One of the best times to sell options is when volatility is abnormally high. Now, certain events can drive volatility- anyone with just a little experience knows that earnings season is a good, predictable time for volatility spikes. Certain other news, good or bad, can also drive price movements into a frenzy.
But you know what else can drive volatility? The biggest IPO in history.
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Space Exploration Technologies Corp’s (SPCX) IPO price was set at $135, and it’s now trading at over $200.
But as you can see, the ride isn’t exactly straight up. Investors who bought shares during market hours were likely clenching their fists as the rollercoaster ran its course. And, honestly, I don’t expect it to calm down in the next few days.
But if you wanted to sell options on space stocks to take advantage of the overall volatility in the sector, but not necessarily expose yourself to the wild ride that is SpaceX, then selling puts on a space-themed ETF might be the better choice.
But first, let’s talk about the strategy at the center of this idea.
What is a cash-secured put?
Selling cash-secured puts is an options trading strategy in which you collect the premium by selling a put option on a stock.
Now, for those unfamiliar, a put option is a contract that gives the buyer the right, but not the obligation, to sell an asset at a certain price, the strike price, on or before the expiry date.
Since you’re selling a put, you’re obligated to buy shares with cash on hand if you do get assigned. This happens when the stock price is below the strike price by expiration, making the put “in the money”. When that happens, the buyer exercises the put and sells the shares to you at the strike price.
Keep in mind that for cash-secured puts, you need to hold enough cash so that if you do get assigned, you have enough money on hand to buy the stock.
But if the underlying stock trades above your strike price at expiration, the put disappears from your account and you’re free from further obligation, unless, of course, you sell another put.
Now, when you’re selling puts, the golden rule is to sell them on a stock you’d actually want to own. That way, even if the price tanks, you’ll own shares of the underlying, and you’ll be happy about it (well, at least that’s the idea).
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Why space-themed ETFs?
Now, the next obvious question here is why invest in space stocks?
Well, the investment case for the space sector is that it sits at the intersection of several long-term growth trends.
Satellites are becoming increasingly important for communications, navigation, weather forecasting, Earth observation, defense, and global internet coverage. At the same time, launch costs have fallen dramatically over the past two decades, making access to space cheaper and creating opportunities for new commercial applications.
Then, of course, we can’t disregard the SpaceX angle. With its IPO, many investors will be combing the sector to find the best and most speculative picks without necessarily lining up to buy SPCX.
But unlike buying a single or maybe two space names, a space ETF provides diversification. Instead of betting on one company to succeed, you gain exposure to a basket of businesses that are likely to benefit from the growth of the space sector.
That plays into one of the end scenarios for a cash-secured put: owning the stock or ETF at a price that works for you. If you believe that the space sector is going up, then collecting a premium on that bet while having money to buy shares during temporary downturns can be a winning strategy.
Which space ETF should you choose?
There are quite a few space-themed ETFs, some of them new to the market, but I feel like there are only a handful of “good” choices here. There’s ARK Space Defense and Innovation (ARKX), Tema Space Innovators (NASA), and Procure Space ETF (UFO). Each of these funds brings a different approach to space-sector investing, but for this article, I will choose the Procure Space ETF for its pure-play focus and track record.
How to find cash-secured put trades on UFO?
To find potential trades, you first need to go to UFO’s ETF profile page. Once there, click Naked Put under Option Strategies, and you’ll be brought to the dedicated short put screener for the ETF.
Once there, you can change the expiration date from this dropdown.
I typically sell puts 30 to 45 days out to maximize time value and give me some wriggle room to get out if needed.
Then, I click on the Strike Selection dropdown and choose Show All to see all available trades.
From there, I usually choose the trade with the highest probability of profit. In this instance, it’s already the top one.
Trade breakdown
According to the screener, you can sell a 47-strike short put on UFO and receive $0.95 per share, or $95 per contract. The trade expires on July 17, 31 days from now, and has a 77% chance of ending profitably. But even if you do get assigned, you get to buy 100 shares of UFO at a ~10% discount to its current trading price of $51.28.
If the ETF trades above $47 at expiration, then you keep that $95 without further obligation.
But either way, if you’re starting from a relatively bullish mindset, then either result works in your favor.
Final thoughts
Selling puts on stocks, ETFs, and sectors you’re bullish on can be a great way to supplement your income and potentially bolster your portfolio with a top pick.
Just always remember: sell puts on assets that you would actually want to own. That way, if you do get assigned, you can just hang tight and wait for it to recover. And if it doesn’t, well, you can treat it like any other investment and assess whether it’s worth keeping or not.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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