How Cash-Secured Puts Create a Margin of Safety

During their recent episode of the Value Options Letter and Acquirers Podcast, Travis and Carlisle discussed How Cash-Secured Puts Create a Margin of Safety. Here’s an excerpt from the episode:

[Tobias] So that’s the value options report strategy is to, on one hand, to look for something that’s undervalued, high quality.

You’d be very happy to own it where it’s trading in the market, but you can structure an options trade where you’re selling an option, which gives you a little bit of premium up front, which means that you’re getting a slight discount and you set a strike that’s below where the stock’s trading in the market. So you have a further cushion, a little bit more margin of safety to the downside should the stock actually get put to you.

And then you’d be very happy with that price if you did buy it at that price. And on the other hand, you’re looking at the option, the internal rate of return over the course of a year, in addition to the absolute return. And because they’re cash secured, you’re looking at the cash that you put into the account relative to the size of the premium that you receive and the amount of time to expiry, which is how you then calculate your annualised return.

And so when those two criteria are met, that’s an option trade that is recommended through the site.