater risks. That is the level I use for my IRA and my ROTH IRA.

Start here to learn more about put trading: