How Cash-Secured Puts Add a Margin of Safety

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

And on the other side, if the stock moves, and stocks are volatile in the short term, you don’t know which direction they’re going to go. They take a random walk. It can be up or down.

So if it takes a random walk down, then you’ve got a little bit of premium buffer.

So you’re already buying with a margin of safety. It adds an additional margin of safety.

So the stock is put to you. You should be excited to get it at that very discounted price. And so the two outcomes should be good outcomes, even though nobody likes a stock when it goes down.

But if you like it long, and you get it at a very good price, and your timeline is long enough, then that should be a good outcome. So we’ve sort of discussed what we’re looking for. But let’s just talk a little bit about the context, the backdrop at the moment, the macro backdrop.

Perhaps it’s always a little bit uncertain, but it seems a little bit more negative, perhaps, than it ordinarily is. And two reasons for that. One is that rates are cranking up everywhere around the world in all the developed markets, Japan, Europe, and America.

The 10-year in America has gone over 5%, which we haven’t seen 5% since 2007. I don’t want to raise 2007 like it’s a boogeyman, like that was the precursor to the big crash. We’ve been normalising rates for a few years now.

So to get to the 2007 level, that’s really just close. 5% is not really a high rate. The long-run average of the 10-year is closer to 6%.

Value Options Letter combines value investing with conservative Buffett-style options strategies. Follow the strategy from cash-secured puts through assignment and covered calls, with ongoing trade recommendations focused on businesses they believe are worth owning.

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