r/stocks
My approach to selling cash secured puts without getting reckless
Author sells cash-secured LEAP puts on $CMG to buy at a discount while collecting premium, citing fair valuation and strong growth.
- Chipotle is a high-quality business with a long growth runway and 15% expected future growth.
- The stock is currently trading around fair valuation with strong technical support near $30.
- Selling cash-secured puts is an effective strategy to get paid while waiting to buy at a cheaper price.
- Persistent inflation could cause the stock to trade sideways for a while.
- A forward P/E of 26x indicates the stock is not deeply discounted at current levels.
LEAP ITM 17th June 2027 Put options on $CMG are looking good. At $32.50 with a $5.30 premium for an 18.7% annualized.
Chipotle remains a great business with a long growth runway. Current forward P/E at 26x with future growth prospects of 15% for the upcoming years. If inflation persist this could keep sideways for a while.
Here's the strategy:
- When you found a business around fair value and you want to buy it cheaper. Go 10% - 20% under their current share price and take around 3 months in time decay.
- Or, go for a LEAP which is around 12 months in time decay and take the slight ITM strike price for a better premium.
Only do this with businesses you’re intended to own and that are of high quality. Always take into consideration they are either:
- Fairly or undervalued
- Or, technical analysis supports it.
$CMG is currently a great example. They are around fair valuation and support is touched 3 times at or around $30.
Waiting for a stock to buy at an even cheaper price and getting paid for it… You’ve got to love it!
Very important to manage your risk when selling CSPs as I’ve seen many people get too cavalier, resulting in margin calls or being forced out of their positions once they approach the strike prices well in advance of expiration.
Always leave room for error in your margin account - do not use all of it.
"Selling ATM CSP is free money" is the famous phrase of r/thetagang
At the current market I would only advise to use this at maybe 20 or 30 companies. Reliable companies that have weathered many recessions and that can't be wiped out that easily. This is not to get highest and juiciest premium. It's more thinking like an insurance company and get a high succes rate.
how deep are you actually going ITM tho, a 17% annualized on a LEAP puts sounds off if most of that is intrinsic
Just slightly above the current share price. Support has touched 3 times around $28 and to my estimations I believe they are slightly undervalued. So an ITM secured cash put of $32.50 sounds reasonable without to much risk carried anyway.
Careful with the annualized number on a deep ITM LEAP put. Most of that 5.30 premium is intrinsic, which is just the discount to strike, not compensation for risk. The part that is actually yield is the extrinsic, and on an ITM 2027 put that slice is small relative to the cash you have to secure for a full year.
So the real carry if you are not assigned is a lot thinner than 18.7 percent makes it look, and if you are assigned you own CMG at a high effective basis a year out. Cleaner way to judge a CSP is to annualize the extrinsic only against the secured cash, and only sell it on names you genuinely want at that strike. Selling far dated ITM puts inflates the headline rate while locking capital at low real return, and a 12 month single name window is exactly when these blow up.
95% of you guys get wrecked, you just slink away broke.