How Cash-Secured Puts Remove Emotion from Investing

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Tobias discussed How Cash-Secured Puts Remove Emotion from Investing. Here’s an excerpt from the episode:

So heads, I win. Tails, we’re comfortable owning the stock at these discounted prices. Next one.

This is another trade just from today. So we want to give you some current examples. And you can see that this, for $99 a month right now, which is the promoted rate, that’ll be doubling in not too long in the future.

But you can see that we’re putting out a lot of great, great ideas. So SPGI, what a great company this is. So one of the most defensible businesses in financial services.

It’s the co-owner of the credit ratings duopoly with Moody’s, licensor of the S&P 500 index family, and a deeply embedded revenue stream tied to bond covenants and investment mandates. So we think this stock’s worth about 500 bucks conservatively. These are conservative estimates.

Trading at around 413. So it’s got about 17% discount to our estimate of intrinsic value before any of the options. So what we’re going to do is we’re going to sell a 370 put that expires in 87 days.

And if that put expires worthless, we’re going to make 11% annualised. Our breakeven, if we get exercised, would be 360.55, which is 28% below fair value, 12.7% below the current price. And at that price, we’re happy to own this stock.

This is a phenomenal business that we think would have 40, 50% upside from that level, but this is a safer way to enter into it. So once again, three pillars of protection. We’ve got an already undervalued stock.

We’re doing a strike below the current price, and we’re collecting that premium.