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Low CD Interest Rates Depressing You? Selling Put Options May Be a Good Substitute
If you are one of those grumbling and complaining about how little interest you are earning on your deposited cash account you will certainly want to explore how cash-secured-put-selling can generate high returns on your liquid cash. The technique of selling put options is especially useful for people or institutions with plenty of cash stashed away in CDs, money market funds or other cash derivatives. Most of these fund pools pay very little interest to the point of being ridiculous, less than 1.5%. It makes little sense to park money in this low yield investment instruments when the income received does not even cover the loss of value caused by inflation.
In today’s economic environment, where interest rates are down to historical lows, it is no longer good money management to leave your cash in the traditional safe havens of bank deposits, CDs, money market accounts and treasury instruments. Many such instruments are now returning less than two percent and in many cases even less than one percent. With inflation running at around 3 percent you need to make your money grow more than this rate or it would be losing value every year.
For nearly two decades inflation has caused the value of the US dollar to dwindle from $1.00 in 2000 to a much decreased (estimate) $0.69 as this book was written in 2017. The table below shows how inflation has eroded the US dollar over each of the five year periods in the last sixteen years. That’s a 31% reduction in the dollar’s value!
This does not bode well for those invested in money funds who are earning less than 2% annual returns.
The solution to higher earnings is you need to be a little more aggressive in your choice of where to place your cash. You also need to do a little more than just park your money and wait for someone to do magical numbers with your money. It is time for you to take personal control of your finances and make your money work for you. There is a well-known investing strategy that is gaining popularity as a possible alternative to earning high returns on cash reserves. The investment strategy is referred to and is known in the financial world as Cash-Secured Put Selling.
This cash investment approach is being used by many rich individuals and institutions to give them returns of approximately 10% on their cash resources. In very brief terms the technique involves using cash funds as security or collateral to engage in selling or writing put options. While many believe that trading in stock options is extremely risky it is not the case when using the system of cash secured put option selling. Selling cash secured put options in stocks or ETFs (Exchange Traded Funds) or indexes is among the safer strategies in the many options trading systems.
I have another article here at HubPages titled The Challenge: Using Stock Options In Lieu of Buying Stocks that gives a classical demonstration of how cash used in options trading can provide outstanding results.
In one of my published books, I show how selling put options can offer a substitute to hoarding cash in low yielding money funds. In the book I illustrate just how this strategy is done. It demonstrates how a $50,0000 cash fund invested in writing (selling) options yielded a much higher return than money funds.
There must be a downside to this magic
What is the downside or what are the risks involved in the strategy of selling put options? What is the risk of losing my savings in such a program?
The only downside, if you can call it such, is that the stock market as a whole might go into a long and swift downtrend. And since Cash-Secured Put Selling is directly tied up to the stock market you may eventually end up having to buy the stock or ETF secured by your cash position thereby owning the shares. But then you would be buying the shares at such a low price that you would stand to gain substantially when the stock market turns around and starts going in the other direction. Some would say that in this scenario, the market could take several years to turn around and your investment would then be locked in. In answer to that let’s look at the current situation.
Presently you would need to invest a very large amount of cash in a money market fund for durations of at least 2 to 5 years to earn just a meager 2%! You are locking your cash for 2 to 5 years for a measly return of 2% per year? In the other scenario where the stock market plunges dramatically (which happens rarely) you may end up owning shares of stock and you may be locked in that investment for the same period. The difference is that at the end of 2 to 5 years your stock ownership could give you a return of 100% or more in the form of cash revenues from options sold and appreciation of the stock’s value. This is the worst-case scenario.
The average return for those in the Cash-Secured Put Selling business is a steady cash inflow of 2% - 3% every two to three months. This works out to an annual rate of around 10% or more.
So if you have cash deposited in a ridiculously low yield money market account and you want to generate better returns, act now and start learning the simple trading strategy of writing put options. It may be the answer to higher yields on your cash funds. If you wish to procure my book that explains this strategy contact me via email.
Any and all information pertaining to trading stocks and options including examples using actual securities and price data, are strictly for illustrative and educational purposes only and should not be considered as complete, precise, or current. The writer is not a stockbroker and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information. Options involve risks and are not suitable for everyone.
© 2018 Daniel Mollat