How to Trade Cash-Secured Puts on Robinhood: A Complete Guide by InTheMoney

how's it going it's adam and today we're talking about cash secured puts what are cash secured puts well and in essence they are locking in a price to buy 100 shares at and getting some money for doing so i mean that's basically it there's a little bit more to it than that but that's that's the essence of a cash that you put you're locking in a price by selling a put to buy 100 shares at now if you're already lost that's okay because i feel like the learning curve for the strategy starts out a little steep but then once you get it like it's in there you don't have to constantly be re-remembering re-figuring out like how does this interact with this like once you get it it's stuck in your head it'll become very very easy from that point on so if you feel like you're struggling right off with a little bit to grasp what a cache secured put is don't worry don't be disheartened it is totally normal and there will be a moment where it clicks and you'll understand basically all aspects of this strategy so i'm going to teach you a cache secured put is and then we'll actually trade one on robinhood so you can see what that's like as well you ready all right let's do it got my tablet my pin the foundation of understanding cash secured puts revolves around the idea of selling to open you are probably very familiar with buying the open that's when you go find a call or a put and you're like that looks good i want that so you pay some money for it you collect the option it's in your possession you no longer have your money it's out there in the ether you have that option and over time you hope that the value of this option rises in the market so that you can sell it back and collect more money than you initially paid that would be getting a profit for the trade selling to open is being the other guy the guy who sells the option the guy who sold the option to you in this hypothetical so when you sell to open you go to your brokerage platform whatever that might be robinhood td merchant etrade tastyworks whatever and you sell an option that you don't already own when you sell an option you don't already own you create an entirely new contract you are writing an option and you sell it to someone else so you are providing the option in this case you're not buying it from someone you're literally creating it out of thin air and selling it to somebody else so there's a very simple exchange that occurs when you sell to open an option over here on the left is a buyer and over here on the right is obviously you the seller and when you go to sell to open an option you give the guy a contract and in this case it's going to be a put and in return for that contract this guy gives you some money that's as simple as it starts out as that's it and this money that you receive is yours it's yours to keep forever you can do whatever you want with it so when you sell cash secured put and we'll talk about what cash secured means here in a minute but when you sell this cash accurate put you are selling to open a put to somebody and you are collecting some money in return and that's as simple as it gets when you first sell to open this position and again you get that money instantly it is instantly added to your buying power and you can withdraw it you can spend it you can buy more stocks you can do whatever you want with it now after this point after you've sold the put there are a couple possible outcomes and we are going to run through these possible outcomes by simulating an actual trade so we're going to we're going to write down some specifications for a specific put okay so let's sell to open this put here and i've written the put specifications so the current stock price which is denoted by s sub 0 is 26 for snap that's the underlying we're going to be hypothetically trading on today and k is the strike of 25 p is put premium which is 50 cents and the expiration is on the 2nd of october which is less than a week from now so when you first sales put you're going to go to your brokerage and you're going to find this put option and you are going to enter a limit sell order even though you don't already own it you're going to enter a limit sell order which will create an entirely new contract so you go set a limit order for 50 cents at the mid price and it fills so this transaction up here just took place when that order fills as i'm sure you're well aware of this 50 cents right here that means 50 50 cents in premiums terms is 50 cents per share of the 100 shares that the contract controls so when you see 50 cents in premium that means 50 in more realistic terms so like i said this is as simple as it starts you sell a put you get some money in return that's it now things can get a little bit more complicated here as time goes on but you can enjoy that 50 however you want to so let's recall that s sub 0 is 26 so the current trading price is right here and let's also recall that our strike is 25 so our strike is down here so currently because the strike price is below the trading price this option is out of the money it's out of the money because if the buyer of this option your counter party right here this donut if he decides to exercise this option he will be selling 100 shares cheaper than he could at then if you just sold them at the current trading price it's not cost effective it makes no sense to exercise as put option therefore it is out of the money so if s sub zero the current stock price stays anywhere within this range our contract or put option will be out of the money and if it stays within that range the entire time it is guaranteed that at expiration this option will expire worthless because the counterparty will never have a chance to exercise because it was never in the money at any point so if they never exercise if they never have the opportunity to exercise if the option never gets in the money then it is guaranteed to expire worthless and nothing happens you get to keep your 50 bucks and that's it it's pretty easy keeping that 50 bucks is commonly called collecting premium you sold that option for a credit a credit is when you receive money and that is also synonymous with collecting premium and when you collect that premium and the option expires out of the money you keep that premium you never paid it back to anybody never goes anywhere you're going to keep it the whole time if you want it to we'll talk about how that might not be the case in certain scenarios but most of the time you'll keep that money regardless but when the option expires nothing else happens you collect the fifty dollars it expires that's it the contract evaporates it no longer exists you have no obligations or liabilities you are done with the trade and you can open a new cash security put if you wanted to so that's one possibility that it expires out of the money in that case you just keep the 50 bucks nothing else happens but let's say s sub 0 drops down and is somewhere in this range so at that point if it's below 25 your put is now in the money now this is where things get interesting so you've collected 50 dollars but you also gave the sucker a put who now has the right to exercise that put and if you remember when you exercise a put you are selling 100 shares at the strike price so when this becomes in the money it is possible at any point in time that your counterparty exercises their option selling 100 shares at the strike price it is more likely that your counterparty will exercise the deeper in the money it is uh or the closer to expiration it is that is because the deeper in the money or the closer to expiration the less extrinsic value the option has which means the less the person will give up by exercising if you don't understand what that means that's okay you don't have to to understand that the deeper in the money it is and the closer to expiration is it is the more likely the buyer is to exercise now if it expires in the money is almost guaranteed that your counterparty is going to exercise when your counterparty exercises they sell 100 shares of the strike and that's why you as a seller are there you are there to fulfill that that right that the buyer has so when they sell 100 shares of the strike you have to buy 100 shares of the strike you're on the other end of the trade and when that happens when your counterparty exercises that means you get assigned so they exercise but you get assigned you are assigned to to buy 100 shares of the strike and this is a totally normal process when you have a cash secured put it is ultimately at some point going to happen so it's not something it's something you might try to avoid and we'll talk about in a minute but it is something that is probably going to happen to you at some point if you trade cash secured puts frequently so what let's talk about what that looks like so let's say the stock price changes it no longer is at 26 let's say it drops all the way down to 24. and let's say it hovers around 24 and the whole time your buyer is not exercising but then it hits expiration day and after close on expiration day the buyer exercises and you are assigned so let's talk about what that looks like so here's your portfolio over here and the whole time you have this put open you're going to see that you have the put so it'll show that you have a short put and it will say how much the put is worth in the market so over time maybe the put increases in value and now it's worth not 50 but 90. don't worry this does not affect you right now because you are not buying to close we'll talk about that here in a minute but because we are not planning on buying to close in this scenario you get to keep the 50 so don't worry about this number so much for now but you will see this in your portfolio for a little bit changing in value even though you still get to keep your 50 unless you buy to close this put which we'll talk about here in a little bit so you're going to see this put and then when it gets assigned this put is going to disappear and in return you have to buy 100 shares at the strike price so you are buying 100 at uh 25 which means you are paying a debit of 2 500 for this share so you have 2 500 worth of snap shares okay don't be confused this is adam from the future okay i'm talking quiet because it's a little later at night it's not like anyone's sleeping i just it just makes me talk quieter okay so because assignment can happen at any point in time robin hood or whatever brokerage you use is going to hold this money aside as collateral so however much it costs to buy 100 shares at the strike price is the amount of money that robin hood's going to take and set aside to ensure that you have the funds to pay for those shares in case you do get assigned so if the strike is 25 you'll see 2 500 disappear from your buying power if it were 24 you'd see 2 400 disappear from your buying power and so on all right future adam is peacing out to you so let's say this is a debit so if you pay 25 per share for each of those 100 shares we currently have a profit loss that is unrealized for this position the profit loss is the difference between the current trading price and where we had to buy the shares at which is one dollar per share because our average cost for these shares is 25 and the current trading price is 24 we have a profit and loss of minus 100 we also have to keep in mind the 50 we initially received so let's add 50 to our profit and loss and we are now at a loss of minus 50 so at this point i would not be surprised if you're bashing your head on your on your desk going what is the point of all this we still ended up at a loss i'm confused why we even did this to begin with and that's okay like i said the learning curve is kind of steep but once you get all the little pieces it'll click and i promise it'll make sense let's remember the possible outcomes the first possible outcome was that it expired out of the money that would be great because if it expires out of the money then we get to keep the credit without ever having to buy 100 shares and incur any sort of loss so that is a distinct possibility and would be a beneficial outcome however this outcome even though we ended with a loss so far can still be beneficial there's two reasons why this outcome is not necessarily bad if we do not mind owning snap or if we actually intended to get assigned at some point in own snap then we don't mind holding these hundred shares that are in our portfolio and these hundred shares if they rise in value it can very quickly recoup these losses and this is even better if you were initially intending on owning snap because if we were initially intending on owning snap remember what s sub zero was to begin with it was at 26 dollars if we bought it 26 and our average cost would be 26 dollars per share which would mean our cost basis is what this is called our cost basis is 2600 and as the stock price dropped down to 24 we would hit a loss of minus 200. now this is unrealized sure but you see how 50 is a much more advantageous and preferable position to minus two hundred dollars so there becomes this two-sided coin to why you might want to sell a cash secured put the first is just to collect premium to sell a put in hopes that it doesn't get in the money and doesn't get assigned and in that case you just get to keep your premium without ever having to own the underlying shares or you intend on owning the underlying but you want to collect a little bit of a premium first and so you sell a put to collect some premium and if you do get assigned great you are going to own the shares anyway but now the average cost for the shares is much cheaper hello how's it going hope you're not falling asleep like i am because this guy oh man he's a [ __ ] nerd nerd that he may be i need to correct something he just said because although it's not entirely incorrect it's just not very well put i made it sound like you could choose between just collecting premium or wanting to get assigned and owned the underlying that's not true if you tried to just collect premium over and over and over again eventually one day you're going to be assigned so that said even if your intention is to collect premium most of the time trying to avoid assignment you still have to be okay if you do get assigned if you sell cash secured put on some garbage penny stock and then you get assigned and you're not happy holding those shares you're gonna have to sell them for a loss it's much better to sell cash secured puts on an underlying that you don't mind owning so that you can recoup those losses we talked about in case you are assigned that said you can still try to avoid assignment it's totally fine if you prefer the premium but at some point you probably will get assigned so don't come crying to me if you do hope things are going well how are the kids tell susan i said hi okay see you so let's go through the two possible outcomes that we briefly mentioned earlier just to recap here when you sell a cash secured put usually you're going to sell it a little bit out of the money to avoid assignment the goal is to collect as much premium as possible so you're going to sell it out of the money usually you can sell at the money if you're selling in the money that's a pretty uh bullish move you hope that it becomes out of the money so you don't get assigned but most of the time it's at the money or a little bit out of the money and you're hoping to not have to buy to close that position which we'll get to here in a second so in this case if you hold it to expiration and it state's out of the money you get to keep that premium you initially received and the put expires worthless it just disappears so that's one possible outcome the other possible outcome is that the put becomes in the money and you get assigned having to buy 100 shares of the strike which is kind of beneficial because if you're intending on owning the underlying anyway you probably got in at a cheaper price than you would have as well as received a credit for that premium you sold for that put option you sold however when you're trading cash secured puts you're most of the time you're trying to avoid assignment we would have much rather preferred to have kept that fifty dollars we discussed a minute ago when we sold that put and never had to buy the strike because when we bought it the strike we ended at a loss sure it wasn't that big of a deal because we can just hold the shares and hope that they rise in value but it would have been much better just to keep that 50 bucks and not have to be assigned so the goal of selling a cash secured put is to sell puts for premium collect that premium and avoid assignment if assignment does happen which it will happen it's okay because we already understand that we are okay with owning the underlying stock and letting it increase in value to recoup any losses but for this next section that we're going to discuss let's keep in mind that we are trying to avoid assignment we're trying to collect as much premium as possible so let's remember this transaction let's say you sell a put to somebody okay it's a little bit out of the money because you're hoping not to get assigned the further out of the money it is the less premium you're going to receive because out of the money options are cheaper however it's less likely that you're going to get assigned if you don't really care that you get assigned like if you get a sign at the current stock price and you're like that's sweet i don't really care i don't mind owning the underlying then you can sell at the current stock price at the money and that's pretty that's plenty good and you will get plenty of credit for that however if you sell an in the money put option that's kind of a bullish move because if you get assigned you're gonna end up buying at a more expensive price than the current trading price so you're going to have to hope that it gets becomes at the money or becomes out of the money so that means that the stock price has to go up to push your option at the money or out of the money so generally speaking you won't sell one that is in the money unless you are pretty bullish on the underlying stock so we still put that's a little bit out of the money uh because we're trying to avoid assignment sure we get a little less premium for it but we don't want to get assigned anyway this is kind of a pain in the butt so we sell a put and in return in this hypothetical we're going to say we receive 100 for this put that money is yours like i said you can do whatever you want with it but we're gonna hang on to it for a moment here because we can use that money to help manage our position and let's keep a running tab of our credits and debits here so when you receive money that's a credit it's going into your account uh that 100 is credited to you so we have a hundred dollar credit so far now this number that you see here that's a hundred dollars is gonna be represented when on your brokerage platform when you first open the position you will see your short put there in your portfolio and you'll also see this number this is describing your equity your money involved in the trade and in this case it's negative because you don't have money involved in the trade you have negative money involved in the trade the money is in your pocket or in other words in more simpler terms it's showing what the value of the option is currently so when you first open this position you're gonna see the value of the option is one dollar and it's negative because you don't have money in the trade you have taken money to enter the trade the negative is less important than what the value of the uh this number is so this is what the option is worth currently over time this is going to change so let's say that the underlying stock drops in value well that increases the value of put options so you'll see that this number will increase so this might increase to 150. have we lost this hundred dollars nope we have not this is just saying that the current price for the put that we sold at the market is one dollar and fifty cents but let's say you know when we initially sold it it's out of the money but when it drops down a little bit it pushes our option in the money and this is the current value of that option at the market well we could leave it like we said we can just let it be in the money we'll take our 100 bucks and run and we'll get assigned at some point and when we get assigned we'll have an unrealized loss that we hope will be recouped as the stock moves up in value so we could just do that we could leave it we want our hundred bucks we want to go do something with it we want to go have dinner tonight sure that's totally fine that's a good outcome but like i said let's focus on trying to avoid assignment here because we just want to collect premium we don't want to end up with an unrealized loss so one thing you can do to avoid assignment if your put option becomes in the money especially as it nears expiration because the closer to expiration it is the more likely you are to be assigned the one thing you can do is roll your put rolling your put is buying to close your position and then selling to open another position with a lower strike probably an out of the money strike so if it becomes in the money and it's worth one dollar and fifty cents here we can buy to close this position okay so we're gonna we're gonna buy to close this here in a second but we also wanna know what option we're gonna sell to open that's later in the future and further out in strike we have to choose one that's later in the future because ones that are further out in the future that have a few future expiration are going to have more extrinsic value if i just choose the same expiration and try to sell buy to close this position and sell one that's further out of the money those out of the money options are gonna be cheaper than the one i've already sold so you'll see in a second that won't allow us to collect a credit that'll be a debit and we want to avoid that that doesn't make sense i'm sorry it's okay so let's go ahead and find an option let's say these options return to okay so we have our first put that we sold put one and we're gonna have a put that we're gonna sell out here in a second so let's say sub-zero has the current stock price is uh 20. input one has a strike of 21. so this put is in the money put two out in the future has a strike of 19. so let's say this is a 10-2 expiration and this is a november 28th expiration this put is worth one dollar and fifty cents as we can see from up here it's become in the money it's now worth the dollar fifty this put out here even though it has a lower strike because of the time value of this option is worth more let's say it's worth two dollars so what do we have to do to buy to close our first position well we have to pay whatever that option is worth so remember we're keeping track of our credits and debits over here so we'll buy to close our first split so we're going to pay 1.50 which is 150 and then we'll sell to open the second put way out here that is now out of the money so we're trying to avoid assignment and we'll collect a credit of however much that's worth which is two dollars so let's look at how much money we've gathered from the position so far we collected a hundred dollars for selling this initial put and then once it became in the money and was worth 150 we bought to close it so that's this section we sold here and then we paid to close the position right here then we sold to open a new put that's out of the money to avoid assignment for a higher credit than we had to pay to close our other put and we received 200 for doing so so so far 100 minus 150 is negative 50 plus 200 makes it 150 return so what happened well we initially sold this put for 100 bucks but by rolling out our put and avoiding assignment we've actually collected more premium we've collected a total of 150 dollars in premium and avoided the potential for assignment so rolling your put is avoiding assignment by pushing your put out of the money again sometimes this is not possible which is why you want to be comfortable with being assigned and be comfortable with owning 100 shares of the underlying stock at this at the strike price but this is a great way to avoid assignment and continually collect premium so when you roll make sure that you're buying it close for one price and you're selling to open for a higher price so you're collecting more money than you're paying that's the critical part of rolling your position so let's let's recap everything so far there's several possible outcomes when you sell to open a cash secured put the first is you sell the put you collect your money that money is yours you can do whatever you want with it i promise you you can do whatever you want with it you'll see in your cash balance that it increases by however much you sold that put for time goes on time goes on times go goes on and it expires out of the money nothing happens your put evaporates you no longer have any obligations and the trade is over and you've always had that premium you collected and it's yours to do whatever you want with so that's the first possible outcome it's a nice outcome right second possible outcome is you sell your put you collect some money for selling that put and time goes on time goes on it becomes in the money and your counterparty decides to uh exercise that means you get assigned this is more likely the closer it is to expiration and the deeper in the money the option is when you get assigned you have to buy 100 shares at the strike price so you're going to have 100 shares of the underlying in your possession you're going to have an unrealized profit and loss which is the difference between the strike price and the current trading price times 100 minus however much you receive for the put so think about it if you buy 100 shares at 26 but the current trading price is 25 well you have a 100 loss but you can also subtract the premium you initially received for selling the put and this is fine you're still going to end with an unrealized loss that isn't too bad and if you trust that the underlying is going to increase in value it will recoup your losses this the third possibility is you sell to open your cash secured put you collect some money for doing so that money is yours time goes on time goes on time goes on and it becomes in the money at some point you're a little bit scared that your counterparty is going to exercise and you're getting assigned and you don't really want to do that you much prefer to collect more premium so to avoid this you buy to close your put and you sell to open a new put in the future with a lower strike in this case you make sure that when you buy to close this put you're selling to open the new put for more money than you paid to buy to close this one you'll do this as one trade you'll enter a limit order to buy this put in a limit order to sell this one at the same time and it will be for a net credit this is called rolling your position and you can continually do this as long as you can sometimes this may not be possible unless you sell to open a new put way way out in the future with a lot of time value but you might not want to do that because you do have some money locked up as collateral to make sure you can buy 100 shares at the strike price and if you sell to open a new one way way way way out in the future to make sure that the whole the rolling you're put is a net credit well you're gonna have that money locked up for a long long long time and you may not like that okay so those are the three possible outcomes we've discussed so far the main strategy you should be implementing here is selling to open a cash that you would put and trying to roll it as much as possible without pushing it too far out where you have your money locked up for a long time for a small premium you don't want to do that but you're trying to roll your strategy and keep rolling it and avoid being assigned eventually you will be assigned and that's okay because you're just going to hold the underlying shares and let it rise in value in that case when you do get assigned we'll talk about selling covered calls against those shares but that'll be part of a different strategy where we talk about the the wheel strategy okay so option one expires out of the money keep the premium option two get assigned you have 100 shares at the strike price you're gonna have an unrealized loss that will be recouped as the shares rise in value possibility number three is that you roll your position to avoid assignment and collect more premium in doing so now we're gonna get to the fourth possible outcome so let's run through this example again where you sell to open a put and this guy pays you some money and in this case we're gonna say it's 100 again when you buy a put if you remember you have a negative theta as time passes you lose money the value of the option is deteriorating when you sell to open a put that's good for you you want this value of this option to deteriorate because if you sell to open the put for one dollar and then buy to close the put for 99 you just made one dollar in profit and this one dollar difference may not have been due to this the stock price or implied volatility it might be just due to theta eating away at the value of the option so if the value of the option decreases you can buy to close it for a cheaper price and that's that's good for your your profit and loss so maybe as time goes on uh the value of the option decays a lot and also it becomes very far out of the money because uh the stock price rises in value which would decrease the value of a put so time goes on and because of theta and because the underlying stock price moves upwards um because of delta the value of the option decreases to 20 cents well at this point you might be like what's the point because i have three months till expiration and i have to wait three months for this to expire out of the money and ensure that i collect all my all the premium so what's the point you know might as well buy to close it so instead of holding on to this hundred dollars and just running with it which you could definitely do you don't want to lock up all that collateral let's say the strike is uh strike is 25 you have 2 500 locked up in collateral you're like well i have 2 500 locked up just to collect an extra 20 bucks is that really worth it i can make way more money with 2 500 and a different investment or selling a different cash that you'd put so you decide to buy to close the position so let's run through the credits and debits here initially correct collect 100 credit and we'll write this in premiums terms and then to buy to close the position because options worth 20 cents now you pay a 20 debit so your profit and loss is 80 bucks and we put it in normal dollar terms now not in premium so you've locked in that 80 profit you no longer have this locked up as collateral and you can sell a new cash secured put that's maybe less out of the money and maybe the same expiration date but you'll collect more premium so far this has pretty much wrapped up the entire concept of a cash secured put although there's one more important thing we'll get to in a minute which is called cost basis but let's run through one more time the different possibilities when you sell to open a cash secured put the first possibility when you sell a cash you could put is it expires out of the money you keep your premium and that's it it expires out of the money you get to keep everything everything's fine and dandy the contract is uh dissolved it no longer exists you no longer have any obligations and your collateral is freed up in the case of assignment you still keep your put premium you buy 100 shares at the strike and your collateral is used and that's the point of having collateral is if you are assigned you can actually afford to buy those hundred shares so in this case it results in a profit in this case it results in a loss but but we anticipate that the underlying will increase in value recouping losses and this is why you want to be okay with owning the underlying because if you're not okay with owning the underlying and you think it's going to decrease in value well if you get assigned you might be stuck holding these shares or selling them for a loss because you don't want to hold them while they deteriorate in value so you want to be okay with owning the underlying stock roll your position you buy to close your current put that's in the money and sell to open a new put that's out of the money that's further out in the future for an overall credit so you collect more premium and you will have a different collateral and this is all to avoid assignment so in this case you collected more premium but that doesn't necessarily constitute a profit and loss you won't see that collection of premium as a profit and loss on your brokerage so we're not going to call it a profit and loss although in this case it's very good you collected more money it's now your cash balance has increased the final option is buy to close in this case not much value left and you want the free collateral and in this case would definitely be a profit so if you think about it this is why cash secured puts are so awesome it's because in the first example it's a profit and the second example yeah technically it's a loss but if you don't mind holding the shares and they you think they'll definitely increase in value in the future this is more of a profit than anything because you reduce the cost of the shares and you expect the value of the underlying to increase which will recoup your losses and produce a profit so really it's not so bad of a loss it's not like day trading and you lose two grand and it's gone forever in this case you collected more premiums so you can think of this like a profit although it won't show it as profit and loss on your platform and then the last position is a profit so really all four of these in one way or another can be looked at as a profit and that's why it's so awesome now if you decide not to roll your position or buy to close your position and it becomes more and more and more and more in the money and you can't roll it out for a credit uh way out in the future because it just be too far in the future you don't want to lock up your collateral for that long you may see that the value of the option is going to increase significantly so if you sell one for one dollar you may see over time it rises up to one thousand or ten dollars which is one thousand dollars in premium in this case your brokerage is going to it's going to show you a loss you're going to have an unrealized loss of a loss of 900 this is not really valid because you collected the 100 of premium up here and that is yours as long as you are okay with being assigned if you are okay buying 100 shares at the strike price then you maybe you're going to do so anyway if it's the current trading price and you're just going to buy those shares at the underlying at the current trading price anyway then you're happy buying it at the strike price you're happy you collected a hundred dollars and this loss won't matter because eventually when you get assigned this will go away okay you still get to keep your 100 bucks you just have to buy 100 shares at the strike price so do not panic if you see a massive loss when you're selling cash secured puts as long as you are okay with buying the underlying at the strike price there is no problem that loss will disappear although you will end up with an unrealized loss when you own the shares probably a pretty significant one that's okay if you think the underlying stock will increase in value so keep that in mind and do not panic if you're okay with owning out the strike price there's nothing to be afraid of this this loss will not become realized okay so these are the four possible outcomes i think when it comes to cash secured puts and we'll talk about how we can combine this with covered calls to create the rolling strategy which is a real juicy premium collecting strategy but we have one more thing to cover which is cost basis so actually i think we'll discuss cost basis when we start discussing the wheel strategy because that's when it's really really important to keep track of your cost basis is when trading the wheel strategy or trading covered calls but if you feel like you're going to be doing this on a certain underline quite a bit and maybe you're going to do some covered calls on it too to i would keep track of your credits and debits for your trades as well as the cost of shares if you do get assigned and to do so there is a spreadsheet down below i made for you it's not very complicated it's pretty straightforward just fill in your credits and your debits and if you do get assigned enter how much you paid for those shares that'll keep track of your cost basis for a cash you could put up until you get assigned now keeping track of this is most important because we'll be discussing how to combine this with covered calls in the wheel strategy where you definitely will need to know your cost basis if it doesn't make sense okay just just punch the numbers in there whenever you do a trade okay it'll become handy later when you do covered calls and cash secured puts combined as the wheel strategy i almost forgot we're gonna do an actual trade so you can see me do it so we're gonna sell one on snap okay we don't mind snap snaps a cheap underlying so the collateral we'll have to have a side is going to be fairly low so let's go to trade trade options and we're going to do one that's not super far out because if we have to roll our position we don't have to roll it super far out if i chose one that's way out in april and then it becomes in the money and i'm scared it's going to stay in the money and it's getting deeper in the money well i don't want to have to roll it out to january of not this year but the following year that's way too far out and then my collateral's held up forever so really you want to do it probably 30 to 45 days out because it'll make rolling your position easier and also theta starts to really ramp up so the value of those options will start decreasing quite quickly and if you ever want to buy to close that's a good thing because then you'll have to pay less to buy to close the position so we're going to do one that's 30 to 45 days out it is september 29th so let's do like october 16th that seems all right and we want to sell one that's a little bit out of the money before i do though i want you to look at my cash balance my cash balance is dollars and 3533.51 cents and i'll make sure you remember that here in a moment because this is where we will see the premium get deposited so we're going to go to snap again and we're going to go to a put and we don't own this put this is a put we do not own we're about to write it we're writing a cash secured put so we're going to sell one that's a little bit out of the money so let's say we don't mind owning snap if it drops down to 25 let's say that's a really nice entry price if it does drop that far great we wanted the shares anyway if it doesn't we get to collect the premium so it's no big deal we don't feel like we missed out so let's sell the 25 put for a premium of 70 cents so today we will collect 70 dollars so we'll tap on it we'll hit one to say that we're gonna sell one put contract and then we can enter the limit order another tip for the limit order just to remind you if we're going to sell to open immediately we have to sell for cheap so remember that if you want to sell to somebody immediately they're going to want to buy it for cheap so you have to sell at the bid price if you want to set a limit order for a higher price that's fine but the value of the put option will have to rise to meet you up there for you to get a fill a good place to start is right in the middle if there is a mid price for this one the bid ask is so tight it's only a penny wide so i'm going to enter it for 70 and see if the price changes and maybe we'll get a fill here but if you wanted an immediate fill you'd do 69 cents generally though it might be better just to wait a minute so we're going to do a minimum credit of 70 bucks and you can see our collateral there at the bottom is 2 500 that is because the strike is 25. if we were assigned we had to buy a 100 shares at the strike price we would pay thousand five hundred dollars for those shares so robin hood is taking two thousand five hundred dollars from me and setting it aside as collateral in case it gets assigned so that those funds will not be able to be uh used for any other trades in case i do get assigned so we're gonna go ahead and send the sucker off now if we go to our home screen there it is we see that put cell and see how it says minus 70 that's what i was talking about that's the value of the contract as that decreases in in value we'll see that our profit increases as that increases in value we'll see that we'll start incurring a loss however as long as we never buy to close that number does not really matter to us we may buy to close and that might be fine if we're rolling our position or if we've made a healthy profit but if we never buy to close that money that number is meaningless it means nothing to us because we keep that premium regardless of if it expires out of the money or if we get assigned so if i go up here to my buying power you can see that the money has been held aside as collateral and i'll show the math on the screen here so you can see but we have collected seventy dollars in buying power and we can cash that out however we want to be of course our collateral is gone it's tied up in the trade but we did collect 70 so once this trade is over once we buy to close or if it expires out of the money that collateral will get released to us and we'll have both the 70 and the 2500 in our possession but you did not lose that 2 500 it's still there and if you get assigned it'll be used to buy those those shares and that's not a big deal if we don't mind owning them let's run through an example of rolling this position so let's say this put isn't in the money but let's say it is in the money just for for an example and we want to roll it out so we want to buy to close this put for 70 dollars and we want to sell to open a new put in the future with a lower strike for a higher value so we could we collect a credit larger than the debit we pay so what i would do is i tap on the put i'd hit trade and then view all options we're going to go to the put we initially sold which is the 25 strike put you can see that by the minus 1 indicated right next to it in the top right to select multiple options we're going to tap select and we're going to buy to close this 25 strike put and we're going to sell a new one so we're going to tap on sell now and we want to sell one out in the future let's do one in november 20th here we can sell the 24 strike put for 165 dollars so just to recap here you can see how we're buying the 25 put for 70 and we're selling the 24 put for 164. this 24 strike put even though it's more out of the money is worth more because there's more time value built into the premium there's more extrinsic value and that value will decay off over time so this put will also have a higher theta so this is what rolling your position looks like we're buying the snap put for 69 bucks so far it's changed in value and then we're selling the 24 strike put which is more out of the money that expires a month later for an extra 100 bucks or so so you can see at the bottom we want to make sure that it says credit and not total debit we want to receive a credit when rolling our position so total credit is 94 cents we hit review and we're gonna do one we'll do 94 dollars to try to get a fill here there we go we got a fill and our collateral is going to be lower because the strike is 24. so instead of 2500 in collateral we're going to have a 100 release because they only want 2 400 in collateral so now on our home screen you can see that our old put has been replaced by a new put with a further out expiration for a lower strike and we've collected more premium so that's what it looks like to roll your position and to determine if it's a reasonable amount of premium you're collecting for how much collateral is being held up think of it as a percentage uh return on investment over time so so far we've collected 165 dollars the amount of the amount of collateral we have held up is 2 400 so let's divide that by 2 hundred so we're making a six almost seven percent return on our collateral over the next two months i would say a seven percent return on any amount of money over two months is a good return a way to give yourself an edge when you trade cash secured puts is to find underlyings whose options have high implied volatility whose options prices are inflated in fact you'll find options prices are very inflated before earnings and then suddenly drop right after earnings and that's good for you because if you sell cash secured put right before earnings and with an expiration shortly thereafter you'll find that you'll sell to open for a large amount of money and then after earnings you can buy to close for not that much so overnight because of that iv crush where implied volatility drops and options premiums collapse you can overnight make quite a bit of money and buy to close your position quite quickly and move on to a new cache that you'd put or a different strategy or whatever so find underlyings so if you find underlyings that have high implied volatility or underlyings you don't mind owning that have earnings soon that might be a good underlying to sell a cash secured put on so as for now i'm going to let the snap put stay here and i'll either wait till expiration let expire or maybe i'll roll it or maybe it'll get in the money and i'll get assigned but whatever happens i don't care because cash secured puts are the tits i hope you can find this appealing because out of all four outcomes that we discussed there's not really one that's bad there might be one that's a little more preferable depending on what you want out of the strategy but there's not really one out one distinct outcome that's negative so that's what makes the strategy so appealing and so great it's literally the one of the best strategies out there right up there with covered calls and it's meant for everybody if you have any questions ask them in the comments i answer questions that are written well and have not already been answered by the video so if you have a question that you feel hasn't been answered and you're capable of writing it coherently please ask in the comments i will reply one last thing these guys project m motors uh they found an instagram account that was impersonating me and so in return i'm shouting out their business they are project m motors in paterson new jersey but they ship bmw parts worldwide and they also focus on bmw engine rebuilds if you're in the area so if you are a car guy you have a bmw you want some parts whatever you just want to show some love to a business during this kind of tough time you can check out these guys's instagram and facebook page in the description below so shout out to these guys for finding the dude shoots pretending to be me although you know you can't really blame them [Music] that's a father's love

Channel: InTheMoney

Views: 378,649

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Id: r_rKof8IdfU

Length: 38min 49sec (2329 seconds)

Published: Fri Oct 02 2020