News Snapshot

• The S&P 500 nears correction territory—which would be a 10% decline from February’s highs

• President Trump's recent threats to impose new tariffs, among other factors, have led to a significant surge in the VIX index

• January Jobs Data—7.74 million available positions (100k more than estimates)—while it’s a lagging indicator, it is still worth mentioning

• Canada and the US could reach a deal on oil and gas tariffs

TL;DR

“Good-To-Know’s”

Relevant Quote I Like

Thought Throttle

First, A Reality Check

The S&P 500 has an average return of ~10% per year (Annual average accepted as 8% - 12%). This is what the market (S&P 500) has done over the last 10 years:

You will notice that the past ~6 years have given us great returns (~16.68% average of the annual returns), not to mention the past 2 years both giving us 20%+ Returns. In a bull cycle like this, arrogance and overconfidence in one’s trading abilities become a concern. This is also one of the reasons why there are many financial influencers pushing inaccurate and unrealistic returns to new investors.

A common one is the ability to consistently make ‘just 1% per week’ from premiums received. This sounds achievable and reasonable until you realize that this would be an annual return of 67.77%. Not realistic. Certainly not over a long enough time horizon. Here is a list of some of the top fund managers and their average returns:

Yes, smaller accounts can sometimes achieve higher percentage returns compared to the massive funds these professionals manage. However, it’s important to maintain a realistic perspective and acknowledge the challenges that come with trading, rather than promoting unrealistic expectations.

With Expectations Back to Reality, Let’s Look at the Cash-Secured Put

A Cash-Secured Put is a strategy many investors use to generate income while positioning themselves to buy a stock at a lower price. It involves selling a put option on a stock you’d be comfortable owning and setting aside enough cash to purchase the shares if assigned. In return for taking on this obligation, you receive a premium upfront, which can serve as a steady income source or lower your effective purchase price if the stock declines.

If you missed my previous article where I walked through a real trade example of selling a Cash-Secured Put, be sure to check it out for a deeper dive into how this strategy plays out in practice.

Here is a simplified illustration of the outcomes of selling a CSP:

This strategy works best in scenarios where you wouldn’t mind owning the stock at a discount but also want to capitalize on market fluctuations. By selecting the right stocks and strike prices, you can tailor your risk and reward based on market conditions. The key to success is choosing fundamentally sound companies and understanding the different aspects of options.

What is a realistic target as far as returns are concerned?

Well, it depends on a few factors, including the underlying, the current volatility that is priced into the options, and the delta you are comfortable with. The volatility of the underlying has a massive impact on the differences. A super volatile security, like Nvidia (NVDA), will have more expensive options than a low-volatility stock like Coca-Cola (KO). We can see this when reviewing a snippet of their options chain.

Looking at these chains we can see that the .22-.23 Deltas vary widely in premium prices. KO's .23 Delta put has a premium of $72 (~$3.13 per unit of Delta), whereas NVDA's .22 Delta put has a premium of $310 (~$14.09 per unit of Delta).

This is because Nvidia has had more extreme movements in the past, and thus, the market expects it to continue having extreme movements in the future. Options sellers need to be further compensated for this risk, and options buyers are willing to pay a higher price at a chance of higher volatility.

The volatility of each underlying stock can also be compared to its historical levels. For example, KO currently has an implied volatility (IV) of 19.9, placing it in the 98th percentile rank, indicating that volatility is significantly elevated. This suggests that the market expects KO to experience greater price fluctuations over the next 30 days compared to its past behavior. Due to the broader market’s recent poor performance, this surge in implied volatility results in higher option premiums, making selling options more lucrative.

The option chosen will also affect the return. As seen in the options chain above, the higher the delta, the higher the likelihood of the option expiring ITM, and thus, the higher the likelihood of assignment. Selling cash-secured puts with a 30 delta yields higher premiums than a 15 delta but increases the likelihood of assignment.

The longer the option has until expiration, the higher the premium—there is more time for the option to move. This gives the option buyers more time to be right and the option sellers more time for the underlying to move ITM and bring on assignment—which increases the premiums.

A Couple of Things To Note

The delta you choose will largely affect your returns along with your risks. Most investors sell CSPs with a delta of 15 - 30, though it’s not uncommon to see puts being sold with 10 deltas, or 35, even 40 deltas. You are free to tailor your trade to your outlook, biases, and risk tolerance however you see fit—there are no rules. But, make sure to do your research and know what you are getting into. Also, it may help to talk to a financial professional about your specific situation.

When analyzing the option’s chain, you may also see the higher premiums on the longer-term options, leaving you to wonder, 'Why not just sell the longest-term Option for the highest premium?' Good question. Because we don't want the highest premium, we want the most efficient premium. In other words—we want the best value.

Because of the non-linear aspect of theta decay, we want to utilize theta when it is the most potent, and working the hardest for us, the option seller. This is how theta decays as the option nears expiration:

It really ramps up as expiration draws nearer. There is much debate over which options to sell—some investors like 60 Days-To-Expiration (DTE), some like 45-30 DTE, and some like selling weeklies ~5-7 DTE. They all have their advantages and disadvantages, but the common thread is looking for efficiency in time decay.

The sweet spot for many traders is typically between 30-45 DTE because you get a balance of reasonable premiums without exposing yourself to the extended volatility risks that come with options further out in time. With weeklies, while the time decay is rapid, the premiums are generally lower due to the short duration, and the underlying stock must move less for the position to become more risky.

On the other hand, 60 DTE options often offer higher premiums, but they are more susceptible to volatility changes and can be less efficient in terms of time decay. Longer-dated options also require more active management, especially as they approach their expiration. The key is to find that balance between premium collection and manageable risk.

In Summary

Selling Cash-Secured Puts can be a powerful tool for generating income and acquiring stocks at a discount, but success comes down to strategy, risk management, and efficiency. By selecting the right delta, expiration timeframe, and underlying stock, you can optimize your returns while managing downside risk. Consistency is key—if you can steadily achieve around a 2% return per month (~26.8% annualized), then you're on the right track. Over time, these returns compound significantly, making CSPs a valuable addition to a well-structured options trading strategy.

Next week, we’ll dive into how to pick the best stocks for Cash-Secured Puts—stay tuned!

General Tips for Cash-Secured Puts

Only Sell CSPs on Stocks You Want to Own

This cannot be stressed enough. Only sell puts on stocks you’d be comfortable holding long-term if assigned. This ensures that even if the stock drops, you won’t mind owning it.

Focus on Solid Fundamentals

Prioritize companies with strong financials, consistent earnings, and durable competitive advantages to reduce the risk of significant declines.

Next week’s edition will focus on analyzing stocks for selling CSPs

Use Implied Volatility to Your Advantage

Higher implied volatility means higher premiums, but also greater risk. Look for stocks with temporarily elevated IV to maximize income while managing downside risk. The CSP is a ‘Short-Vega’ position.

Check the Options Chain for Liquidity

Stick to options with tight bid-ask spreads and high open interest to ensure efficient pricing and easier trade execution. A tight bid-ask spread means there’s less of a cost to enter and exit the trade, preventing unnecessary losses due to slippage. High open interest indicates strong market participation, meaning you’re more likely to have your orders filled at fair prices without significant price movement. Liquidity is crucial, especially if you need to adjust or close your position early.

There are Opportunities to Time Your Trades Around Market Events

Earnings reports, economic data releases, and Federal Reserve announcements can cause volatility spikes, which can boost option premiums but also increase risk.

Be Prepared to Manage Assignments

If the stock drops below the strike price, you’ll be assigned shares. Have a plan in place, whether it’s holding the shares, selling covered calls, or cutting losses.

Avoid Overleveraging

Keep sufficient cash on hand to cover potential assignments. Don’t stretch your capital too thin by selling too many puts at once.

Track and Adjust Based on Market Conditions

Stay flexible and monitor the market. If implied volatility drops or the stock moves significantly, consider rolling the position or closing early to lock in profits.

Throttle Q&A

What are the Tax Implications on Cash-Secured Puts?

When selling cash-secured puts, the tax implications depend on whether the put is exercised and the premiums received:

• Premium Income: The premium you receive from selling a cash-secured put is considered short-term capital gains and taxed at your ordinary income tax rate. This applies whether the put is exercised or expires worthless, as the IRS treats the premium as income the moment the option is sold.

• Put Exercised (Stock Assigned): If the put is exercised and you are assigned the stock, the premium you received reduces your cost basis for the stock. When you sell the stock, the capital gain or loss is calculated based on the difference between your selling price and the adjusted cost basis. If you hold the stock for more than a year, any gain will be taxed as long-term capital gains; if sold within a year, the gain is taxed as short-term capital gains.

• Put Expires Worthless: If the put expires worthless (the stock price stays above the strike price), you keep the premium, which is taxed as short-term capital gains. No further action is required until you make another trade.

In summary, the premium income is taxed as short-term capital gains, and if you're assigned the stock, the premium lowers your purchase cost basis, affecting how capital gains or losses are taxed when you sell the stock.

How do I roll a cash-secured put if I want to avoid assignment?

Rolling a cash-secured put involves closing your current position and opening a new one to extend the trade and potentially improve your outcome. To roll:

• Buy to close your existing put option to exit the trade before assignment.

• Sell to open a new put option with a later expiration date.

• You can also adjust the strike price (usually lower) to reduce assignment risk, ideally while still collecting additional premium.

• This strategy is useful when you remain bullish on the stock but want to avoid immediate ownership, allowing you to manage risk and improve your cost basis over time.

What’s the biggest risk of selling cash-secured puts?

• The main risk is assignment in a sharply declining stock. If the stock price drops significantly below the strike price, you will be obligated to buy shares at a much higher price than their market value.

• This can result in an unrealized loss if the stock continues falling.

• While you collect premium upfront, the risk is that the stock remains below your strike price, locking you into a position you might not have wanted to own at that price.

• To mitigate this, traders often roll the put or exit early if the stock shows signs of breaking down.

Is selling cash-secured puts better than simply buying stocks?

• Pros of selling puts:

  • Generates income from the premium.

  • Allows you to potentially buy the stock at a discount if assigned.

  • Can be used in sideways or slightly bullish markets.

• Cons of selling puts:

  • Limits upside—if the stock rallies, you only keep the premium and miss out on large gains.

  • Requires maintaining cash reserves for potential assignment.

  • If the stock drops significantly, you still take on downside risk.

Ultimately, it depends on your strategy. If you want steady income and are okay with owning the stock at a lower price, selling puts is a great strategy. If you prefer unlimited upside, outright stock ownership may be better.

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