Reversing Delta with the PCP Strategy: A Real-Life Example with Etsy, Inc. (Nasdaq: ETSY)


The PCP Strategy, called the “wheel strategy” outside the BCI community, involves selling cash-secured puts and covered calls. One of the ultra low-risk strategies developed by the BCI team involves selling weekly cash-secured puts with Deltas of 10 (-0.10) or less with an annualized return goal range of 10% to 20%. This article will highlight the role of Delta for both the put and call aspects of the trades using ETSY and taken directly from one of my portfolios.

 

Initial put sale trade on 1/11/2021 for the 1-week 1/15/2021 expiration

  • $165.00 strike: Delta = -0.09
  • Minimum bid premium: $0.38
  • Cash required: $165.00 – $0.38 = $164.62 per-share
  • ROO: $0.38/$164.62 = 0.28% per week
  • Annualized return = 14.7%
  • 91% probability of success (approximate)

 

Price acceleration during weekly contract

 

ETSY Price Chart on 1/12/2021

 

This substantial price increase due to positive news allowed me to roll-up 2 times in the same contract week, first to the $187.50 strike and then to the $205.00 strike. In both cases, I re-sold put options with Deltas under 10. This resulted in an annualized return of 25%.

 

What happened on Friday?

Profit-taking caused the share price to decline to $204.50 and I decided to “allow” assignment and purchase the shares at $205.00. To continue the PCP strategy along with the ultra low-risk Delta strategy,

 

What happened the following week?

When ETSY was trading at $213.59, I sold a deep in-the-money 1-week $195.00 covered call for $19.10 with a Delta of 92 (0.92), resulting in a 92% probability of shares being sold at the new strike while still generating a 13.6% annualized return. If the shares are, in fact, sold, the cash will be freed up to secure another ultra low-risk cash-secured put.

 

Discussion

An ultra low-risk option-selling PCP strategy can be developed by using deep out-of-the-money cash-secured put options with Deltas under 10 and deep in-the-money call options with Deltas above 90.

 

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Hey Alan,

I read your book, Cashing in on Covered Calls, and loved it. I am reading Exit Strategies now. I have navigated through your website and watched a large portion of your videos. I have had 5 or 6 successful covered call trades. I am starting slow.

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