For the past month I've been experimenting with a new variation of the Cash Secured Put strategy by combining it with a Bull Call Spread. This strategy is called a Bullish Seagull (named for the shape of the risk graph).
A Cash Secured Put (Short Put) consists of selling an OTM put for a net credit. At expiration, if the stock remains above the put strike, it expires and the maximum profit is the premium received. If the stock is below the put strike, it can either be rolled out, rolled down and out, or assigned to purchase the stock at a discount. Selling a Cash Secured Put gives up any upside if the stock continues to rise.
A Bull Call Spread (Long Call + Short Call) consists of buying an ATM or slightly OTM call and selling an OTM call at a higher strike for a net debit. At expiration, if the stock is above both call strikes, they are automatically exercised/assigned for the maximum profit (difference in the strikes - the premium paid). If the stock is in between the call strikes, the ITM call can be sold, possibly for a profit, and the OTM call will expire. If the stock is below both call strikes, they expire and the maximum loss is the premium paid.
Combining both strategies creates a Bullish Seagull (Short Put + Long Call + Short Call). When this is sold for a net credit, it's similar to a Cash Secured Put but with the potential for additional profit on the upside. The credit received is less than just selling the put, but it also pays for the Bull Call Spread, making that a free trade. At expiration, if the stock remains above the put strike and below both call strikes, then all options expire and the maximum profit is the premium received. If the stock is in between the call strikes, the ITM call can be sold, possibly for a profit, and the OTM call and OTM put will expire. If the stock is above both call strikes, they are automatically exercised/assigned for the maximum profit (difference in the strikes + the premium received) and the OTM put will expire. So it's the best of both worlds.
My criteria for entering a Bullish Seagull.
- Find a stock that's in a solid uptrend (e.g. XLK).
- Look to sell an OTM put below a support level with an 80% probability of expiring OTM.
- Look to buy an ATM/OTM call with a delta around 50.
- Look to sell an OTM call 1-5 strikes above the call to buy. This determines the maximum profit to the upside.
- The trade must result in a net credit to insure a minimum profit.
Trade management is similar to a Cash Secured Put.
- If the put strike is in danger of being breached, roll the put for a net credit to the next expiration and possibly down in strike.
- If the long call is ITM near expiration but the short call is OTM, buy back the short call for $.10 or less and let the long call run, then sell it on expiration day.
- If both calls are ITM at expiration, the broker will automatically exercise the long call (buy stock) and assign the short call (sell stock). This results in the maximum profit.
- If all options are OTM at expiration let them expire and keep the premium received. This results in the minimum profit.
Examples of closed Bullish Seagulls
XLK Seagull #1
If all options are OTM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 98/103/105 | 7/10/2020 | 14 | $9,800.00 | $33.06 | 0.34% | 8.80% |
If both call options are ITM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 98/103/105 | 7/10/2020 | 14 | $9,800.00 | $233.06 | 2.38% | 62.00% |
Result: Both calls were ITM and automatically exercised/assigned for max profit. Short put expired OTM.
XLK Seagull #2
If all options are OTM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 104/108/110 | 7/24/20 | 17 | $20,800.00 | $105.15 | 0.51% | 10.85% |
If both call options are ITM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 104/108/110 | 7/24/20 | 17 | $20,800.00 | $505.15 | 2.43% | 52.14% |
Result: All options expired OTM. Profit was credit received.
XLK Seagull #3
If all options are OTM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 102/107/109 | 7/31/20 | 15 | $20,400.00 | $112.97 | 0.55% | 13.48% |
If both call options are ITM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 102/107/109 | 7/31/20 | 15 | $20,400.00 | $512.97 | 2.51% | 61.19% |
Result: Both calls were ITM and automatically exercised/assigned for max profit. Short put expired OTM.
XLK Seagull #4
If all options are OTM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 103/107/108.5 | 8/7/2020 | 15 | $20,600.00 | $121.73 | 0.59% | 14.38% |
If both call options are ITM at expiration.
| Stock | Strikes | ExpDate | Days | Margin | P/L | ROI | AROI |
|---|---|---|---|---|---|---|---|
| XLK | 103/107/108.5 | 8/7/2020 | 15 | $20,600.00 | $421.73 | 2.05% | 49.82% |
Result: Both calls were ITM and automatically exercised/assigned for max profit. Short put expired OTM.
Total profit on all 4 trades was $1,272.91 in 42 days (6/26/20 - 8/7/20) vs $975.26 had I just sold CSP's at the same strike, an increase in profit of $297.65. Not bad!
Hope you find this new strategy useful.
