So last time
I let people offer to buy my shares at a higher price than I paid, taking guaranteed money and keeping the collateral if the share price doesn't go high enough.
The other basic theta gang
play is offer to purchase shares if they drop below a certain price
. This can be done in a naked/yolo way, it can be done in a leveraged way, or it can be done by letting your broker hold on to your money for a bit.
With volatility as it is and the prospect of having chunks of cash hamstrung but idle (this is a really dumb view on being in cash), I didn't really pay attention to CSPs until I was looking for stocks to sell covered calls for. Like the CC is a better way to do a limit sell, a CSP is a better way to do a limit buy.
Let?s assume stock XYZ is currently trading for $96 per share. You would like to buy 200 shares of stock XYZ if it drops to $90. You could place a GTC limit order to buy 200 shares at $90 and wait to see if you buy the shares. Or, you could sell two XYZ 90 puts at $2.25 and collect $450 (2 X $2.25 X 100 = $450) on your willingness to buy 200 shares at $90. With the cash-secured put, you can generate additional returns in your portfolio by collecting a premium minus commission for your willingness to be obligated to buy a stock at a price that is below current market.
The etrade explanation
covers the acquisition approach. Degenerate options traders
seem to avoid assignment like the plague.
My first CSP
AMD is pretty strong and announced a Xilinx acquisition (more or less the extent of my DD), so it seemed like a put I wouldn't mind getting exercised. At $83-ish bucks I sold a $78.50 put, also not minding if it stayed out of the money and ended up being just $200 in the clear.
I could have timed the volatility better (more volatility -> higher premiums, typically). The underlying share price also dipped during this week's market downturn.
Thirteen days from expiration, it's still well OTM. Earnings is between now and then, so it wouldn't be great if they did a FSLY.
- AMD stays above $78.50; an $8,000 investment turns a $200 premium = 2.5% return in two weeks.
- AMD drops below the strike price and I'm the proud owner of 100 shares of the chipmaker. I can sell if they haven't tanked or I can start selling covered calls.
- I can purchase a call to cover my position.
Like covered calls, I must have faith that the underlying won't drill (or pay to hedge). And that's why I chose an expiration before November.