My approach to put selling is really Jim’s approach to put selling. He explains it better than I can.

https://www.shrewdm.com/MB?pid=-2&previousPostID=2...

That post is related to BRK but the premise is the same.

I treat the put sale like a limit order on a stock I would be interested in owning at the strike minus premium received price. The added bonus versus a limit order is I receive the put premium on the sale. If the price of the stock doesn’t drop below the strike at expiration I still earn a return on my cash at risk that I was presumably happy with when I established the position. Plus my cash is still sitting in an interest bearing sweep vehicle earning ~5%.

My last put sale on KMX went like this. I sold the July 67.5 strike for $2.28 for a 24% annualized return rate if I held to expiration. I covered the position prior to the earnings call last week for $0.62, capturing $1.66 in premium for a 35% annualized return over my holding period of 30 days. All of that ignores the additional interest I’m still earning on the cash backing it. Based on the prices today it turned out not to be the optimal strategy but I’m content.

Jeff

CarMax FAQ

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