Another rescue strategy which a Put Selling investor could consider using when his naked puts end up deep in the money is a Staggered Covered Calls Strategy. Sometimes a simpler strategy works best for many investors since it requires less work and for many investors who have not used option strategies for too many years, keeping the strategy easy to understand works to their benefit. There is little point in implementing a strategy that is not fully understood. Covered Calls on the other hand are easily understood by lost investors. In general covered calls are an exceptional product to invest in and trade through. While I do not believe they are as versatile as Put Selling, covered calls strategies can go from the most basic to very complex.
In The Money Naked Puts Rescue Strategy
There are many strategies for rescuing in the money options, both puts and calls. The Staggered Covered Calls Strategy is designed to rescue deep in the money naked puts that an investor failed to get out of early and now finds himself trapped with a very large price tag to buy to close.
Once the Staggered Covered Calls Strategy is implemented an investor must change his time horizon from weeks to months and possibly longer than a year. A lot depends on the stock movement which the Put Selling investor is hold naked puts against and how deep in the money these naked puts are. In this article the investor, Fred, is holding naked puts at the $65 put strike and the stock is below $57.00.
I have used this strategy on stocks that pay a decent dividend and which I would be happy to hold but would prefer to get my lost capital returned as soon as possible. The Staggered Covered Calls Strategy is a rescue strategy. It is designed for return of capital and not for income gain.
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