In our article, we presented a cash-secured put on United Airlines shares. The trade idea worked perfectly despite the difficult market environment and delivered the maximum profit on September 17, 2021. The other presented cash-secured puts with an expiration date in September were also successful.
The Cash-Secured Puts strategy is an excellent trading method to either generate income in the form of option premiums or to buy stocks at high discounts. By selling a put option, you automatically receive a premium that is often higher than the planned dividend distribution of the underlying stock.
The cash capital required to enter the trade and cover the purchase of 100 shares at a time, if exercised, is between $ 3,832 and $ 7,860. Trade ideas can therefore be implemented for every portfolio size. The amount should be kept in cash in your securities account, because this is the only way you can acquire the shares without margin when exercising the option and you do not risk the liquidation of positions in your securities account.
The breakeven point is the price the underlying stock is allowed to fall to in order to stay profitable with the trade. Only below this rate does the trader begin to suffer a loss.
The safety cushion is the distance between the current share price and the breakeven point of the put.
Among the identified candidates, we take a closer look at Pfizer (US ticker: PFE). The trade takes the smallest amount ($ 3,832) of all candidates as necessary cash. The safety cushion of 13% makes the trade idea particularly attractive. The annual return of + 7.53% has been chosen conservatively here.
The cash-secured put with a premium of at least $ 68 per contract would be a good option, if exercised, to purchase the stock at a cheaper price. This means that if you were to sell the put, you’d be willing to sell the option at $ 0.68 or higher. If the share is quoted above the base price of $ 39 at the end of the term, 100% of the premium will be cashed in as profit without the shares being booked.
Principle of the Cash-Secured Put on Pfizer
If you sell the put option short with no intention of buying the stock, you want that put option to expire worthless. This is the case if the PFE share closes above the strike price of $ 39 at the end of the term. In this case, the trade is over and you collect the premium of at least $ 68 as a profit. Premature profit-taking is possible at any time. To do this, simply buy back the put option.
If PFE is quoted below $ 39, the option can be exercised early so that for each contract traded, 100 PFE shares are booked into your portfolio at a price of $ 39. Exercising the option is rather unlikely before the expiration date, but it is certain if the PFE share closes below $ 39 at the end of the term on December 17, 2021. After subtracting the premium, which you will definitely receive, it’s like buying 100 shares per contract at $ 38.32. So the premium of the put option you sell short lowers the cost base for the stock: you’d get it around 13% cheaper than its current price of $ 43.92.
With a base price of $ 39 and a earned premium of $ 68, $ 3,832 of capital would be required ($ 3900 – $ 68). Converted, this is around € 3,270.
If the option is exercised and 100 PFE shares are booked into your portfolio, you can continue with the covered call strategy. You sell 1 short call option for every 100 shares you hold, for example with a strike price of $ 39 and a term of your choice. This way you receive additional premiums.
You can find out how you can implement the Covered Call strategy in our article “Option Strategy: Covered Call”. But you can also choose to keep the shares in your custody account in order to benefit indefinitely from dividend distributions and possible future price increases.
Development of PFE over 1 year
Cash Secured Put: Development of Pfizer shares from September 2020 to September 2021
After a fulminant rise in the summer, the PFE share has recently corrected sharply. A support range can be seen in the range of $ 39, where the base price of the presented cash-secured put is chosen. With a cash-secured put, the underlying stock doesn’t necessarily have to rise to reap the profit. A sideways movement or even a small downward movement is enough to complete the trade successfully.
Performance profile at the time the trade idea was created on September 22nd, 2021
Performance Chart Cash-Secured Put Pfizer Share | Online broker LYNX
On the right of the performance graph you can see the maximum possible profit at the end of the term on December 17, 2021 (based on a bid price of $ 0.68). This profit is limited to the premium received and is earned if the stock is above $ 39 at the end of the term. The line in the performance graph slips below 0 at the break-even price (profit threshold).
On the left of the picture you will find statistics on the trade, such as probability of winning, maximum return, break-even rate and much more. Please keep in mind that these numbers change every second. Accordingly, the picture is only a snapshot at the time this trade idea was created.
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