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

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 you never know keep you entertained

keep you on your feet see you next time