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Ep71 - Cash-Secured Puts: Case Study of TGT Trade
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Ep71 - Cash-Secured Puts: Case Study of TGT Trade

The Importance of Timeliness in Trading

Hesitation and Market Dynamics

  • Waiting too long to execute trades can lead market makers to adjust their bids, reducing the chances of a favorable fill.
  • A strategy called "cancel replace" is employed to adjust offers incrementally until filled, emphasizing the discipline of middling.

Introduction to Cash Secured Puts: TGT Case Study

Overview and Book Promotion

  • The episode focuses on cash secured puts with a case study on Target Corporation (TGT).
  • The host encourages listeners to review his book, "Build Consistent Wealth with Options," which contains valuable insights beyond podcast discussions.

Job Market Trends for Recent Graduates

Economic Insights

  • Recent studies indicate that remote work, rather than AI, significantly impacts job opportunities for recent college graduates.
  • Employers struggle to train new hires remotely, contributing to increased unemployment among young graduates since the pandemic.

Understanding Covered Calls and Cash Secured Puts

Key Concepts in Options Trading

  • Many existing books explain how covered calls work but lack practical trading strategies; understanding both theory and application is crucial.
  • The author includes case studies in his book to help readers grasp the complete process of executing wheel trades effectively.

Trade Objectives: Skate vs. Trade Objective

Risk Acceptance in Trading

  • Traders must understand their objectives—whether they want options assigned or prefer not being assigned—to manage risk effectively.
  • Analyzing potential assignment scenarios is essential for formulating a trade management plan.

Exploring Cash Secured Put Trades

Case Study Setup: Target Corporation (TGT)

  • The analysis begins with TGT's stock price at $94.38, identifying support levels and technical indicators like moving averages.
  • Upcoming earnings announcements are factored into trade decisions; avoiding trades through earnings can mitigate risks.

Evaluating Option Chains for Trade Viability

Technical Analysis Considerations

  • Technical support at $87 per share serves as a critical factor in assessing trade viability alongside other data points.
  • Shorter-term options are preferred due to reduced risk periods and flexibility in strike selection during rolling processes.

Liquidity Concerns in Options Trading

Assessing Bid/Ask Spreads

  • A wide bid/ask spread may indicate low liquidity; traders should consider holding positions until expiration if necessary.

Investment Decision-Making Process

Return on Risk Evaluation

  • Traders must weigh whether the expected return justifies the risk associated with potential stock declines within specific timeframes.

Alternative Strategies: Put Credit Spreads

Comparing Strategies

  • A put credit spread involves selling one put while buying another lower strike put, offering reduced maximum loss compared to cash secured puts.

Execution Strategy for Selling Puts

Management Plan Development

  • Entering limit orders immediately after executing trades helps secure profits while managing risks effectively.

Understanding Skate Yield and Trading Decisions

Changes in Skate Yield

  • The skate yield has significantly decreased from 36% to 10.4%, indicating a shift in trade profitability.
  • Annualized figures are essential for accurate comparisons, even if the current trade won't be repeated over a year.
  • A trader made $140 in two weeks but could only expect an additional $10 over the next two weeks, suggesting better capital allocation elsewhere.

Managing Illiquid Options

  • Illiquid options present challenges; market makers may avoid filling small bids on far-out-of-the-money options due to risk management.
  • The less liquid the options (failing the 10% rule), the harder it is to roll without incurring significant bid-ask spread costs.

Decision-Making at Expiration

  • Traders face a choice between closing an option or letting it expire, weighing potential losses against premium retention.
  • If stock prices fall below strike price at expiration, traders must act quickly to avoid assignment, balancing delta and theta risks.

Rolling vs. Closing Trades

  • When deciding whether to roll or close a position, consider support levels below cash-secured puts and resistance levels for covered calls.
  • The fundamental question revolves around whether technical patterns will hold enough value to justify rolling into another trade.

Maximizing Value from Wealth Building with Options

Subscription Benefits

  • Paid subscriptions offer exclusive content such as video training sessions and subscriber-only posts detailing specific trades and strategies.
  • New subscribers are acknowledged, emphasizing community growth within the Wealth Building with Options platform.

Call to Action for Subscribers

  • Interested individuals can subscribe through wealthbuildingpodcast.com for various subscription tiers that provide extensive resources and coaching opportunities.
Video description

Dan walks listeners through a real-world cash-secured put case study using Target Corp. (TGT) as an example. He demonstrates how to evaluate a trade from start to finish, including technical and fundamental analysis, option selection, trade execution, liquidity considerations, and management planning. The episode emphasizes that successful wheel trading is not just about understanding option mechanics, but about developing a repeatable process for finding, executing and managing high-probability trades. Key Topics • Understanding the difference between skate objective and trade objective wheel trades • Evaluating assignment risk before entering a cash-secured put position • Using technical support levels to identify high-probability trade setups • Incorporating earnings dates and implied volatility into trade selection • Applying fundamental analysis to strengthen trade candidates • Comparing strike prices and expirations to optimize risk and return • Using the 10% liquidity rule when evaluating option markets • Cash-secured puts vs. put credit spreads and their respective risk profiles • Improving execution through effective option order “middling” techniques • Building and implementing a trade management plan, including profit targets, rolling decisions and exit criteria Key Takeaways • Every wheel trade should begin with a clearly defined objective: Are you trying to collect premium (skate) or acquire stock (trade)? • Assignment should never be treated as an afterthought; traders should understand and plan for assignment before entering a position. • Strong cash-secured put candidates combine technical support, reasonable fundamentals, elevated implied volatility and sufficient premium. • Earnings events can dramatically change risk profiles and should be factored into expiration selection. • Liquidity matters. Wide bid-ask spreads can impact both execution quality and trade management flexibility. • The best trade is not always the one with the highest premium. Risk, probability and return on capital must all be considered together. • Entering profit-taking orders immediately after opening a position can help systematically remove unproductive risk. • Rolling should only occur when a new trade opportunity stands on its own merits and still offers a valid edge. • Traders should not roll simply to avoid taking a loss; there must be a technical or fundamental rationale supporting the adjustment. • Successful wheel traders think in terms of return on risk and long-term cycles rather than focusing on individual trades in isolation. Connect • Learn more about host Dan Passarelli and Market Taker Mentoring: MarketTaker.com (http://markettaker.com) • Get exclusive content including video trade walk-throughs, Dan's actual trades, monthly AMA webinars and more: wealthbuildingpodcast.com (http://wealthbuildingpodcast.com) • Subscribe on your preferred platform and leave a review to help more traders discover the show. Disclosure: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, investors must read Characteristics and Risks of Standardized Options (ODD), which can be found at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document Don’t trade with money you are not prepared to lose. Anything discussed on this show is intended to be generalized information and not intended to be a recommendation to buy or sell any security. The host and guests are not familiar with listeners’ specific situations. For trading information relevant to your specific needs, speak with a licensed broker or advisor.   Trumpet Trumpet Fanfare by bevibeldesign -- https://freesound.org/s/350428/ -- License: Creative Commons 0 Wah Wah Wah Wah wah trumpet failed joke punch line.wav by Doctor_Jekyll -- https://freesound.org/s/240195/ -- License: Attribution 4.0 Dramatic Drum Roll dramatic drum roll.wav by ingsey101 -- https://freesound.org/s/51401/  -- License: Attribution 3.0