Trading Options Secured Put and Covered Call
Trading options in the scenario I will describe is really not that difficult to understand if you can follow what I am demonstrating in this blog post. I used only the secured put and the covered call techniques to get started in trading options as I had cash and these were the techniques that came easiest to understand. I continue to bite off one chunk at a time learning more about trading options.
Using screenshots from my Options House account, the stock Nutanix (Ticker Symbol: NTNX) is a good example of these techniques in action because I can show both, starting from the secured put, and then going to the covered call, and back to secured put over a period of approximately sixty days. Again, as I stated in my blog, What is Options Trading Drawback?, don’t get caught up in any jargon I am using if it confuses you, just try to understand fundamentally what I am doing.
Nutanix is company I came to know of by watching CNBC, this is a new stock trading at pretty low valuation, but the options premiums were pretty high given the price of the stock. So, I speculated a bit and opened the first part of this strategy which is selling a secured put. The term secured put just means that I have the cash to buy 100 shares of NTNX if it is put to me at the strike price I sold the put at, which is $30; otherwise, the put option would be naked position.
On December 16th, 2016, I sold 1 NTNX Jan17 30 put at $3.52 per share (an option bought or sold always consist of 100 shares)
Technically, from the 16th December through January 17th, if the stock was to hit the $30 strike price, I could be assigned(put) the stock, but that usually doesn’t happen. It usually comes down to that last day on expiration if the stock is in the money or not. Typically, when you sell an option, you want to collect the premium and see the stock price stay far away from your strike price, in my case the $30; however, that may not always be the case and you need to be willing to take on the stock at that time. You will be put the stock at the agreed upon price, even if the market value is below your strike price.
On the third Friday of the month is when monthly options expire, which in this case was the 20th of January, and on this day the market close stock price for NTNX was $28.05 which was below my $30 strike; thus, in the money. I didn’t flinch and try to close my position beforehand, as I didn’t mind owning the stock.
On that Saturday, I was assigned 100 shares of Nutanix for $3,000 + $4.95 commission. To recap, I sold 1 put option that was secured because I possessed the $3,000 needed to purchase the stock NTNX if it was put to me, which wind up happening. I also collected $352 in premium in December for selling that put option. I now own $3,000 worth of NTNX stock.
As it stands, my cash has been substituted for stock, and now I will perform what is called a covered call. It is covered because I own 100 shares of the stock in question, so if the stock is called away from me, I do not have to go to the market to buy them as I already have ownership of 100 shares; otherwise, this would be a naked position.
I would like to get my cash back, and sometimes a little more, depending on the situation as I am in this more for cash flow than stock appreciation, though when I do get stock appreciation, all the better. On January 23th, 2017, I sold 1 NTNX Feb17 30 call at $.95 ($.95 x 100) per share and collected $89.49 after $5.45 commission and $0.06 fee. I will keep this position open until expiration.
We are now close to expiration on 17th of February for this position and the state of my option is as follows. NTNX is in the money which gives strong indication if nothing materially changes over the next 3 days, that the stock will be called away from me at $30 strike. If it remains at $32.14, I do not capture that appreciation as my gain was capped at my premium of $95, because like I said, I wanted my money back.
If I get my money back after the 17th, then what happened is- first I leveraged my cash, was assigned the stock, then I leveraged the stock, and if called away, I will get back my original cash investment and I can start the process over again on the same stock or another if I like. Let’s see how well I done by doing the math. My initial investment was $3,000, and I received $351 + $89 = $440 in premiums over a 63 day period for return on investment (ROI (net profit/cost of investment) x 100) before taxes of 14%.
This concludes this example of trading the secured put and covered call options.
