What is a SuperPut?

First, you have to know what a covered call is. A covered call is a trade in which we buy the stock and write (sell) call options against the shares; selling the call options (calls) produces income, which mere stock ownership does not accomplish. The most common practice is to write calls that expire in the current (front) option month or in the immediately following (near) month. Writing covered calls every month produces a stream of income at fairly low risk, assuming that you are conservative in stock selection and confine your writing to large, established companies such as the S&P 100 - one of our most popular lists, by the way.

The SuperPut adds a protective put to the classic covered call trade. This long put is long-term, having an expiration that is 6 to 8 months out in time. The protective put limits risk in the trade to a few percent of the amount spent to open the trade. Thus if the amount spent to open the trade (including buying the stock, buying the put and selling the call) is $40, the protective put will limit your risk to a maximum of 10% - in this case $4.00. Many times the risk is less than 5%. That is a considerable benefit to the income investor!

The length of the put allows you to keep writing calls on the stock month after month. After a couple of calls have been written, perhaps three calls, there is no longer risk in the trade.

On our SuperPut lists, the long put is quite cheap, usually not more than 2.5x the current-month's call premium, and sometime less. This makes it easier to assure that the SuperPut trade - low risk to begin with and soon riskless - will nonetheless yield a strong profit.

OK, so that's the "deep background" on SuperPuts, as our new CIA director would put it. Now let's get to your questions.

Put Expiration Months

Question: The puts on the SuperPut lists don't seem to be 6-7 months out in time. What gives?

Answer: All the long puts shown on the SuperPut lists are 6 to 8 months out in time. Recall that call month codes are A - L, and that put month codes are M - X. Right now (September 26, 2007), the earliest-expiring put shown has an "O" code for March-2008. Some have the "P" (April) or "Q" (May) codes.

Cost of the Long Puts

Question: The puts on the SuperPut lists in many instances cost a lot more than the calls. This does not seem too advantageous.

Answer: The SuperPut lists are not put spreads, but covered calls with a long-term put added for protection. That is the entire point of the SuperPut lists: to allow the writer to buy a long-term but very cheap protective put, which allows many months of writing the stock. The puts ideally will not be more than 2.5x the current call premium; but of course you would expect to pay more for the long-term put with an expiration 6 to 8 months out than you receive for selling the short-term call.

If the put is ITM the cost is higher yet. In that case, click on the Put symbol on the list and pull up a Put & Call chain for the underlying stock. Check the price of the ATM put for the same month as the ITM put shown on the list; the ATM put should be far cheaper. While you have the research page open, look at ATM puts even further out in time. You may find that they are little more expensive for lots more time. Think of the put's cost per month - in essence amortize the puts' cost. How does it compare to normal levels of call premium?

Note that on the OTM SuperPut lists, the put is always ATM or OTM, and will be very cheap in relation to the current call premium. On the ATM SuperPut lists, the put is always ATM or ITM, and will be more expensive (but as noted, you can use our Research Page to look for cheaper ATM or even OTM puts).

How is Maximum Risk Calculated?

Question: I am having difficulty understanding upside risk and downside risk in your super put lists and how it is calculated. Maybe you can explain it to me. I am obviously missing something.

Answer: Downside risk is the Net Trade Debit (S+P-C) less the put strike, and assumes the stock sells off. The upside risk is the NTD less the call strike and assumes the stock moves up. The maximum risks are artificial numbers and do not include 1) any value in the put, in effect assuming that the writer exercises the put to sell the stock, nor 2) any trade management.

It is unlikely that a trader would lose the entire sum paid for the put, but it is possible if the stock moved up quickly. A strong upward movement in the stock would seriously reduce the long put's value, in which case the writer might get very little for the put or decide to keep it, getting no value for it. The maximum risk, then, is a theoretical measure of worst case, which a call writer would not often realize. But it is nice to know what the worst case is.

The Rising Stock Situation

Question: I established a SuperPut position, yesterday. I like the strategy but if the stock rises and I'm assigned on my short calls during the first month, what would you do then? Retain the put; buy the stock again and write a higher-strike call on the stock? It's the only alternative I can think of except closing out the position at a loss due to the higher cost of the put.

Answer: The SuperPut is not the best bullish strategy, precisely because of the problem you described. With the stock up and your short call ITM, you will be assigned (have to sell the stock) at the call strike, unless you roll the calls up or at least buy back the short call. This seriously increases your debit in the trade, so don't roll up unless convinced the stock will hold the new price or, better, continue higher. The danger in rolling the calls up or closing the call on a rising stock is that the stock pulls back, whipsawing the trader.

Depending on how I assessed the stock's move up, I might just retain the put. It has a long life, and I see no point taking a loss on closing the long put, when the stock might fall enough to get the put back into the game. However, if the stock were rising and you felt certain that events were likely to keep powering it higher, it might be feasible to sell the put and get whatever price for it. This is a decision that has to be made at the time. Selling the put, though, carries the risk that the stock is spiking and will pull back. Just don't day-trade the put.

If you keep the put and keep buying and writing the stock, the stock's rise will leave the put (and the protection level it offers) behind. This means that as the stock rises, the put will become increasingly less protective. In this situation it is possible to realize a larger loss if the stock falls after you have bought it again and rewritten it. If the stock is technically and fundamentally impressive, it bears writing again; covered writers look for strength and such a stock shows strength. If you find yourself in this position, keep a firm eye on the charts: don't buy and write the stock at resistance, for example. Don't get sucked into a bad play because you feel you must chase the stock. Remember, your maximum loss is 10% or less in the original trade. That will increase only as a result of new transactions that you initiate.

If you are feeling bullish about the stock, BTW, it makes sense to leg in to the trade after you are assigned: buy the stock but wait to write the call for a few days. If the stock continues to rise, you will receive more for selling the calls. The SuperPut is not a perfect trade, just a great one.

Choosing Put Strikes in SuperPut Trades

Question: I’m not sure about arranging call and put strikes in a SuperPut trade. What am I looking for in this trade?

Answer: Like any trade, the SuperPut is a balancing of risk and return. When building the SuperPut trade, forget the long put for a moment. What makes the most sense if the trade is viewed as a straight covered call? If short-term bullish, write an OTM call. If short-term bearish, consider an ITM call. If you don’t have a particularly bearish or bullish outlook, then write ATM calls, since that is the fattest return.

The SuperPut trade would not be built any differently – the question is which strike put to buy? The ATM put is always the best bargain. The best-balanced trade is ATM call - ATM put. If the put is the higher strike, upside risk is increased. If the put is the lower strike, downside risk is increased. If both options are ATM, the maximum risk is the same.

Isn't the OTM Put the Smartest Buy?

Question: Isn’t the OTM protective put a better buy than ATM or ITM puts? It’s cheaper.

Answer: No and no. Suppose the stock is $55 and the APR 55 Put will cost $6, while the APR 50 Put will cost only $4. But if the trade tanks, you will get $5.00 less by exercising the 50P than the 55P. In this example, you added $5 of risk to the mix, while saving only the $2. I think the OTM put is not the best bargain, all things considered, but many times it is the choice of writers who are bullish or neutral on the underlying stock, because they are not concerned that the OTM put adds downside risk; instead they are more concerned about an upside move.

Stock Collapses: Exercise the Put?

Question: If the stock collapses, is the best practice to exercise the long put?

Answer: No, don't exercise the put right away. As the stock is falling, close the calls and roll them down. Doing this allows you to stick some of the downside move in your pocket. You don't care how much the stock falls, since you have the long put: the stock's collapse is not YOUR problem.

Remember that when you exercise an option you lose any time value it contains. Thus if the put had 0.60 of time value, you would forfeit that by exercising the put. The better strategy would be to sell the stock and sell the put.

If the stock is in free fall, consider selling the stock. As the stock continues to fall, the put will continue to gain in value. The OTM put will gain value the most slowly as the stock falls until it becomes solidly ITM. Then sell the put if the stock appears to find real support.

What About Calendar Put Spreads?

Question: I'm not that keen on covered call trades with a long put added, but more interested in calendar put spreads. Do you have any lists that will accommodate that interest?

Answer: Yes, the SuperPut lists. Recall exactly what the SuperPut lists are showing you: trades with high short-term call premium (their short-term put premium will be high, also) and low long-term put premium. If short-term call premium is high, short-term put premium will be, also.

This allows you to sell expensive current-month or next-month puts and buy long-dated (cheap) puts in order to establish a very advantageous calendar put spread in which you can, month after month, write puts. Isn't that what writers of calendar put spreads want? Simply click on the put symbol on the list to open a Put & Call chain and look at put prices for the months of interest, which literally takes seconds.

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