As Good As It Gets
AGAIG: Selling Cash Covered Puts vs Selling Covered Calls
A friend asked me over the weekend what I think about Selling Cash Covered Puts?
AGAIG: Selling Cash Covered Puts vs Selling Covered Calls
A friend asked me over the weekend what I think about Selling Cash Covered Puts?
These are my thoughts on Cash Covered Puts, Stock Covered Calls and/or Selling Naked Calls or Puts:
First of all: I don’t recommend selling naked Puts! Never sell Naked Puts on a stock you don’t want to own. With Cash Covered Puts make sure you have the cash available to actually buy the stock being traded (or else you might be using margin and/or become subject to a margin call).
On the positive side: Selling Cash covered Puts may allow you to buy the stock at a price lower than its current selling (cost) price. This is a strategy frequently used by traders with larger accounts and/or traders wanting to hold stocks (or this particular stock) in their portfolios.
Let look at an example: NVDA is a stock frequently traded and its 12-Day ATR (Average True Range) is 6 points up/down Daily, and 13.1 points up/down Weekly based currently on 21 March ’25.
NVDA is in a pullback this morning trading at $121.40 as I begin to write. Next Friday’s 115 Put (21 March ’25) is Selling for 1.69 ($169) per contract, and/or the 110 Put for .78-.82. One week further out (i.e. 28 March ’25) the 115 Put is selling for 2.50 – 2.52 ($250-$252 per contract) and the 110 Put for 1.18 ($118 per contract). The reason for the increase in price one week further out is based on time until expiration (slower Theta Decay).
Selling a Cash Covered Put reduces the amount you are willing to pay for the stock. If you sell Friday’s 115 Put for 1.69 you would be willing to buy NVDA between now and Friday for 119.71 (121.40 – 1.69 = 119.71) should the stock pull back below that $119.71 price. If it does not pull back at, or below, that price and you end Friday OTM (Out of the Money and have not been exercised) you will have made 1.69 ($169 per contract). It is highly doubtful that your position would be exercised when if the stock is selling for more than what you have sold the Cash Covered Put and are willing to pay for the stock.
If you sold the Cash Covered 115 Put one week further out (i.e. 28 March ’25) for $2.50 you would be willing to buy NVDA for 118.90 should it fall at, or below that $118.90 price. If you sold the 110 Cash Covered Put you would have received $1.18 and be willing to Buy NVDA for $120.22 should it fall at, or below that $1.18 price.
The other option you have is to close the Put you have sold prior to expiration for a price lower (or higher if you chicken out) or have been exercised and now own the stock for the price you agreed.
Ironically, as I finish writing this diatribe, NVDA is selling for $119.73 (and trending back up) and you may have purchased NVDA for a lower price than where it opened and can now Sell Covered Calls on the position’s you now hold which is essentially the same process in reverse except now you are Selling Calls against Shares you own (Selling Calls further out should the price reach a higher price and you will be willing to sell the shares you now hold). Again, since you are receiving money for the Call being sold the cash is yours unless the stock rises above that price or is at, or above, the agreed Sell price at expiration.
Of course one can Sell naked Calls (according to personal risk) for impending stock pullbacks with less risk usually than that of a naked Put since stocks don’t usually rise as fast as they tend to fall.
Both Selling Cash Covered Puts and/or Selling Stock Covered Calls and/or Naked Calls are viable trades depending on your risk tolerance and desires, but no naked puts unless you meet the first criteria as outlined above!
Hopefully this is an understandable explanation.
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