Daniel is a retired business executive who now devotes most of his free time to trading stocks and stock options in the stock market.
Grumbling and Complaining About Low CD Rates?
If you are one of those grumbling and complaining about how little interest you are earning on your deposited cash account, you will certainly want to explore how cash-secured-put-selling can provide the best CD rates for you, generating high returns on your liquid cash.
The technique of selling stock put options as a means of generating high returns on deposited cash is especially useful for people or institutions with plenty of cash stashed away in CDs, money market funds or other cash derivatives. Most of these fund pools pay very little interest to the point of being ridiculous, less than 1.5%. It makes little sense to park money in this low yield investment instruments when the income received does not even cover the loss of value caused by inflation.
Watch How Inflation is Eroding Your Money
In today’s economic environment, where interest rates are down to historical lows, it is no longer good money management to leave your cash in the traditional safe havens of bank deposits, CDs, money market accounts and treasury instruments. Many such instruments are now returning less than two percent and in many cases even less than one percent. With inflation running at around 3 percent you need to make your money grow more than this rate or it would be losing value every year.
For nearly two decades inflation has caused the value of the US dollar to dwindle from $1.00 in 2000 to a much decreased (estimate) $0.69 as this article was written in 2017.
The table below shows how inflation has eroded the US dollar over each of the five year periods in the last sixteen years. That’s a 31% reduction in the dollar’s value! This does not bode well for those invested in money funds who are earning less than 2% annual returns.
The Solution to the Problem of low CD Yields and the Secret to Higher Money Earnings
The solution to higher earnings is you need to be a little more aggressive in your choice of where to place your cash. You also need to do a little more than just park your money and wait for someone to do magic numbers with your money. It is time for you to take personal control of your finances and make your money work for you.
There is a well-known investing strategy that is gaining popularity as a possible alternative to earning high returns on cash reserves. The investment strategy is referred to and is known in the financial world as Cash-Secured Put Selling. This technique is turning out to be a good substitute to investing in money funds yielding returns better than even the best CD rates available.
This cash investment approach is being used by many rich individuals and institutions to give them returns in excess of 12% on their cash resources. In very brief terms the technique involves using cash funds as security or collateral to engage in selling or writing stock put options.
While many believe that trading in stock options is extremely risky it is not the case when using the system of cash secured put option selling. Selling cash secured put options in stocks or ETFs (Exchange Traded Funds) or indexes is among the safer strategies in the many options trading systems.
How It Works
You have $50,000 in cash and want to earn the best CD rates in the market. You explore all the available money funds and find that the best you could find was a rate of 2% in a fund that requires you to lock your cash for a period of 3 years.
If you are already familiar with the workings of stock options and how they are traded you decide to sell options as a means of generating better returns on your cash.
It is recommended that in the cash-secured-options game you only select good, well-established stocks, ETFs or Indexes for this purpose. Let’s assume you like the stock International Paper with the stock symbol IP.
You look at IP’s option chain and find that the June 50 put has a premium of $0.84 expiring in six weeks. The stock is currently trading at $52. You sell 4 contracts (4 contracts = 400 shares) of the June 50 puts using $20,000 of your cash funds to secure the 4 put contracts. The sale generates a total cash inflow of $336 (.84 put premium x 400 shares).
Having used $20,000 of your $50,000 cash fund, you next look at Walmart Stores (symbol WMT) option chain and find the June 82.5 put with a premium of $1.83 to your liking. WMT stock is at a price of $84 when you sell 2 contracts (equivalent to 200 shares) of the 82.5 put option, generating a total $366 on this transaction. This trade used $16,500 of your remaining cash balance to secure the 2 put contracts.
You still have $13,500 left of the original $50,000. You again make another put option sale. This time you select the XYZ Corporation June 67 puts at a premium of $1.30 when XYZ stock is at $67.50. You sell 2 contracts generating $260 secured by $13,400 of your remaining original capital.
Your remaining cash balance in your account is as follows:
As you can see from the table above, you generated a total of $962 of cash revenues from the sale of options. The options expire in 6 weeks, after which time you can again write or sell new options for another 4 – 6 weeks.
The $962 income you produced represents a return of 1.92% on your capital of $50,000 in a six week period. Annualized, this translates into a return of about 16.6%. Can you ever find a CD fund that pays this rate?
And best of all, your cash stays liquid all the time. You can access your cash any time after each option expires, or even before, by liquidating your option position earlier.
By employing the margin benefit offered by broker's which allows you to use only as little as 20% of your cash balance to secure your put positions, your annual returns can be as high as 30-40 percent!
Not Familiar with Options?
After seeing the awesome benefits afforded by options in generating better rates for your cash, it behooves you to learn options. There are many books, websites, blogs, and articles on the subject of stock options.
For the beginning options student, I would highly recommend the book "OptionsTrading: Strategy Guide for Beginners" This book is short enough to enable the newbie to get started in no time at all. One important feature is the section on how to avoid mistakes in the options business.
Once you have gotten a good understanding of how options work, you should go to an advanced level with the book “The Complete Guide to Option Selling”. I have read this book several times in my search for books and materials to recommend to those aspiring to learn how option selling works. This is one of the best books I've come across for simplicity and completeness.
There Must Be a Downside to This Magic
What is the downside or what are the risks involved in the strategy of selling put options? What is the risk of losing my savings in such a program?
The only downside, if you can call it such, is that the stock market as a whole might go into a long and swift downtrend. And since Cash-Secured Put Selling is directly tied up to the stock market you may eventually end up having to buy the stock or ETF secured by your cash position thereby owning the shares.
But then you would be buying the shares at such a low price that you would stand to gain substantially when the stock market turns around and starts going in the other direction. Some would say that in this scenario, the market could take several years to turn around and your investment would then be locked in. In answer to that let’s look at the current situation.
Presently, you would need to invest a very large amount of cash in a money market fund for durations of at least 2 to 5 years to earn just a meager 2-3%! You are locking your cash for 2 to 5 years for a measly return of 2% per year?
In the other scenario where the stock market plunges dramatically (which happens rarely) you may end up owning shares of stock and you may be locked in that investment for the same period. The difference is that at the end of 2 to 5 years your stock ownership could give you a return of 100% or more in the form of cash dividends, revenues from sale of options and appreciation of the stock’s value. This is the worst-case scenario. Is this a downside?
So if you have cash deposited in a ridiculously low yield money market account and you want to generate better returns, act now and start learning the simple trading strategy of writing put options. It definitely is the answer to higher yields on your cash funds.
Any and all information pertaining to trading stocks and options including examples using actual securities and price data are strictly for illustrative and educational purposes only and should not be construed as complete, precise or current. The writer is not a stockbroker or financial advisor and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2018 Daniel Mollat