Author Topic: Cash Secured Puts via Margin  (Read 176 times)

mizzourah2006

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Cash Secured Puts via Margin
« on: January 28, 2022, 11:16:55 AM »
Has anybody considered writing cash secured puts on margin? I'll go into some detail about why I'm considering it and I'd love to get some people's thoughts. The way I see it is that because it's a put the margin acts as collateral, so you aren't paying interest on it, unless you got assigned and couldn't come up with the cash for the assignment. Also, I'm focusing on stocks I'd like to own long term (AAPL, AMD, NVDA, SQ, etc.), so the way I'm looking at it is this allows me to effectively get paid to write limit orders for stocks I currently would like to own, but I'd like to own them at a better price and that I may not have the current cash free to get to, but in 2-3 months I will (cashflow from income). So in my mind I'm getting paid ~$1k/month to take out an interest free loan of $60-$75k spread across 3-4 stocks.

In my specific case I have about $25k in cash in my brokerage, another $15k in cash in my savings account, and I have about $6-$8k in monthly free cash flow beyond 401ks, expenses, etc. I typically write these ~45 days out and can always roll down and out a few months (as tying up capital that isn't mine is no skin off my back). I guess I figure worst case scenario I get assigned on all $75k, which is somewhat unlikely as I spread it out over 3-4 different plays. But even if it all goes against me, I can buy time for a few months and shave off ~$5-$10k by rolling down and out for breakeven in premiums. Also, I'm not writing aggressive puts (which is why the premium is usually only between $700-$1k/month). So the underlying would usually have to drop 10-20% in the 30-45 days for me to be in the arena of needing to take assignment.

Just wondering if anybody has ever thought about doing this before. Seems like a pretty conservative way to borrow from your future self for free and collect an additional $8-$10k/yr in income while waiting for shares you want to own anyway to come to you.

ChpBstrd

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Re: Cash Secured Puts via Margin
« Reply #1 on: January 28, 2022, 11:23:20 AM »
Have you seen this?

https://earlyretirementnow.com/2016/09/28/passive-income-through-option-writing-part1/

This is written by an actuary and he's been earning about 15% annualized on the strategy, even in 2020. This is like a 9 part series.

mizzourah2006

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Re: Cash Secured Puts via Margin
« Reply #2 on: January 28, 2022, 11:24:04 AM »
Have you seen this?

https://earlyretirementnow.com/2016/09/28/passive-income-through-option-writing-part1/

This is written by an actuary and he's been earning about 15% annualized on the strategy, even in 2020. This is like a 9 part series.

I have not. I'll definitely give it a read. Appreciate it!

Financial.Velociraptor

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Re: Cash Secured Puts via Margin
« Reply #3 on: January 28, 2022, 02:18:36 PM »
Just a nit but you have your definitions mixed up.  If the put is "cash secured" that means you have undeployed cash in your account sufficient to buy the shares if you are assigned.  E.g. no use of margin.  Using margin gives you 5:1 leverage.  That is great when the trade goes your way but hurts 5x when it goes against you.  You can do pretty well without using margin, with a lot more safety.  I've written puts on margin a few times when the market was down 50% off highs and an uptrend was back in place.  For the most part, I avoid margin these days.  It just isn't worth the risk in most cases.

mizzourah2006

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Re: Cash Secured Puts via Margin
« Reply #4 on: January 28, 2022, 02:46:15 PM »
Just a nit but you have your definitions mixed up.  If the put is "cash secured" that means you have undeployed cash in your account sufficient to buy the shares if you are assigned.  E.g. no use of margin.  Using margin gives you 5:1 leverage.  That is great when the trade goes your way but hurts 5x when it goes against you.  You can do pretty well without using margin, with a lot more safety.  I've written puts on margin a few times when the market was down 50% off highs and an uptrend was back in place.  For the most part, I avoid margin these days.  It just isn't worth the risk in most cases.

I guess that's fair, technically it's partially cash secured partially margin secured.  But you aren't really using margin from an interest accumulation perspective, you're just using it as collateral. I'm definitely not considering using all of my available margin. That can go wrong fast. I'm considering using about 20-25% of my margin purchasing power and like I said in this instance I have about 50-60% of the cash quickly available, but I don't have the rest, although given my monthly free cashflow from working I'm only about 3 months from having the rest available if all move against me and I usually write the puts 30-45 DTE.

Again the way I'm looking at it is it's an interest free loan to write limit orders on stocks I want to own anyway and get paid $~$700-$1000/month for doing so and if the stock moves my way I'd have the actual cash to accept assignment after rolling down and out for another 30-60 days (or easily just close the position at a loss if it went really wrong). I kind of see it as being equivalent to if my employer gave me a 2-3 month advance on my pay.

A quick example would be with AAPL: I can write a 3/18 $150 put for $245. So, the stock would need to fall about 13% from here in the next 50 days for it to be ITM. So, in this instance you'd be using $15k as collateral via margin and they'd give you $245. If it went wrong I could easily roll down and out to 4/17 $140 for break even or maybe being debited $50-$100. In that instance it goes way wrong, I still come out with $145 in cash and I own 100 shares of Apple at $140/share when they are currently trading at $170/share.


I know that a lot of people with $300-$400k in one brokerage account wouldn't bother trying to squeeze an extra $700/month, but being a mustachian I see it as a type of additional interest free dividend and if I look at it from an income perspective and what it would cover, it pays for most of my kids daycare or all of our family groceries and eating out for a month. It's equivalent to about 15% of our monthly expenses covered.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.
« Last Edit: January 28, 2022, 03:12:00 PM by mizzourah2006 »

ChpBstrd

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Re: Cash Secured Puts via Margin
« Reply #5 on: January 28, 2022, 04:03:59 PM »
For a while, I was tempted to write a way-outta-the-money put every week or month for a while to see if I could support a 4% or 5% WR. In theory, if one earns just 0.5% of their collateral on one's monthly trades, that'll support a 4% WR and leave 2% growth per year to offset inflation. The kind of put options that pay 0.5% are unlikely to be called. S&P500 options expiring in 30d where 0.5% of the strike price is the premium are currently at the 3,900 strike, a delta of .10, implying about a 10% chance of expiring ITM, and requiring a drop of 12% to be assigned.

Still, that 10% chance adds up month after month, and because corrections are fairly common, you'd probably be assigned in year one. Even worse, the stock market would likely take off without you, earning 15%-25% in some years while you scalped 6% from put options. Ask me how I spent the summer of 2020!!!

I was similarly tempted to buy some bank stocks yielding 3-5% and selling way-OTM calls to make up the difference. I would have needed a new plan in late 2020 when my shares would have been called away.

I know that a lot of people with $300-$400k in one brokerage account wouldn't bother trying to squeeze an extra $700/month, but being a mustachian I see it as a type of additional interest free dividend and if I look at it from an income perspective and what it would cover, it pays for most of my kids daycare or all of our family groceries and eating out for a month. It's equivalent to about 15% of our monthly expenses covered.

Not sure I'd be comfortable doing it when I'm actually FIRE and I don't have future cash flow coming in though.

Bottom line: Any option that anyone will buy from you has a utility to that buyer equal to the sum of its probabilistic payoffs. That is to say, if it has a 1% chance of earning $100, it's worth $1. That's what you're selling, which is quite different than a dividend.

mizzourah2006

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Re: Cash Secured Puts via Margin
« Reply #6 on: January 28, 2022, 04:19:37 PM »

Still, that 10% chance adds up month after month, and because corrections are fairly common, you'd probably be assigned in year one. Even worse, the stock market would likely take off without you, earning 15%-25% in some years while you scalped 6% from put options. Ask me how I spent the summer of 2020!!!


This makes sense. sitting in cash writing puts waiting for a market crash is probably a losing proposition in a market that always goes up over time. The only reason I'm looking at this as a somewhat viable option is because it's money I don't have today. I couldn't buy 100 shares of AAPL today, but I can write a put on margin to buy 100 shares of AAPL 45 days from now.

But you both have given me some things to think about.

jim555

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Re: Cash Secured Puts via Margin
« Reply #7 on: January 28, 2022, 05:47:15 PM »
Writing a put without having 100% cash to back the strike is considered a naked write.  The risk chart is equivalent to a cover call position.  It is identical to buying a stock on margin and selling a call against it. 

mizzourah2006

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Re: Cash Secured Puts via Margin
« Reply #8 on: January 28, 2022, 06:18:08 PM »
Writing a put without having 100% cash to back the strike is considered a naked write.  The risk chart is equivalent to a cover call position.  It is identical to buying a stock on margin and selling a call against it.

But if you do that you have to pay the interest associated with the margin, so it's not identical. One is interest free the other isn't.

But yes, I understand writing a CC and a CSP at the same strike price are identical derivative contracts.