Selling Weekly In-The-Money Puts To Enter Covered Call Positions

Introduction: When To Utilize Cash-Secured Puts?

Cash-secured puts are utilized best to buy a stock at a discount in the short term. Also, in-the-money short puts (synthetically long stock) are appropriate to circumnavigate dividend withholding taxes. For example, I'm a Belgium-based investor and manage client portfolios that own Investor AB, a Swedish investment firm aka 'the European Berkshire Hataway'.

The problem is that there's a total dividend withholding tax of 50%. That's a pity. So what do we do? We are synthetically long the stock by selling in-the-money cash-secured puts with a delta of 90+ for the coming 12 months. The reason for that is because the one-year dividend is priced in, so the puts are more expensive.

For foreign investors looking for European dividend aristocrats, you can mimic the stock by selling in-the-money cash-secured puts to capture the dividend and maybe a covered call-like strategy can be implemented as well.

Looking For A Long-Term Leader That's Crushing The Market: Service Now

Service Now earns a stunning 99% overall rating, meaning it belongs to the 1% best stocks relative to the S&P-500. As premium members know: focusing on outstanding underlyings with breakout potential creates the most attractive short-, mid- and long-term opportunities. Moreover, Service Now belongs to the 3% best equities when it comes to earnings consistency, growth and analyst revisions. In terms of price strength, Service Now sports a 95% momentum score, putting it far ahead of the S&P-500, Nasdaq and its industry.

The directional movement remains bullish (green bars) with the MACD bouncing back up from the signal line, well above 0. The last time Service Now generated a buying or accumulating signal was in 2016 at $75-$85. The stock has since more than quadrupled, with new buying signals presenting themselves at the lower end of the channel.

(Source: Pro Real Time)

Selling A Weekly Cash-Secured Put On Service Now (NOW)

Below you can find the puts for Service Now with one week to expiration. Since we want to enter a covered call write, we opt for in-the-money puts which have a higher delta and thus a higher likelihood of expiring in-the-money. Once the shares are put to us, we sell a covered call with a one-month expiration period.

(Source: Market Watch)

The following outcomes appear in the cash-secured put calculator.

(Source: Option Generator spreadsheets)

Selling the $350 put leads to an adjusted cost-basis of $337.4 if the shares are put to us. This will only take place if Service Now closes below $350 by the end of next week. Our maximum return is 3.62% if the put expires worthless. Our breakeven is 1.55% lower than the current market value, thereby providing an immediate cushion for our future buy and hold position.

Selling An Out-Of-The-Money Covered Call (1-Month Expiration)

When the shares are put to us, we can turn to traditional covered call writing.

(Source: Market Watch)

Selling the $355 out-of-the-money covered call with a 1-month expiration yields a 4.32% time value return, while allowing for 3.60% upside potential, thus a maximum one-month-return of 7.92%. Our breakeven stands at $327.92.

(Source: Option Generator spreadsheets)

If we add the time value component of the in-the-money put ($5.32 per share) to the equation, our adjusted cost-basis suddenly amounts to $322.6 or 5.87% below current market value. The lower breakeven point automatically increases our chances of success. By nibbling at your cost-basis, the risk of permanent capital losses decreases while the compound effect accelerates (re-investing the cash proceeds from covered call and cash-secured put in other securities).

We now have the covered call write in place which puts us in position management mode (rolling out when the option is in-the-money at expiration to avoid assignment). Covered call writing also opens doors to other complex strategies that we present to our premium members. Interested in our premium membership plans or a 1-on-1 online meeting? Take a look at our "Pricing" page.

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