Pictured here is an SPX short put vertical I recently put on as an alternative to going SPY short put in cash secured environment. (See Post Below). When do one as opposed to the other and how should I manage each?
First, let's compare the metrics of the two strategies, both of which are neutral to bullish assumption: they will make money at expiry if SPX/SPY goes up, sideways, or down, as long as it doesn't go so far down as to finish below the setup's break even.
Currently, a "ten percenter" in the SPX November expiry (i.e., a spread paying at least 10% of its width) would be the 3080/3130, paying 5.00 even as of Friday close on a buying power effect of 45.00 ($4500), with a 3125 break even. The buying power effect is the same regardless of whether it's on margin or in a cash secured environment.
A SPY short put with a similar break even (and therefore a similar probability of profit) would be the November 20th 315, paying 3.05 as of Friday's close with a break even of 311.95. Here, the buying power effect is different on margin versus cash secured. On margin, it should be approximately 20% of the short put strike or ~63.00 ($6300); in a cash secured environment, it is the short put strike (315) minus the credit received (3.05) or 311.95 ($31195).
Buying Power Effect:
On Margin: $4500 for the short put vertical, $6300 for the short put.
Cash Secured: $4500 for the short put vertical, $31195 for the short put.
Return on Capital:
On Margin: 5.00/4500 = 10% for the short put vertical; 3.05/63.00 = 4.84% for the short put
Cash Secured: 10% for the short put vertical; .98% for the short put.
Given the expensiveness of going short put and the lower return on capital, why would I ever opt for that strategy over the short put vertical with its lower buying power effect and higher return on capital?
1. I am looking to acquire shares in the underlying, but don't want to reduce credit received by buying a long leg. In this particular example, I will never pick up shares via an SPX spread since it is cash settled.*
2. I am looking for flexibility in managing the strike price at which I'm potentially assigned shares. The short put can be rolled for additional credit, reducing cost basis further, or the strike improved via roll to change the strike price at which I'm assigned shares. The SPX spread won't roll well for a credit if tested.
Trade Management:
Short Put:
Generally: Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll out for a credit), whichever comes first.
In cases where I'm looking to acquire shares in the underlying, however, I'm more likely to run the short put to approaching worthless, at which point it will be fairly clear that I'm not going to be acquiring shares in that cycle. There's little point in tying up buying power further to milk what little is left out of the option, particularly if there is oodles of time left until expiry. If it's in the money toward expiry, I compare and contrast whether I should roll out the short put "as is" for additional credit, versus allowing assignment of shares and then covering the shares with a short call. I generally go for the option that yields a higher credit.
Short Put Vertical:
Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll for a credit), whichever comes first.
* -- I can naturally sell a SPY spread and take on shares if the short put is broken which is another option to consider if I'm comfortable with and am able to take on shares at the short option leg price.
First, let's compare the metrics of the two strategies, both of which are neutral to bullish assumption: they will make money at expiry if SPX/SPY goes up, sideways, or down, as long as it doesn't go so far down as to finish below the setup's break even.
Currently, a "ten percenter" in the SPX November expiry (i.e., a spread paying at least 10% of its width) would be the 3080/3130, paying 5.00 even as of Friday close on a buying power effect of 45.00 ($4500), with a 3125 break even. The buying power effect is the same regardless of whether it's on margin or in a cash secured environment.
A SPY short put with a similar break even (and therefore a similar probability of profit) would be the November 20th 315, paying 3.05 as of Friday's close with a break even of 311.95. Here, the buying power effect is different on margin versus cash secured. On margin, it should be approximately 20% of the short put strike or ~63.00 ($6300); in a cash secured environment, it is the short put strike (315) minus the credit received (3.05) or 311.95 ($31195).
Buying Power Effect:
On Margin: $4500 for the short put vertical, $6300 for the short put.
Cash Secured: $4500 for the short put vertical, $31195 for the short put.
Return on Capital:
On Margin: 5.00/4500 = 10% for the short put vertical; 3.05/63.00 = 4.84% for the short put
Cash Secured: 10% for the short put vertical; .98% for the short put.
Given the expensiveness of going short put and the lower return on capital, why would I ever opt for that strategy over the short put vertical with its lower buying power effect and higher return on capital?
1. I am looking to acquire shares in the underlying, but don't want to reduce credit received by buying a long leg. In this particular example, I will never pick up shares via an SPX spread since it is cash settled.*
2. I am looking for flexibility in managing the strike price at which I'm potentially assigned shares. The short put can be rolled for additional credit, reducing cost basis further, or the strike improved via roll to change the strike price at which I'm assigned shares. The SPX spread won't roll well for a credit if tested.
Trade Management:
Short Put:
Generally: Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll out for a credit), whichever comes first.
In cases where I'm looking to acquire shares in the underlying, however, I'm more likely to run the short put to approaching worthless, at which point it will be fairly clear that I'm not going to be acquiring shares in that cycle. There's little point in tying up buying power further to milk what little is left out of the option, particularly if there is oodles of time left until expiry. If it's in the money toward expiry, I compare and contrast whether I should roll out the short put "as is" for additional credit, versus allowing assignment of shares and then covering the shares with a short call. I generally go for the option that yields a higher credit.
Short Put Vertical:
Assuming a 45 day cycle, take profit at 50% max, take loss at 2 x credit received, or otherwise manage at 21 days until expiry (i.e., close out or roll for a credit), whichever comes first.
* -- I can naturally sell a SPY spread and take on shares if the short put is broken which is another option to consider if I'm comfortable with and am able to take on shares at the short option leg price.
