No. of Recommendations: 5
Hi All,
I have been playing with putting together a Cash Secured Puts portfolio based on Cohen's book using the ROE_CashLTDebt screen that Jim posted a while back as an MI version that would do slightly better than the SP500.
The basic screen steps are:
VL Timeliness 1-5 (timeliness exists) - 1175 stocks pass this
Sort by ROE Latest QTR (high to low), take top 33% - 388 stocks pass this
Sort passing stocks by Cash-LTDebt, take top 45 stocks
Ran this today and it generates the following list of tickers sorted by Cash-LTDebt:
GOOG, MSFT, TSLA, ELV, CSCO, HUM, ACN, RNR, MOH, COST, APO, NKE, NVDA, TJX, ROST, EOG, AMP, MELI, NVR, CPRT, EQH, FTNT, ALNY, SPNT, NYCB, TXN, SEIC, BBY, PBF, WST, NTAP, MLI, EW, ADBE, IDCC, EME, CFR, VSH, ENPH, BKNG, SEDG, NSP, ACLS, DKS, EWBC
After this, it gets slightly more complicated. Using this list of 45 stocks, I have a python script that goes through TDAmeritrade and pulls the PUT data out for each stock (first three put options OTM for the given date). For each option, I have bid/ask, target price (70% between bid and ask), %OTM, the premium (target price - strike + current stock price), the premium % (premium/strike), the hedge % (%OTM + 0.75*premium%), the corresponding strike of the SP500 hedge (current price * (1-hedge%)). The hedge and premium formula are all from Cohen's book.
Using this data, I create a list of descending premium%, and take the first 6 unique stocks, and then create a portfolio of puts and hedges. For example, using a portfolio size of $500K, and expiration of 19-Jan-2024, and todays numbers:
PRICE DESCRIPTION STRIKE BID ASK TARGET CASH REQ'd OTM % PREMIUM CONTRACTS REVENUE
273.2914 TSLA Jan 19 2024 270 Put 270 32.85 33 32.895 237.105 1.20% 13.87% 4 $13,158.00
41.02 PBF Jan 19 2024 40 Put 40 4.7 5 4.79 35.21 2.49% 13.60% 24 $11,496.00
435.985 NVDA Jan 19 2024 430 Put 430 48.55 48.75 48.61 381.39 1.37% 12.75% 2 $9,722.00
1142.27 MELI Jan 19 2024 1120 Put 1120 118.1 122.5 119.42 1000.58 1.95% 11.94% 1 $11,942.00
205.25 ALNY Jan 19 2024 195 Put 195 16.4 18.7 17.09 177.91 4.99% 9.61% 5 $8,545.00
120.58 EOG Jan 19 2024 118.2 Put 118.2 8.7 8.9 8.76 109.44 1.97% 8.00% 8 $7,008.00
This gives an average OTM% of 2.33% and an average preimum% of 11.63%. Thus using the Cohen formula, the SP500 Hedge strike would be 395, and thus 14 SP500 Put contracts would hedge the portfolio. Thus on a 500K cash, you would collect $61871 premium, but pay out $7133 for the hedge (11% of your potential profits), for a net of $54738 (or 10.3% on your cash pile, 20.6% annualized). Note that you can construct a table of what the loss including the hedge would be if the entire portfolio (and SP500) fell by a corresponding %. The worst case scenario there is a 15% loss across the board, resulting in a 0.03% loss.
Obviously, the problem isn't that everything drops together the exact same amount, but that your chosen stocks drop and the market does not. Also, I seem to recall Jim at some point saying that given that you will almost never have to buy all of the stocks in the set, you can actually only hold half of the required cash, which would of course increase the % by double. True disasters are hedged (the only thing that goes up in a down market is correlation), but you are only holding 6 positions, thus any one of them can crater on you without the broad market doing so.
Running this for various expiration dates, I get the following aggregate results:
DATE OTM PREMIUM HEDGE NET ANNUALIZED
1/19/2024 2.33% 11.63% 11.53% 10.29% 20.57%
3/15/2024 13.68% 12.68% 6.95% 11.79% 17.91%
6/21/2024 2.71% 18.15% 10.70% 16.21% 17.23%
9/20/2024 4.80% 12.35% 22.09% 9.62% 7.99%
12/20/2024 5.15% 8.94% 40.34% 5.34% 3.67%
1/17/2025 4.43% 22.67% 12.55% 19.83% 12.63%
There is some judgement involved, but it would seem to me that the 21-Jun-24 expiration gives a nice tradeoff of high annualized return without a too crazy hedge percentage, though the Jan-25 doesn't look to bad either.
Looking forward to hearing your thoughts on this...and ask me if you need any additional details.
-Gabriel
