Profiting with Defensive Cash-Secured Puts: An NTES Case Study

Cash-secured put trades offer a conservative approach to generating income in the options market. By strategically employing deep out-of-the-money (OTM) strikes, investors can craft positions designed for capital preservation while still achieving notable returns. On May 27, 2025, a prime example of such a strategy was executed with NetEase Inc. (Nasdaq: NTES), a prominent stock then featured on our premium member watch list. This article delves into the detailed rationale behind the trade entry, the careful selection of strike prices, and the ultimate successful outcome of this 4-day defensive trade.

The Core Strategy: Defensive Cash-Secured Puts

A cash-secured put involves selling a put option and simultaneously setting aside enough cash to purchase the underlying stock if it falls below the strike price and the option is exercised. The "defensive" aspect comes into play by choosing deep OTM strikes, meaning the strike price is significantly below the current market price of the stock. This reduces the probability of the option being exercised, while still allowing the seller to collect a premium. Should the stock price fall below the strike, the investor is prepared to acquire a high-quality stock at a predetermined, lower price, effectively buying it at a discount.

Why NetEase Inc. (NTES) Was Selected on May 27, 2025

The selection of NTES for this specific trade was based on a comprehensive set of criteria, reflecting a blend of fundamental and technical analysis, combined with favorable option characteristics:

• Industry Leadership and Fundamental Strength: Operating within the software industry, NTES held an "A" ranking, indicating robust fundamental health, a strong competitive position, and consistent performance. Its status as an elite-performer from a fundamental perspective meant it possessed strong financials, sustainable growth, and a solid market presence.
• Strong Analyst Sentiment: The stock boasted an excellent mean analyst rating (MAR) of 1.41. Such a low number signifies a consensus among analysts for strong buy recommendations, often correlated with positive future earnings and stock price appreciation.
• Absence of Event Risk: A critical factor was the absence of impending earnings reports or ex-dividend dates. These events can introduce significant, unpredictable volatility, which conservative option strategies aim to avoid.
• Bullish Technical Indicators: All chart technical indicators were bullish, suggesting the stock was in a healthy uptrend and exhibiting positive momentum. This reduces the likelihood of a sudden, sharp decline that could push the stock below the OTM strike.
• Liquidity and Flexibility: The availability of weekly options on NTES provided essential flexibility for short-duration trades, allowing for precise time management and the ability to capture premiums over very short periods, such as a holiday-shortened week.
• Attractive Implied Volatility: A robust implied volatility (IV) of 33.8% was particularly attractive. High IV translates to higher option premiums, enabling significant returns even for deep OTM strikes and short trade durations. This allowed for a substantial income generation potential relative to the capital at risk.

NTES vs. The S&P 500: A Visual Comparison

The one-month price chart visually demonstrates NTES's relative strength against the broader S&P 500. While the S&P 500 may exhibit more pronounced fluctuations, NTES showed a remarkably stable or even slightly upward trajectory leading up to the trade. This stability, coupled with bullish technicals, reinforced the confidence in the stock’s ability to remain above the selected strike price.

Initial Trade Calculations Using the BCI Trade Management Calculator (TMC)

The BCI Trade Management Calculator (TMC) is an indispensable tool for structuring and analyzing such trades. For this NTES trade:

• The initial time-value return was calculated at 0.65%, which translates to an impressive 59.70% on an annualized basis (highlighted in brown cells). This demonstrates the power of compounding even small returns over short periods.
• The break-even (BE) price point was identified at $119.22 (yellow cell). This is the price at which the investor would neither profit nor lose if the option were exercised. Since the strike was $120.00, the premium collected effectively lowered the acquisition cost.
• A crucial defensive aspect: if the option were exercised, NTES would be purchased at a 3.13% discount (purple cell) from its trade entry price. This illustrates the protective mechanism of cash-secured puts—allowing for the acquisition of a quality asset at a reduced cost if the market moves unfavorably.

Broker Trade Confirmation

The broker trade confirmation served as a record of the executed transaction, validating the entry price, strike, and premium received, and ensuring all trade parameters were accurately recorded.

Final Trade Status as of 4 PM ET on May 30, 2025

The trade concluded successfully at expiration, yielding the anticipated results:

• NTES was trading at $121.76.
• This was $1.31 below its price at trade execution ($123.07), demonstrating that even with a slight price decline, the defensive strategy remained profitable.
• Crucially, the stock price was $1.21 above the OTM put strike of $120.00. Consequently, the option expired out-of-the-money and worthless.
• The realized final 4-day return was 0.65%, amounting to a remarkable 59.70% annualized return.
• Significantly, no exit strategy intervention was required, indicating a smooth, well-managed trade from start to finish.

Discussion: The Power of Defensive Options Trading

This 4-day cash-secured put trade on NTES vividly demonstrates that significant returns are achievable even with conservative, short-duration option strategies. By meticulously selecting stocks with strong fundamentals and bullish technicals, and by utilizing deep out-of-the-money strikes, investors can generate consistent income while effectively managing risk. The trade's success, despite a modest share price decline, underscores the robustness of this defensive approach. Option trades can be precisely crafted to align with various market environments and individual risk tolerances, offering a versatile tool for investors seeking both income and capital protection.

Enhance Your Trading with the BCI Trade Management System (TMS) & Calculator (TMC)

The success of trades like the NTES example is greatly facilitated by robust tools such as the BCI Trade Management System (TMS) & Calculator (TMC). This comprehensive package includes a unique calculator/spreadsheet that streamlines initial trade entries and calculations, both on a per-trade and per-portfolio basis. Its middle section offers over 20 trade adjustment options (exit strategies) and provides post-adjusted results, enabling proactive position management. Additionally, a dedicated trade journal serves as an excellent learning tool for recording notes and comments. The spreadsheet is designed for both covered call writing (upper section) and cash-secured puts (lower section).

The package also includes a PDF version of Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts, an extensive resource with 27 chapters of detailed position management information. This book is intricately linked to the TMC, providing theoretical backing for the practical application of the calculator.

To learn more about how the BCI Trade Management System can empower your trading, click here for more information.

Community Insights & Upcoming Events

The BCI community thrives on shared knowledge and success stories. We are grateful for the testimonials received, such as the one from Tom, who praised the "Credit Spreads for Bull & Bear Markets" presentation and noted how BCI's conservative investment approaches empowered him to protect his capital while achieving market-beating returns. These testimonials underscore the value our educational content brings to families and individual investors.

For those looking to deepen their understanding and engage further, BCI offers a range of educational opportunities:

• Orlando Money Show (October 16–18, 2025): Featuring an opening ceremony keynote address and a 45-minute workshop on Traditional & Low-Risk Covered Call & Cash-Secured Put Trades. Register here.
• Money Masters Symposium Sarasota Florida (December 1–3, 2025): A session on Setting Up Option Portfolios Using Stock Selection, Diversification, Cash Allocation and Calculations. This will cover analyzing covered call writing trades, minimizing risk, and maximizing returns through strategic stock and ETF selection, diversification, cash allocation, and effective position management.
• BCI Educational Webinar #9 (Thursday, January 15, 2026): An upcoming webinar focusing on advanced strategies and market insights. Details on the topic and registration will follow soon.

Alan speaking at The All Stars of Options event in Las Vegas.