3/30/2020 Markets look like they don’t want to move much lower this week as the VIX continues to collapse. Sold the 140 put on Boeing for $10 and averaged down on MRO at $3.21. I’m neutral/bullish.

Hi everyone, I hope you are having a great start to the week. Charts are at the bottom of the post, and a description of cash secured puts and the trade I took this morning are below. 

I sold another put on Boeing this morning in order to get more exposure to the stock in the case that I’m filled. I wanted to be long at 125 a couple weeks ago, but the put I sold expired last Friday so I’m selling another cash secured put expiring this Friday. I sold it for 10 dollars this morning when Boeing dropped to about 146 from the open. If I kept my morning limit order for $11 banking on the fact that Boeing would retest the top of the gap fill at 140, it would have been even better. Either way, I sold it for $10 which was the original plan. 

What I like about selling these weekly / bi-weekly puts is that time decay works great in my favor. As each day that passes, the option’s time premium is worth less and less, meaning time is working in my favor.

The reason why I’m selling the put is because I don’t want to own the shares at current prices, but would be glad to own shares at cheaper prices (like 130 for Boeing). If I sell a put with a strike price of 140 for $10, if Boeing closes below 140, I am forced to buy the shares from the put owner at 140. Since I receive the $10/share premium upfront, I’m effectively buying Boeing at 130. 

Now, the best part is that if Boeing closes above 140 by the end of the week, the put option expires worthless and I keep the $10/share or $1000 per contract premium, and  can sell another put the following week. 

Another small benefit of selling a cash secured put is that if the option expires in the money, forcing me to buy the shares at 140 from the put buyer, the option premium reduces the cost basis of the shares so you aren’t taxed until you sell the shares. 

I want to point out that there are 3 trade-offs in selling the put versus setting a limit order at $130. 

1. Since this is a cash secured put, my money is tied up. For each put I sell, I’m tying up $14,000 of capital (strike price of 140 times 100 shares) that I can’t use to purchase stocks. This is offset by the premium so I’m tying up $13,000 per option contract. If you set a limit order, it can be cancelled or revised at any time so no capital is tied up.
2. If Boeing drops to 130 then quickly reverses before the week ends and rebounds sharply to let’s say 180, the limit order for 100 shares would have given me a gain of $50 per share for $5000, whereas selling the put only gives me the premium of $1000.
3. A large downside of selling the put versus setting a limit order to buy shares is that if the stock tanks, you are still forced to buy the stock at the strike price of the put, leading to large losses. This is true if you are trading the stock and don’t plan to own it for a long time. In my case, since I’m fine with owning Boeing shares at 130, it doesn’t matter to me even if the stock drops to something like 70 by the end of the week. In other words, selling the put is equivalent to having a permanent weekly limit order set at 130 and getting paid for it. 

Below is the daily chart of Boeing. The horizontal lines show where the put I sold today is profitable and where it starts generating losses. 

I’m surprised MRO hasn’t bounced yet, but the entire energy sector is still not doing great with crude oil briefly breaking below $20 today.