Скачать или смотреть Combining Cash Secured Put with Christmas Tree Spread with Puts | Live Example on SBI

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One small tip before I start the video. Please do not hold positions over the weekend ever unless they are properly hedged.

In a previous video, we learned how to acquire a good fundamentally strong stock at a desired price using naked puts. The strategy is known as cash secured put writing or target buying.

In this video we will learn how to combine cash secured put strategy with christmas tree spread with puts for enhanced profits.

Let’s have a quick recap of both the strategies.

Cash secured put writing or target buying involves the sale of a Put option with the intention to buy the stock at the strike price of the Put option minus the premium. This strategy is only used when the investor believes that a stock is cheap at a target lower than the current market price, and is happy to buy it at that price, but not above.

The Christmas Tree Butterfly spread with Puts has a slight bearish bias and is placed below the underlying asset’s price. It is the purchase of one Put at strike price X1, skip strike price X2, the sale of three Puts at strike price X3, and the purchase of two Puts at strike price X4.

All the strike prices are equidistant and the distance between the strike prices X1 and X3 is twice the distance between the strike prices X3 and X4, and all Puts have the same expiration date.

There could be three scenarios in a cash secured put strategy:

If the price of the stock is above the Put option's strike price at expiration, the option expires worthless and you get to keep the premium.

As the Put option loses some of its value with each passing day the investor might be able to repurchase the option at a profit before expiration.

If the price of the stock is below the Put option's strike price at expiration, the investor has to either repurchase the option at a loss or take delivery of the stock. The investor risks huge losses if the stock falls well below the strike price.

Though it is considered a bullish strategy, the major disadvantage of the strategy is that the investor cannot participate in the upside move of the stock, if it happens. The reward is limited to the premium received.

But the reward can be enhanced by combining it with different option strategies. We learnt how this is done in a previous video. Here we will learn one more such strategy.

Now let’s look at a sample trade:

SBIN is at 160 on May 29, 2020. A Cash Secured Put trade can then be entered as follows:

Sell one lot of 25 June 150 strike price Put at 5.75

Risk graph:

It is clear that the profit is capped at the amount of premium collected when the position was entered which is ₹16950 and the break even point is Put strike price minus premium which comes to about 144.3.

Let’s now see what adding a Christmas Tree Spread with Puts would do to this trade.

The trade would then look like this:

Buy one lot of 25 June 160 strike price Put at 10.1 (X1)
Sell four lots of 25 June 150 strike price Put at 5.75 (X3)
Buy two lots of 25 June 145 strike price Put at 4.05 (X4)

Make sure that the distance between the strike prices X1 and X3 is twice the distance between the strike prices X3 and X4.

Risk graph:

It is clear that the profit potential of the Cash Secured Put trade has been enhanced to ₹44400 by combining it with Christmas Tree spread with Puts but the break even point has moved a little higher to 145.1 as the Christmas Tree spread is a net debit trade.

Comparison:

The combination requires more margin money and also you may have to pay more commissions (depending on your broker) as the number of options involved are more.

The premium received at the outset is more for the regular Cash Secured Put strategy.

The maximum profit potential is more for the combination but the break even point has moved a little higher to 145.1 making the trade just a bit more risky.

The maximum loss potential however is unlimited in both the regular and the combination strategies.

Both the strategies have a good probability of profit (about 80%).

While initiating the Cash Secured Put trade, the investor should be ready to experience some unrealized losses in the short term with the goal of making good profits from the owned stock in the long term. Initiate the trade only on the stocks you wish to own.

Thank you for watching!
Please post any questions you have in the comments section!