where to "put" cash? - 2nd edition - to help pay bills!

See my 6/2/20 post, where to "put" cash?  It was an idea that offered an alternative for investors who are unhappy with money market returns.  But I put the idea to work this month in my own account.  It's a cash account that's used for checkwriting, bill pay, ATM withdrawals, pension & Social Security deposits.  It holds about $120K in cash that's in a money market fund that pays a 7-day yield of 0.01%.  

On 8/6/21, I sold 23 cash secured puts against XLE, the energy ETF.  XLE was trading at $49.69.  I sold the $43 puts that expired on 8/20/21.  I received a $0.07 premium that netted $152.12.  On 8/20/21, XLE closed at $45.89 & my puts expired worthless - i.e., I was not assigned to buy XLE shares at $43.  All I earned was $152.12, representing an annualized yield of over 3%.  Because this account holds "sacred" cash (especially in my wife's eyes), I would have been really displeased if XLE closed below $43 & I'd have been assigned to buy XLE at $43 (my risk).

Today, I did similarly.  XLE traded at $47.69.  I sold 22 cash secured puts against it - the $40 puts that expire on 9/17/21.  I received a $0.13 premium that netted $270.93 for the 25 day commitment, again representing an annualized yield of over 3%.  I have a $7.69 cushion until a $40 put assignment - a 16% cushion.  

What's interesting is that prior to the trade, I observed my monthly bill pay debit of $1,548.83 for my credit card against this cash account.  After my cash secured put trade, that debit was reduced to $1,277.90 - by exactly $270.93, today's put premium.  

Selling puts (& calls) can be helpful - with a controlled amount of risk - to help pay for routine expenses like bill payments.  This strategy can also be applied to finance Required Minimum Distributions.          

defense versus a 10% correction

On another forum, an investor asked for an idea to protect against a 10% decline.  My reply:

"I'm not defending myself against a 10% pullback, in large part, because I don't guess the market.  But if I wanted to defend against a 10% pullback, I might sell a cash secured put against SPY, the ETF that holds the S&P 500.  An example:

SPY is trading at $444.45; close to an all-time high.  A 10% drop would take it to $400.  To be defensive, I'd sell an SPY put with a $400 strike price that expires on 12/17/21.  The buyer of that put would pay me $7.10 (per share).  This put buyer is often a speculator that's making a guess that SPY will fall toward or below $400 between now & 12/17/21. That $7.10 would be paid to my account tomorrow & it's non-forfeitable.  It's mine.  I could spend it on investments, gasoline, groceries.

But the $7.10 isn't free to me; there's a catch...an obligation for me:  if SPY drops below $400 between now & 12/17/21, I'm obliged to buy SPY at exactly $400.  Even if it drops to $390, or to $300 or to $0 (the risk of this idea).  When I'm forced to buy it at $400, my cost basis is $400 minus $7.10 = $392.90.  

I do not have to own SPY shares to make this trade.  But I must hold $400 cash (per share) in my account to secure the $400 buy obligation. 

If SPY stays above $400 until 12/17/21, the put option expires, & my obligation to buy SPY at $400 ceases.  All I have earned is the $7.10.  What's my return if SPY doesn't drop to < $400?...$7.10 divided by the $400 on reserve = 1.8% for about 4 months, which annualizes to over 5%.

If SPY drops to < $400, I'll be obliged (forced) to buy SPY at $400, a 10% discount from today's price.  (Actually, at $392.90!)  

A pure defensive move against a 10% drop would be to stay in cash.  And then, after SPY drops to $400, buying it at the 10% discounted price.  Selling these cash secured puts pays you $7.10 while you wait for the 10% correction."    

where to "put" cash?

There's an abundance of blogging today on cash-like investments in this low interest rate environment:  FDIC savings accounts, CDs, money market funds, brokerage cash accounts.  Even ETFs that invest in short duration bonds.  As I sell puts, then calls, I'm not interested in cash-like returns.  But if you're inclined to sell cash secured puts, here's an idea:

This afternoon, SPY, the S&P 500 ETF, traded at $306.57.  I looked at the option chain for the June 19, 2020 expiry.  The $306 puts showed a $6.32 Bid & the the $264 puts showed a $0.47 Bid.  Let's consider a $100,000 account, with all the money positioned in the account's core position to secure the selling of puts. With $100,000, I'm able to sell 3 of the $306 puts, or 3 of the $264 puts.

I sell puts rather aggressively.  Just a bit out-of-the-money.  I often don't mind an assignment...getting put to buy SPY at the strike price.  So I'm inclined to sell the $306 puts. 

• 3 puts require cash security in the core position of 300 X $306 = $91,800.  
• At the $6.32 Bid, I'd receive a premium of 300 X $6.32 = $1,896.  
• $1,896/$100,000 = 1.896% over 17 days until 6/19/20's expiration.  
• That's a 40.7% annualized premium yield.  

The core position of $100,000 + $1,896 also earns the modest interest rate provided by the core position's investment.  But I can hardly call this cash secured put investment cash-like.  There's a great chance of assignment.  More accurately, I call it a stock market investment & an aggressive one.

But the $264 puts are a different story. 

• 3 puts require cash security in the core position of 300 X $264 = $79,200.  
• At the $0.47 Bid, I'd receive a premium of 300 X $0.47 = $141.  
• $141/$100,000 = 14.1 basis points over 17 days until 6/19/20's expiration.  
• That's a 3.0% annualized premium yield.  Cash-like investors would die for 3% today.

With my choice of the $306 put, SPY needs to drop only 57 cents to get into assignment territory.  With the $264 put, SPY needs to drop over $42 to hit assignment territory.  With the $264 put, a much lower chance of assignment & a higher chance of what often feels like "free money."

Some put selling investors use these way out-of-the-money puts (like the $264s) to serve as a cash alternative.  I still call the $264 put a stock market investment, but a conservative one.

One beauty of selling puts, then calls is an investor's ability to select risk.