How I Made 155.73% ROI Selling In-The-Money Put Options

When it comes to selling Put options for income, the most widely used method is to sell Out-of-The-Money Put options (OTM).

That’s because, with OTM Put options, we have a higher chance of it expiring worthless and hence capturing the full profit on the premium received.

And if the stock does go below the strike price and gets exercised, then we would at least be assigned 100 shares at the price we want, which is well below the stock price when we first entered the trade.

But what about selling In-The-Money (ITM) Put options?

Is it a viable strategy?

And how profitable can selling an ITM Put option be?

In this post, I’ll share with you a trade of mine where I sold an ITM Put option and made 155.73% in just 9 days.

Selling An In-The-Money (ITM) Put Option

On 23rd May, QQQ was trading around $290.

At this point, the price indicated that there’s some support at this level.

That’s because it had tried to break the previous low around $285, but couldn’t close below it.

It then closed with a bullish candlestick pattern on 22nd May.

This candlestick pattern is called the bullish pin bar.

It indicates that the market has a higher probability of it going up than it going down.

Upon seeing this, I sold an ITM Put option with the strike price of 300.

This ITM Put option had a delta of 0.65 with a Days-To-Expiration (DTE) of 53 days.

I sold this ITM Put option for a credit of $20.01.

That means $2,001 is credited into my account.

Now, this is where you need to understand the difference between ITM and OTM options.

Difference Between OTM And ITM Options

With OTM options, the only value that it has is Extrinsic Value.

Extrinsic Value is time value, which means you’re essentially paying a premium for however long the “lifespan” of the option has.

The longer the DTE, the more Extrinsic Value it will have.

The shorter the DTE, the lesser Extrinsic Value it will have.

Extrinsic Value also decays over time.

That means it will go to zero once the option expires.

This is called theta decay.

Every single day that the underlying stock is not moving, the option is losing Extrinsic Value.

On the other hand, ITM options have both Extrinsic Value and Intrinsic Value.

Intrinsic Value is simply the price difference between the stock price and the option’s strike price.

So if the stock price is $100 and the ITM Put option’s strike price is $110, then the Put option has an Intrinsic Value of $10.

The higher the delta, the lesser the Extrinsic Value and the greater the Intrinsic Value.

The ITM Put option I sold, has a delta of 0.65.

This gives me a good mix of Extrinsic Value and Intrinsic Value.

In fact, the Extrinsic Value and Intrinsic Value are split equally for this ITM Put option I sold.

The Extrinsic Value is $10.00, and the Intrinsic Value is $10.00.

We ignore the additional $0.01 I received because I routed that order with an additional one cent for the purpose of paying the commission.

My broker charges me $0.70 per option contract, so for the $0.01 I received $1.00 which I used to offset the commission.

Why I Sold An ITM Put Option

Now, you might be wondering, why did I sell an ITM Put option as opposed to an OTM Put option?

The reason is because I wanted to profit from the Intrinsic Value portion of the option.

You see, this ITM Put option has an Intrinsic Value of $10.00 because the strike price is $10 away from the stock price at that time.

QQQ was at $290 and my Put option strike price was at 300.

That’s a $10 difference.

And that means that if QQQ was to go up to $300, I’d make that FULL $10.00 in Intrinsic Value.

But if I had sold an OTM Put option that comprised fully of Extrinsic Value, I wouldn’t have been able to make that much.

And from my technical standpoint of what I saw on the chart, I felt that QQQ had a higher probability of going up in the next few days than it going down.

That’s because it has bounced off the previous low and failed to close below it.

The fact that it closed above the previous low suggests that the bulls were overcoming the bears.

There was more buying pressure than selling pressure.

So there were several bullish indications that suggest that QQQ could go up in the next few days.

But of course, I knew I could also be wrong.

That is why I didn’t buy the stock outright.

And that’s why I wanted some Extrinsic Value protection in case it took some time before the QQQ goes back up.

Since QQQ is a broad-based Index, I was confident it would eventually go up in the long term.

So with $10.00 in Extrinsic Value, I’d be able to capture profit through theta decay as well if QQQ takes a long time to eventually go back up.

Exiting The ITM Put Option Trade For 155.73% Gain In 9 Days

On 1st June, QQQ went above my strike price to $310.

At this point, my ITM Put option with the strike price of 300 became OTM.

This meant that I had gained the full $10.00 in Intrinsic Value profit as I had anticipated.

The Stochastic Oscillator was also showing an Overbought reading.

This meant that QQQ had a higher chance of it going down than it going up at that point in time.

And since I’ve already gained the full profits on the Intrinsic Value, which is 50% of the Put option’s value in just 9 days…

I decided that it was time to close out the trade.

To close the trade, I bought back the Put option for $8.49.

This gave me a profit of $11.52, which is $1,152 per option contract.

And this whole trade only took 9 days.

This gives an annualized return is 155.73%.

So if you noticed, I made about 58% of the Put option’s maximum profit in just 9 days.

Would it make sense for me to hold out another 44 days just to realize the remaining 42% of the profit and put the 58% profit I’ve already made at risk?

Absolutely not!

If you can realize more than half of the short option’s maximum profit in less than half the option’s DTE, then it doesn’t make much sense to hold out till expiration to realize the remainder of the profits.

But if you want to get assigned on the shares, then there’s certainly no issue holding out till expiration.

Extrinsic Value VS. Intrinsic Value Profits

Now, if you noticed, while I realized the full Intrinsic Value profits of $10.00 on the ITM Put option, I only realized $1.51 in Extrinsic Value profits.

That’s a very small portion of the maximum Extrinsic Value I can get.

Why is that so?

That’s because there was still lots of time left in the option.

Because I sold the ITM Put option with DTE 53, there is still 44 days left to expiration.

That’s a relatively long time!

That also means that if I had sold an OTM Put option that only has Extrinsic Value, chances are that I wouldn’t be able to make as much profit as the ITM Put option I sold.

So if you think that a stock is going to go up in the next few days, it would be more profitable to sell an ITM Put option instead of an OTM Put option.

Now, as you can see from the chart above, after I closed the position, the market started to go back down.

So in hindsight, my exit seemed to be the perfect exit!

This shows the advantages of being able to read the chart when entering and exiting option trades.

What If The Trade Didn’t Work Out?

Now, you might be wondering, what if QQQ went down right after I sold the ITM Put option?

Maybe I was lucky and QQQ just happened to go up, but it could just have easily gone down instead.

This is a good question!

And I’m glad you asked.

Because what I’m about to share with you is my thought process before I placed this trade.

So before I placed this trade or any trade for that matter, I always ask myself three questions:

1. What is the worst-case scenario if I put on this trade?
2. What is my plan of action if the worst-case scenario happens?
3. Would I be okay with that?

So let’s go through each question.

Q1) What is the worst-case scenario if I put on this trade?

Since I sold an ITM Put option at the strike price of 300, the worst-case scenario would be that I would be assigned 100 shares at $300.

That means I would need $30,000 in capital to fulfill the obligation in case the option gets exercised.

And I’m perfectly fine with getting long 100 shares of QQQ at $300 because I have more than sufficient funds to fulfill the obligation, and $300 is a pretty decent price to go Long QQQ.

Since the all-time high of QQQ is $408.71 at this time of writing, $300 is a drop of roughly 27% from its high.

That is a pretty good price to go Long!

And since QQQ is a broad-based index, there’s little chance it will go to zero.

If it really does go to zero, then we have more problems in the world than the stock market!

So far, QQQ has always gone higher and it will continue to go higher over time.

So the worst-case scenario is getting Long 100 shares at $300 and potentially holding it out for a long time until it goes above that price.

Q2) What is my plan of action if the worst-case scenario happens?

My plan of action is two things:

1. Sell Covered Calls whenever I can.
2. Repair this trade using my Stock Repair Strategy.

If I get assigned and become Long 100 shares, I will sell Covered Calls at or above $300 whenever I can.

This now becomes what’s called the Options Wheel Strategy.

Basically, it’s where you start off selling a Cash-Secured Put and when you get assigned 100 shares, you sell Covered Calls to have your shares called away and this closes out the position.

If QQQ continues to drop further, then I will use my Stock Repair Strategy, which essentially is to use options to lower my cost basis on the 100 shares and average down my price.

This makes it easier for me to become profitable on the overall positions as I no longer need QQQ to go above $300 to be in profit.

Q3) Would I be okay with that?

Finally, I’d ask myself if I would be okay with the worst-case scenario and the plan of action in case it happens.

If my answer is no, then I wouldn’t have put on the trade in the first place.

But if my answer is yes, then I put on the trade and simply execute my plan.

Simple as that!

So these are the three questions that you want to ask yourself too before you enter into any trade.

As long as you know what the worst-case scenario is, and you’re well prepared for the risks and plan of action if that happens, then you can place the trade.

Takeaways

Selling ITM Put options can be highly profitable if you’re right in the direction of the underlying stock.

ITM Put options consist of Extrinsic Value and Intrinsic Value.

Extrinsic Value is time value and will decay over time as it gets closer to the option’s expiration.

Intrinsic Value is the difference between the stock’s price and the option’s strike price, and does not decay with time.

Before placing any trade, you must ask yourself three questions:

1. What is the worst-case scenario if I put on this trade?
2. What is my plan of action if the worst-case scenario happens?
3. Would I be okay with that?

If you’re able to come up with the answers to these questions and you accept the risks that come with putting on the trade, then all that’s left to do is to place the trade and execute it according to your plan!