It has been a while since I last sold a Cash Secured PUT (CSP). The main reason is because CSP is capital intensive since I need to set aside the capital to buy 100 shares of a particular if the contract gets exercised.
I have been using the cheaper version of Vertical Spreads, e.g. Bull PUT Spread, with a much lower capital to profit from the bullish momentum. However, the downside of Vertical Spreads is that there is less downside protection in the event you get it wrong on the direction. You have to cut loss or risk losing the max loss for the contract.
2023 has been a total disaster for me, mainly due to the high volatility of the stock market. I am on a losing streak and most of my bets have gone wrong. While I have kept the max loss of each contract to a small percentage and an amount that I can absorb, the accumulated losses from many contracts add up to quite a substantial amount eventually. It was demoralizing when you keep losing. I also did crazy things on impulse to try to claw back some losses, only to lose more money while doing so.
After all these losses and painful experiences, I decided to go back to basis of safe options trading and give myself a safety net, even when I chose the wrong direction. I wrote an article previously to explain this strategy and may possibly be using this strategy for a peace of mind, save myself time and effort to keep monitoring and most importantly, to prevent further losses:
How You Can Possibly Not Lose Money In Options Trading?
Why Nvidia For CSP Contract?
To recap, selling CSP is a bullish bet. The options seller wants the share price to close above strike price during expiration so the contract will expire worthless and he can take the premium without having to use up his reserved capital to buy 100 shares.
Nvidia’s share price has more than doubled for the last 3 months. It has risen from the lows of end 2022 where the company is slashing product prices due to weakening demand on chips and graphics cards to beating earnings expectations (Feb 2023) and currently being at the center of the AI revolution,
Despite the phenomenal rise and close to its 52 week high price, I think there is still room for growth and possibly hitting all-time-high for Nvidia, with a series of exciting projects in progress, Nvidia has announced that it would be partnering with Microsoft to build a “massive cloud AI supercomputer”. This supercomputer could then be used by enterprises that are using Microsoft Azure. Nvidia has also partnered with Oracle and Google to provide AI-as-a-service on their respective cloud platforms for enterprise customers.
Why I Chose This Strike Price (USD200) And Expiration date (19 Jan 24)?
I chose this strike price and expiration date because I have 3 Covered CALL contracts expiring on the same day with the same strike price. I see selling Covered CALL as being bearish, as the fall in share price translate to a lower premium so I can buy to close with a profit. In a way, I have covered both scenarios of how Nvidia may play out by 19th Jan 2024.
If Nvidia falls below USD200 on 19th Jan 24, I will collect full premium of my 3 Covered CALL Contracts as they expire worthless.
If Nvidia closes above USD200 on 19th Jan 24, my sell PUT contract expires worthless and I collect the full premium (USD1,745 ~ 8.75% return on capital) from this contract, without requiring to buy 100 shares of Nvidia. I also free up the capital that is reserved for this CSP contract. For my Covered CALL contracts, I will probably roll them to a later date to earn more time premium.
What If I Am Wrong?
If I am wrong and Nvidia’s share price starts to fall in the coming months, all the way to 19 Jan 24, there are a few scenarios that can play out.
In the first scenario, I give myself a buffer of USD67.79 for the share price to fall before it expires in the money, which means Nvidia can keep falling from the current price of USD267.79 all the way to USD200.01 (33.8% decline) on expiration date (19 Jan 24) and I will still keep the full premium and free up my capital without having to buy 100 shares of Nvidia.
If Nvidia goes on a free fall to less than USD200 by 19 Jan 24, I will either let the contract get exercised and buy 100 shares of Nvidia at USD200 each (total USD20k) or roll the contract to a later date, to earn more time premium and allow the share price to rise above USD200 eventually. I think given time, Nvidia’s share price will definitely rise above USD200.
This method of selling CSP may be capital intensive but it provides downside in the event where things do not turn out the way I have expected. If Nvidia turns out the way I have expected, I may close the contract way earlier than 19 Jan 24, to lock in my profits. If Nvidia’s share price stays stagnant all the way, or drop slightly (10 ~ 30 %), I am still able to capture the 8.75% profit and free up my capital for other trades. It may not give the best returns in the shortest time but it gives me the margin for error if I get it wrong eventually. I think that downside protection is very important in 2023 because we really don’t know whether the market is going to crash or shoot to the moon and creates the next bull market.
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