CSP V: Fourteen 1%-in-5DTE trades, 9/19/22

It’s Monday after hours. Over the weekend I decided to focus on 5DTE CSPs that offer a premium of 1% for the week, but no more. Not that it couldn’t be a little bit more just because of how strike prices and premiums fall out, but I would select the 1st strike that met the 1% criteria, but no higher than that.

In the CSPs II post I described building a watchlist on Barchart of ETFs with weekly options and juicy premiums, and then mentioned the Performance Chart View of those, which looks like this:

This is a 1-month-peformance view (see top left) that I took a screenshot of, but I actually used the 5-day view for this exercise. After scrubbing that list solely on the metric of 1% return at less than 30Δ, not price action or anything else, I came up with this list of 7:

SQQQ, SOXS, LABD, TZE, FAZ, JDST, and DUST.

Then I determined which strike of each one to sell. Here’s a Put option chain for you to practice on:

Strikes down the left, then Bids and Asks, followed by delta and Open Interest. So which strike do you pick? The 35.5P has a great premium, 1.00 at the midpoint, but its delta is 36, so it’s out. Same for the 35P. The Bid on the 34P is 0.45, so comparing just the numbers (cents to dollars), 45 is > 34, so that’s more than 1% and would work. But let’s make sure we’re not missing a less-risky strike: what’s the Midpoint for the 33P? You can just look at it and see that it’s 0.30. Or you can take the average by adding 0.25 to 0.35 to get 0.60, then dividing by 2 to get 0.30. Or you can see that they’re 10 cents apart, take half of that, 5, and add it to 0.25 to get 0.30. However you get there, the Midpoint for that strike is 0.30 and you’d likely get filled there. But 30 cents is less than $33, so that’s not a 1% return and you throw it out. So now you’ve found the one strike, the 34P, that offers at least 1% return, but not needlessly more than that, because that’s riskier, being $1 closer to the money.

After doing a few of those they should become second nature: find the 30Δ strike, then scroll up from there (lower in strike price) until you find the one where the Bid price in cents is smaller than the Strike price in dollars, back up one and that’s your 1% strike.

So I set up those 7 trades on Sunday to go in at Monday’s open. I asked the Bid price for each one, which makes it more likely that they’ll fill, even if the ticker opens a little higher. But don’t worry about cheating yourself, because your broker should give you the best possible fill. So you might offer to sell that 34P for 0.45, but if it’s actually trading at the midpoint, which it usually is, the broker should give you the better fill at 0.50.

Then I thought, “I wonder how the worst-performing ETFs would fare?” Maybe a silly question on its face, but tickers with declining prices often have juicier Put option premiums (because people are scared they’ll keep going down); and then maybe they’re due for a rebound, or at least won’t go much further down. So I built a list from the worst-performing 5-day Performance Chart View, which looks like this right now:

The numbers on the right are how far those tickers have dropped in just 5 days. Big losers you wouldn’t touch with a 10′ pole, right? Especially if your bet is they don’t go down too much more in the next 5 days. But after picking 7 of those to match the 7 I had chosen above, I went through and picked the strikes to sell. As I did that I wrote down the deltas of those strikes, both for the best and the worst, and calculated the average. This proved to me that stocks/ETFs in a downtrend have juicer Put premiums than those uptrending: the best-performers had an average delta for the 1% strikes of 14.2, while the average delta for the worst-performers was 10.0.

What that’s telling us is that to get 1% out of the beaten-down ETFs you can sell way down at 10Δ, whereas to get that return from the hot runners you have to be up around 14Δ. Granted, that’s not a huge difference, but it’s meaningful. And I started this website based on thinking that 10Δ was a pretty safe place to sell premium almost regardless of anything else, so I wanted to try it. And do you know what I found out?

Based just on today, when “the market” (I use the S&P500 as an indicator of that) was mostly flat , with a 0.7% surge at the end of the day, the worst-performing ETFs absolutely KILLED the best-performers. I did 1-lots of each of those 14 trades, and separated them in my TDA paper-money account, and the worst-performers made $316 while the best-performers lost $25. I realize those numbers are somewhat meaningless without knowing the collateral tied up in each trade, but being that they were chosen rather randomly, they’re probably similar.

But it gets better. Would you expect any of those trades that went in this morning to close today at my set profit point? (Which I haven’t talked about yet, but see below.) I didn’t, but 4 of them did. And they were ALL in the worst-performers group! Spoiler alert: I take profit at 50% of max theoretical, and set those buy orders up right after the trades go through. So four of those trades hit my profit point IN THE SAME DAY THEY WERE OPENED, and then I re-opened trades on those tickers.

So while all along I’ve been saying I’m looking for the potential for 1%/wk (which I am), I know from experience that most of these trades will close early and I can recycle that collateral into another trade. So let’s take a side-trip to talk about how to take profit from one of these trades, then we’ll look at one that closed today and see what I mean.

The conventional wisdom for most kinds of options trades is to take profit at 50% of the theoretical profit potential of the trade. For Cash Secured Puts it’s easy to calculate: if you sold a put for 0.50, or $50, that’s the max possible profit from that trade (but minus commissions). Half of that is $25, or the option is currently worth 0.25. You can track that manually just by looking at the position in your brokerage account. It should show that you sold that put for 0.50 on some date, plus today’s current value. If that value is 0.25 or less you’d want to close the trade and pocket the profit.

The reasoning generally goes like this: you made half-profit in probably less than half the time of the trade, so why wait around for MORE time to make LESS profit? Because time is generally the enemy of the option seller; given enough time, almost anything can happen to the ticker you sold the put on. So take half the profit and put it in your pocket before maybe the stock/ETF tanks and you’re on the hook to buy the shares at a loss, or buy back the put at a loss.

The “bird in the hand” analogy also applies: one “bird”, the half-profit, is captured, while the other “bird” is still sitting in the bush. It might still be there at expiration, but it might not. Many people use a 50% rule, but some use 75 or 80, maybe 90%, while some are happy with 25. I mostly use 50%, but I’m also not afraid to let a winner run if it looks pretty safe.

The brokers make it easy to automatically close a trade. After a trade fills, put a Good-till-Cancelled (GTC) Buy-to-Close (BTC) order on it at your desired profit point. So if I sell a put at 0.50, then I put a GTC BTC order on it for 0.25. But I personally fudge that down a little bit, because remember the 0.0066 commission we pay for selling, and again for buying? That adds up to 1.34 cents, and if I don’t account for that and sell at exactly 0.25, then I’m not really netting 50% of the max profit. So I round 1.3c up to 2 cents, then subtract that from my 25c sell price, and actually put in the BTC order at 0.23. Not a big difference, and it probably doesn’t matter in the long term, but I like to know that I actually got 50% of the max available profit.

So what does that look like in practice? Well, of the 14 trades I pre-staged Sunday, and that went in at the market open on Monday, 5 of them hit 50% profit in the same day. So remember, these were trades that could have lasted for up to 5 days, and they’re closing the same day they were placed. The first one that closed was FAS, so let’s take an in-depth look at it.

Monday morning at 9:31 my account sold the FAS 5DTE 62P for 1.20. That happened automatically from the order I pre-staged Sunday. Later in the morning I was going through the 14 positions putting on the GTC BTC orders, and I saw that the sold put was then only worth 0.50, well less than half (60 cents of course), so I bought it back for 0.49 at 11:16. Gross profit was (1.20 – 0.49) = 0.71, and subtracting the trade costs of 1.34c leaves a net profit of 0.697, or $69.70 because 100 shares. Collateral was the strike ($22) times 100, so $2200. Percent yield is then 69.70/2200 = 3.1%. In less than 2 hours.

Astute readers will note the disparity of earning 3.1% on a trade that was only supposed to make about 1%, AND that I bought back at 50%. I put in the sell order for that 62P at 0.66 (17Δ), just above 1%, per the plan. But it sold for 1.20. Hmmm, what happened? First I suspected a glitch in the paper-money platform, but ToS has a great feature called OnDemand that lets you go back in time, see prices, place trades, watch them, etc. So here’s what happened: FAS closed Friday at 70.14, and the 62P had a Bid/Ask over the weekend of 0.65/0.90, midpoint about 0.72. But FAS opened today at 67.80, a full 2 dollars and 34 cents lower than it had been when the 62P was worth 0.72 (a 3.5% drop btw). And what happens to a Put’s price when the stock price goes down? Right, it goes up. The strike is closer to the stock’s current price (which you’ll see called “spot price” or just “spot”), making that protective put more valuable to anyone holding FAS.

It was interesting to watch through time, second-by-second, as the Bid/Ask prices adjusted to the new spot price. I don’t pretend to understand how that happens, it’s probably all computer-driven or Market Maker voodoo, but at 9:30:02, when the stale price of 70.14 updated to the new 67.80, Bid stayed the same at 0.65, but Ask shot up to 3.25. Look at the math: spot went down by 2.34, Ask went up by 2.35. A direct correlation, which seems to make sense. (It’s a direct 1:1 correlation for ITM options, because they have actual, real, tangible, intrinsic value, so they’ll track like that with spot price. But not entirely true for OTM options that only have extrinsic, or intangible, fear-based value.) And the 62P was now 26Δ; remember it had been 17 before; that’s a very big jump, but it was still less than my guideline of 30Δ.

Six seconds later Bid & Ask were 0.90/1.30, midpoint 1.10, at 21Δ. And then except for a few seconds where Ask jumped to 1.60, B/A stayed there until 0931:26, when my order to sell at 0.66 was filled for 1.20. Notice 2 things: 1) the broker looked out for me, not just filling my order at 0.66 when the option was really worth much more than that, and 2) sort of the same, but this is the “price improvement” I mentioned earlier; I’m guessing they’re legally required to do that.

But also notice the unanticipated risk this entailed. It worked out this time and I’m glad for the price improvement, but what if FAS had opened below 62? Was my plan to sell an ITM put? Or what if the 62P was at 35Δ when it filled, did I want to sell an option above 30Δ? No, but I could’ve unwittingly done that. So I guess just be careful about that. Maybe it’s better to wait till Monday morning when the market is open to enter your trades. Or you can pre-load and save trades, then if you have a few minutes Monday you can check the parameters, tweak as necessary, then enter them. And I’ve read where some people on Friday close out all their open trades (remember that you should buy everything back!), and then put in their trades for next week while the market is still open. There’s probably wisdom in that.

So now, I could have sat on that profit for the rest of the week, content that I’d made my goal for that trade, but I like to keep capital at work, so because that trade behaved, I sold another put on FAS. Again for this Friday, now only 4DTE, but there was still good premium. The 64P (it was 62P before, but FAS had gone up about 2 dollars) was 17Δ (13 before), and I sold it for 0.30, for a theoretical return of 1.3% over 4 days. My rules were still met, delta <30 and RoR >1%/wk, so I think that trade made sense. Later in the week though, the premium for 1% would get down to <10, so I would no longer trade this week’s expiration.

Others that opened and closed today:

  • TQQQ 21P sold for 0.36, closed at 15:01 for 0.16, exactly half by the way I do it: half of 0.36 is 0.18, but knock off 2 cents for commissions. Net profit: (36-16-1.3)/2100 = 0.89%. Small, yes, but it was in 1 day. To simple-annualize that: 52 weeks in a year, 5 weekdays each, so 260 possible trading days, but the market is closed for about 10 holidays per year, leaving 250 trading days in a year. If you could get “just” 0.9% every trading day, that would be 220% per year.
  • JNUG 22P sold for 0.70, closed at 11:23 for 0.20. This is another one that benefitted from price improvement (my order was to sell at 0.24), and did more than 50% take-profit because I hadn’t set the GTC closing order yet. So it netted (70 – 20 – 1.32) = 48.68 on collateral of 2200, or 2.2% in 2 hours.
  • TNA 32P sold for 0.62, closed at 13:46 for 0.29, 1.0% in 4 hours. Sold 33P (17Δ) for 0.46.
  • UPRO 33P for 0.75, closed at 15:11 for 0.35, 1.1% in 1 day. Sold 35P (32Δ) for 0.80. I think I messed this one up, and meant to sell the 34P at 0.50, that was the 1% strike. That’s going to matter come Wednesday.

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  172. Не упускай возможность сорвать джекпот с игрой Лаки Джет на деньги – уже сегодня ты можешь стать победителем! Развлекайся и зарабатывай с Лаки Джет – игрой, которая сочетает в себе удовольствие и возможность заработка.

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  173. Its like you read my mind! You seem to understand so much approximately this, like you wrote the book in it or something. I think that you simply could do with some % to drive the message house a bit, however other than that, this is wonderful blog. A great read. I’ll definitely be back.

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  174. naturally like your website however you need to check the spelling on quite a few of your posts. Several of them are rife with spelling problems and I in finding it very bothersome to tell the truth on the other hand I will certainly come back again.

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  175. Hi, Neat post. There is a problem with your web site in internet explorer, may check this? IE still is the marketplace leader and a good part of other folks will leave out your magnificent writing due to this problem.

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  176. Howdy! I know this is kinda off topic however I’d figured I’d ask. Would you be interested in exchanging links or maybe guest writing a blog article or vice-versa? My site discusses a lot of the same subjects as yours and I believe we could greatly benefit from each other. If you might be interested feel free to send me an e-mail. I look forward to hearing from you! Fantastic blog by the way!

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