Longs
selling cash-secured puts and buying call options with the same expiration date (6, 12, or 18 months out) and strike prices that are close to each other. This is a variation of a synthetic long stock or a risk reversal strategy, depending on the exact strikes and execution. Below, I’ll outline the strategy, its mechanics, and considerations for implementing it over the specified timeframes.
6/13/20254 min read
Strategy Overview: Cash-Secured Puts + Long Call
Sell a Cash-Secured Put: You sell a put option at a strike price (typically at-the-money or slightly out-of-the-money) and set aside enough cash to cover the purchase of the underlying stock if assigned (strike price × 100 shares).
Buy a Call Option: Simultaneously, you buy a call option with the same expiration date, typically at or near the same strike price as the put you sold.
Expiration Dates: 6, 12, or 18 months out (long-term options, often referred to as LEAPS for 12+ months).
Objective: Generate income from the put premium, potentially acquire the stock at a lower effective cost if assigned, and maintain upside potential through the call option.
This strategy mimics owning the stock (synthetic long) while potentially reducing the capital required upfront compared to buying the stock outright. It’s bullish to neutral in outlook.
Step-by-Step Setup
Select the Stock:
Choose a stock with good liquidity and options volume to ensure tight bid-ask spreads.
Ideally, pick a stock you’re comfortable owning if assigned (via the put) and bullish on for the long term.
Example: A blue-chip stock like Apple (AAPL) trading at $200.
Choose Expiration:
Select 6, 12, or 18 months out, depending on your investment horizon and market outlook.
Longer expirations (12–18 months) provide more time for the stock to move and higher put premiums but tie up capital longer.
Select Strike Prices:
Put Strike: Choose an at-the-money (ATM) or slightly out-of-the-money (OTM) strike for the cash-secured put. For AAPL at $200, an ATM put might be the $200 strike, or an OTM put could be $190.
Call Strike: Buy a call at or near the same strike as the put (e.g., $200 or $195). A slightly higher call strike (e.g., $205) can lower the call’s cost but slightly alters the payoff.
Execute the Trades:
Sell the Put: Collect the premium (e.g., $10/share = $1,000 per contract for a $200 strike put). Set aside cash to cover assignment ($200 × 100 = $20,000 per contract).
Buy the Call: Pay the premium (e.g., $12/share = $1,200 per contract for a $200 strike call).
Net cost: Call premium minus put premium (e.g., $1,200 – $1,000 = $200 net debit per contract).
Monitor and Manage:
If the stock rises, the call gains value, and the put expires worthless.
If the stock falls below the put strike, you may be assigned the stock but at a lower effective cost (strike price minus put premium).
If the stock stays flat, the put premium offsets the call premium, reducing losses or creating a small net gain/loss.
Payoff and Risk Profile
Maximum Gain: Unlimited on the upside (via the call option) if the stock rises significantly above the call strike.
Maximum Loss: Limited to the net premium paid (call premium – put premium) if the stock stays between the strikes or slightly below the put strike at expiration, assuming no assignment. If assigned on the put, your effective stock purchase price is the put strike minus the put premium, and losses occur if the stock falls further.
Breakeven: Depends on the net premium. For example, if you sell a $200 put for $10 and buy a $200 call for $12, the net debit is $2/share. Breakeven is approximately the stock price at initiation plus the net debit (e.g., $200 + $2 = $202).
Synthetic Long Equivalence: The combination mimics owning the stock, with the put premium offsetting the call cost, reducing the upfront capital compared to buying 100 shares.
Example: AAPL, 12 Months Out
Stock Price: AAPL at $200.
Sell Put: $200 strike, 12-month expiration, collect $10 premium ($1,000/contract). Set aside $20,000 cash.
Buy Call: $200 strike, 12-month expiration, pay $12 premium ($1,200/contract).
Net Cost: $1,200 – $1,000 = $200 debit per contract.
Scenarios at Expiration:
Stock at $250: Call worth $50 ($5,000), put expires worthless. Net profit: $5,000 – $200 = $4,800.
Stock at $200: Both options expire worthless. Net loss: $200 (net premium paid).
Stock at $150: Put assigned, you buy 100 shares at $200 (effective cost: $200 – $10 = $190/share). Call expires worthless. Loss depends on whether you hold or sell the stock.
Considerations for 6, 12, 18 Months
6 Months:
Lower premiums due to shorter time frame.
Less time for stock movement, so choose a stock with expected catalysts (e.g., earnings, product launches).
Lower capital commitment but higher time decay (theta) risk.
12 Months:
Balances premium income and time for stock movement.
Good for stable, dividend-paying stocks or those with moderate volatility.
LEAPS calls are more expensive but provide more time for upside.
18 Months:
Highest put premiums, increasing income to offset call cost.
Ties up capital longer; best for long-term bullish outlooks.
Higher exposure to interest rate changes and implied volatility shifts.
Risks and Challenges
Assignment Risk: If the stock falls below the put strike, you’ll be assigned 100 shares per contract at the strike price. Ensure you’re comfortable owning the stock.
Capital Requirement: Cash-secured puts require significant cash reserves (e.g., $20,000 for a $200 strike). This capital is tied up unless the put expires worthless.
Volatility Risk: A drop in implied volatility can reduce the call’s value, even if the stock price rises slightly.
Time Decay: Both options lose value as expiration approaches, especially if the stock price remains flat.
Opportunity Cost: Cash set aside for the put cannot be invested elsewhere, potentially missing other opportunities.
Tips for Implementation
Stock Selection: Choose stocks with moderate volatility (to maximize put premiums without excessive risk) and strong fundamentals.
Strike Alignment: Keep put and call strikes close to minimize net premium and mimic stock ownership.
Monitor Volatility: Use options with reasonable implied volatility. Avoid selling puts during low-volatility periods (low premiums) or buying calls during high-volatility periods (expensive).
Tax Considerations: Long-term options (12+ months) may qualify for long-term capital gains if the call is exercised or sold at a profit.
Broker Requirements: Ensure your brokerage account supports options trading (Level 2 or higher) and has sufficient margin/cash for cash-secured puts.
Advanced Variation: Risk Reversal
If you want a more aggressive bullish stance, consider selling an OTM put (e.g., $190) and buying a slightly OTM call (e.g., $210). This reduces the net premium or can even result in a credit, but it widens the range where neither option is in-the-money at expiration.
Final Notes
This strategy is ideal for investors who are bullish on a stock, want to generate income, and are comfortable owning the stock if assigned. The 6-, 12-, or 18-month timeframe allows flexibility based on your outlook and capital commitment. Always check current option prices and implied volatility before entering, as these significantly impact the strategy’s outcome.
"Disclaimer: ATC is not a financial wizard, so trade at your own risk! We’re not liable for your gains, losses, or if you accidentally buy 100 shares of a stock called ‘OopsieDoodle.’ Consult a real human expert—or at least a magic 8-ball—before diving in!"
