Ep. 4.5 – Strategy: Shorting Cash-Secured Puts | Step Up to Options

Ep. 4.5 – Strategy: Shorting Cash-Secured Puts | Step Up to Options


It’s in the momey Hi, I’m Rachel, and this is Step Up to Options, where you learn the long and short of trading options Alright guys, we’re almost ready to start trading We know about the Four Basic Options trades from Level 3 We learned about liquidity, IV Rank, and the rest of the pre-game checklist in the last few videos Now we’re going to learn our very first option strategy: selling cash-secured puts We will need our brokerage accounts up and running before we can actually trade options We’ll talk about the account stuff in the last video First we want to understand how a couple of strategies work sometimes together…before we actually put trades for real The first step we’ll take into trading options has to do with buying stock I know what you’re thinking, “What we’re back at buying stock?!? I thought this was going to be about selling puts…” Oh, No it definitely is We’re just gonna learn a strategy where the upside is keeping premium from a winning option trade and the “downside” is buying stock at a price low enough to like First, let’s look at our Stock Direction Compass If we expect a stock price to go up, there are three basic moves we could make Obviously, we could just buy the stock. We could also buy a call, or we could sell a put Buying the stock outright would be expensive and we’d only have a 50/50 shot at winning Buying a call would be cheaper, but, time would be working against us, and we could only win in 1 out of 3 outcomes That leaves us with selling a put, and we can make money without even dealing with the stock Selling puts gets time back on our side, and it wins in 2 out of 3 outcomes Of course, we’ll start with the trader’s pre-game checklist Let’s just run through this really quickly since we already did this set-up in the checklist video We’d start the Grid Watchlist and look for liquidity first High Options Volume, check High IV Rank is next since since we’re selling Alright, cool Here’s XYZ again. We’ll check for XYZ’s notable events so that we know if there’s anything special to look out for And once we load XYZ into the Trade Page and pick our strategy we’ll just tweak our expiration month until we’re close to that 45 day sweet spot Last, we’ll slide the badge around until we’re happy with both the Probability of Profit and our Return on Capital POP will probably be around 70% or so, and the put will probably start just out-of-the-money ROC depends on the prices We check everything again on the review page because its the last will have to catch anything we might want to change If we’re good, we hit the button And now we’ve placed an order to sell a put. Until it actually goes through, the Activity Page will list it as “working.” Once we get a match in the market, it will change to “filled.” And at that point…we’re in the trade So now what? Let’s let Ryan explain Like we covered in Level Three, if the stock goes up above the strike by expiration or if it doesn’t really move much at all, then the put expires worthless and we get to keep the entire credit we sold it for We’d make money, we wouldn’t have to take on any stock, and our position would be closed We’d definitely call that a winner Now what if the stock goes down and is below our strike price at expiration? Then we’ll be assigned the stock and have to buy it at the strike price Assignment is when we make good on the contract we sold, for a small fee In this case, we sold someone the right to sell stock and so we’d have the responsibility to buy the stock at the strike price we picked earlier That’s why we only want to short puts if we’re cool with buying the underlying stock in the first place We decided we were at the beginning of this trade, but only if it got down to a certain price And don’t forget, we’d make up some of the cost of the stock with the credit we got to open the trade Whenever we do things it saves money and it’s called Cost Basis Reduction We’ll learn other ways we can reduce cost basis as we get deeper into options Now, the only time this win-win doesn’t feel so sweet is when the the stock moves way down past the strike we picked But even that’s okay too One: huge moves like that just don’t happen that often And Two: If we no longer believe in our assumption on the stock, we could place a buy order and close the trade to accept the loss just like we talked about in Level Three. Anything else, Ryan? If we do still believe in our assumption and just want more time, we could do what’s called rolling rolling is where we close the trade and, at the same time, open another one with a different expiration It works out well when we’re right, even though we could still get assigned if the option is in-the money Thank you, Ryan Now, if we do get assigned or find ourselves in a long stock position we want to get out of there’s another strategy we can learn It’s totally the next video But first though, let’s do recap The strategy that we covered in this video was Selling a Cash-Secured Put Because we sold the put we are bullish the stock We thought it’ll go up we picked selling a put over buying stock or even buying a call because one, we keep the premium if the stock moves up or stays neutral at expiration Two, if the stock does move down, and we get assigned to buy the stock, it would be at the price we picked Also, if we do get assigned, the premium we got up front lowers the cost basis of the stock Four, if we weren’t assigned yet and no longer believed in our assumption, we could just close the trade and move on Sometimes that means taking a little loss And last, if we did still believe in our assumption and wanted a little more time, we could roll the trade to the next month’s expiration So it’s awesome if we just collect the credit from selling a put and then it expires worthless to the buyers We make money and don’t have to deal with the stock If we do have a long stock position, though, either by selling a put or by buying stock the old-fashioned way we will want to sell it at some point and that’s why we’ll learn how to use options to get rid of stock at the price we pick Click on over to the next video where we’ll learn our next strategy, the covered call Or uncover more about selling puts and rolling over at tastytrade and dough.com Hey guys thank so much for watching
I hope you enjoyed it You can always click for more resources
and uh you know check out whats next you never know I might do a british accent
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7 thoughts on “Ep. 4.5 – Strategy: Shorting Cash-Secured Puts | Step Up to Options”

  • Charlie Ragan says:

    Crazy awesome.  These are great concepts to learn at any age.  I am so glad to show this to my 15 year old.  Fantastic way to learn.  Thank you, thank you Tom, Rachel and team.

  • What would happen if you have a small ($5000) brokerage account and the buyer exercised his right to the put and sells his stock? In the case of XYZ, you would have to buy 100 stock with a value of over $20000. Does your account make you automatically sell them back into the market or do you buy them on margin? If so, how long can you hold them before you are forced to sell?

  • what do you mean by "if we werent assigned yet and no longer believed in our assumption, we could just close the trade" ?

  • Christopher Easler says:

    So if you're selling a put and it is ITM also you still have to place a buy order before expiration to take a profit??

  • Bum Diddily Dee says:

    Now when you look at that screen where AAPL was $129, you woulda bought 1000 call contracts and MARGIN the heck out of selling naked puts at that time. Or NVDA when it was $70.

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