If you are anything like me, you always have a list of stocks you are watching waiting to buy. You might also have a price point in mind that you are willing to pull the trigger. If you are waiting for the stock to come down there is a way to still generate returns on your position. That strategy is cash-secured puts. This allows you to generate premium with your cash while you wait to get a cost basis you are willing to accept. If you are interested in learning how you can get paid for your stock watch list then keep on reading.
Cash Secured Puts
First off, to open a cash secured put you need to have a trading account that is approve options level 0. Almost everyone can get approved for this level. In order to open a cash secured put you need to have enough cash, minus premium received, to buy 100 shares of the underlying security.
So if you are trying to open a contract of $XYZ for a strike price of 10 and a premium of $1 you would need $900 in your account to open that position. Now when you sell a put you are giving someone the right, but not the obligation, to sell you the stock at that price. So that means someone might not want to exercise that option if $XYZ is right at $10 a share. They had to pay $100 so they might want to hold on to the contract unless it falls below $9 a share. Now this is only for American options and before expiration. At expiration there are different rules.
Pretty much every broker uses what is called ‘Automatic Exercise.’ This means that at expiration, if your contract is at least a $0.01 in the money, the contract will be exercised. This works out for our play because we want to own the stock. So in the above situation if the stock is at $9.99 a share at close we will buy 100 shares at $10 a share.
Controlling Cost Basis
Another key feature of using cash secured puts is controlling your cost basis. For stocks bought using options, your cost basis will be the strike price plus premium paid or minus premium received. If the contract expires worthless then you would just have to report the premium received as short term capital gains.
That last part is the key to making money if the market is using sideways. If you are waiting to open a position, rather than using limit buys and just having your cash sitting there idle you can use a cash secured put. It might be better to use another example.
Let’s say today is April 8th 2020. You are looking to open up a position of 500 shares in $T. It is currently trading at $29.50 and you are willing to pay $25 a share for this position. You sell 5 May 15th 2020 puts with a strike price of $25.00 for 0.45 each contract. Then you are paid $225 for these 5 contracts ($0.45 * 100 * 5). You have to have $12,275 plus commission fees for this trade. This gives a return on our equity of 1.83% (225/12,275) or at an annual rate of 18.08% ( (365/37) * (225/12,275) ).
Expanding to a Year
Now you can start to see how you can get paid for your stock watch list. This trade can then be compounded as long as it is not exercised. Let’s say we are able to make this trade 9 more times this year. Our new premium received for the entire year would be 2,250. However, each time we make this trade and it expires worthless we are adding to our cash pile. We are now actualizing an 20.04% return on equity just for being willing to own a stock.
(225/12,275) + (225/(12,275-225)) + (225/(12,275-(225*2)))+(225/(12,275-(225*3)))+(225/(12,275-(225*4)))+(225/(12,275-(225*5)))+(225/(12,275-(225*6)))+(225/(12,275-(225*7)))+(225/(12,275-(225*8))) + (225/(12,275-(225*9))) = 20.04%
Obviously this is assuming you are receiving the same premium every time. This was for demonstration purposes only.
When to Use Cash Secured Puts
Unfortunately, cash secured puts are not a one size fits all. They should be used only when you are willing to own the stock at the strike price the contract is for. There are all sorts of events that can happen that can cause a stock to lose value. Take our current environment as an example. As of the writing of this post we are in the middle of a pandemic. Markets have been a roller coaster as bad news and good news comes out everyday. We just need to be smart and use the cash secured put when it makes sense.
When you are looking to open new positions for the longer term, cash secured puts are be beneficial. Another possibility is improving returns during a sideways market. If there is a possibility of the company going under, then stay away. A worthless stock is a worthless put.
How to Get Paid for Your Stock Watch List
Using cash secured puts is one of the many ways you can make money without actually buying or selling your stocks. If you would like to have access to the calculator I used above, just drop your email below and you can download it yourself. Then we will send you a notification when our next guide is available on otherwise to make money with your stock watch list. If you are looking for a free tool to check out option chains I personally use Yahoo Finance.
Do you have any other strategies you use? Let us know in the comments below!