Chevron Stock – Reader Question On His In The Money Puts

Recently I received a question from a reader about Chevron stock (CVX stock) . I have edited his email and my answer to include it on my site as I felt it would be of interest to others when assessing their own situations when sold puts end up in the money.

Often when investors sell out of the money puts and the puts fall in the money, it becomes difficult to decide what strategy to use next. Because of this many investors buy to close their in the money puts and take the loss to get out. The key to avoiding such losses is to plan BEFORE you even place the original trade, what your strategy will be if:

a) the stock ends up below your sold put

b) the stock ends up above your sold put

c) the stock ends up at or near your sold put

For example with the CVX Stock trade when the put was sold, the reader could have already made his selection PRIOR to actually placing his original trade. It could be as simple as this:

a) if CVX Stock ends up below my sold put, I will accept the stock and sell a deep in the money covered call for a small profit. I am more worried about protecting my capital than earning a large profit.

b) if CVX Stock ends up above my sold put I will let it expire and then reassess the stock for further put selling in the next month.

c) if CVX Stock ends up at or near my sold put at expiry, I will wait until 3:45 PM and then buy to close my put. I will then reassess the stock for further put selling in the next month.

If the reader had made these decisions prior to even selling the puts on CVX Stock at the August $100 strike, then the reader is ready and prepared no matter what happens to Chevron stock by the time of options expiry. It then becomes a simple matter of taking the strategy, either a), b) or c), and applying it at the time of options expiry. There is no questions to ask and no emotions to get in the way of the trade.

This type of planning can prevent a lot of unnecessary losses. Stocks including CVX Stock move around a lot more than investors consider. A stock such as Chevron can easily move 10% in less than a week. By having the plan ready in advance it really doesn’t matter what happens once the August $100 puts were sold because the investor already knows what he will be doing by options expiry depending on what the outcome is, either a), b) or c).

When the reader sold his puts on CVX Stock, the stock was above the $100 put strike. When he wrote the email to me, it closed at $90.27. His question was regarding his August puts of $100.00 which had fallen $10.00 in the money. Below is his question.

Dear Teddi:

I have 3 AUG naked puts at $100 in Chevron stock and have a cost basis at $98.21 because of the option premium from the puts I sold.

I also have 3 SEP  naked puts at $95 in CAT  which I had entered when CAT was at 105.50 and have only sold premium once for this stock.

I don’t mind owning these companies for the most part but with the overall market now in the bearish mode I am wondering if there is something I should be doing to collar the downside.  I’m not overly concerned with CVX stock because I feel safer with an oil company than a construction related company as the economy deteriorates.  CAT has made the bigger move down and it appears to be in bigger trouble.  As I noted previously the tone of the entire market has changed significantly which is where my main concern is.

I had a sell signal for my long term portfolio that has me entirely in cash except for my naked put positions.  I normally wouldn’t mind using time to work my way out of being assigned but I’m thinking we’ve more downside to come. You have a great website and you’re more than welcome to use my question on it.

Do you have any suggestions or ideas to consider for my CVX Stock?



Hi David

If I have your information correctly you have have committed $30,000.00 to this trade in Chevron stock in the event you are assigned shares less the $536.00 you made.

This puts your cost basis in CVX Stock at $98.21 per share if you are assigned shares at $100.00

From your email I believe you want to own CVX Stock but not just yet. Looking at the CVX Stock chart, I believe it could easily fall into the low $80.00’s if the market continues weak. Meanwhile though the dividend is at .78 a quarter which will put some floor under the stock.  If you look at the last 5 years (see below), $100 is pretty well the ceiling for this stock. It looks like you sold near the high for this stock. But at .78 cents a quarter that really works to reduce the overall cost  The dividend works out to $3.12 annual. Imagine over 10 years if they never raise their dividend they will have paid out $31.20 or almost a 3rd of your cost of CVX Stock. Wow!

Chevron Stock 5 Year Chart

I cannot give out personal recommendations as I am not a financial planner, so instead I will look at this as if it was my positions. After studying Chevron Stock I can pinpoint five ideas I might consider:


Idea 1: CVX Stock

In this environment I would want to own Chevron stock. I would want to have CVX Stock put to me at $100.00 because I want the fat dividend. Then I would sell the January 2012 CVX Stock $90 covered call which today I could get $9.40 for.

Once CVX Stock is assigned to me my actual cost is $98.21 due to the $100.00 strike puts I originally sold.

By selling the January 2012 CVX Stock covered call, I then have a good chance to pick up the November dividend payment for .78. This reduces my net cost to $97.46.

By selling the January $90 covered call for $9.40, my return is $99.40 less $97.46 = $1.94 X 300 shares = $582.00, if I am exercised out of CVX Stock at $90.00 which I doubt will happen until into November when the next dividend is paid out and only if the dividend  payment is larger than the premium in the covered call.

It is important to watch around the dividend date in November to make sure that the premium in the Jan 2012 $90 covered call is worth more than the .78 cents dividend being paid out. IF IT IS NOT THEN I WILL MOST LIKELY LOSE MY Chevron Stock as the market maker will take the shares even if all he can make is a few cents. There MUST BE MORE PREMIUM in the January 2012 $90 covered call just prior to the November dividend being paid out.

If there is not enough premium in the covered call by the time the November dividend is to be paid out, then I would buy back the January 2012 $90 covered call and roll out to March 2012 for a net credit before the dividend is paid. This will ensure that I do not lose the November dividend.

But this is just part of the trade. By selling the Jan $90 covered call I have brought in $2820.00 + $536 already made = $3356 less $30,000 = $26.64 / 300 = $88.81 per share. Not too shabby a spot to be in for me as I think CVX stock will easily fall below $90.00 before November unless the economy improves.

If I collect the November dividend payment WITHOUT having to roll the January $90 covered call and the stock stays above $90.00 as mid-December comes around, I would buy back the January $90 covered call and then sell further out another set of covered calls to capture the February dividend payment (probably sell March or April depending on what is available) which again reduces my cost basis in CVX stock and brings in more income.

Meanwhile though if Chevron stock falls below my $88.81 cost basis I would roll down to $87.50 making sure that if the stock bounces back up and I get exercised out I lose no money but end up with some profit.

On another note if I was worried that the market may really get hammered I would probably sell my covered calls deeper. Since I know upon assignment that my cost basis in CVX stock is $98.21 I might consider the January $87.50 call strike which I can sell for $11.00 which equals $98.50. This means I have only broken even, but it buys me a lot of protection.

11X300 = $3300.00 plus $536.00 = $3836.00 less $30,000 = $26164.00 / 300 = $87.21 and if I was to pick up the November dividend that gives be another .78 cents in profit.


The whole idea of rolling down deep in the money and further out is it gives me time. Time to watch the stock and see where it falls. The opportunity to roll lower should the stock plummet down to say $85.00 or even lower. It also provides me with the opportunity that should Chevron stock in fact not fall but stay in the lower or mid 90’s, then I can buy back my covered call and roll up higher. For that I would be waiting until Oct is over because I know how bad Sept and Oct can be for the stocks. By rolling up I am giving up nothing. The fact that I sold deep in the money was purely to protect my stock. I am making no profit should the stock plummet beyond my $87.21. Basically it is just not costing me my own capital on the way down. Sort of like using a put spread against my position.

If CVX stock does not fall to my strike then when I buy back the January $90 covered call and roll up higher, I am losing nothing since I was just buying a big amount of protection in the first place. That’s the beauty of the deep in the money covered call in a bear market. I sold the deep covered call in CVX stock to buy insurance. If the stock fell to $90.00, I am not MAKING MORE MONEY, but I am not losing any money either due to the premium I earned on the covered call I sold. Basically it is capital preservation.

If I have to buy back the January $90.00 covered call in CVX Stock and roll higher and further out, I am just giving up the protection I had when I sold the in the money put. It is not costing me anything from my profit. Instead it is costing me from my capital that was returned to me when I sold the deep $90 call strike in the first place. If I roll from $90 to $92.50, for example, I will probably be giving back perhaps $3.00 in my capital and losing $3.00 of protection. There is no capital loss as long as Cheron stock stays above the new covered call strike of $92.50. This is often a difficult concept for investors to understand. If they put it in a spreadsheet and follow the trade, they will find no capital loss in the end as long as the stock stays above the new higher strike price.

Idea 2: CVX Stock

The other trade I might consider is to buy back the $100 put for $7.45 (today’s cost to buy to close) and sell the January $92.50 put for $7.90. – This gives me another .45 cents reducing my cost basis in CVX stock. So then my cost basis in Chevron stock is down to $90.11.  I then can keep my capital in a money market instrument earning half a percent for the next 5 months or about $70.00.

When the stock falls to $90.00 I would buy back the $92.50 put and sell lower again for a net credit.

Idea 3: CVX Stock

Another idea is to buy back the Aug $100 put and sell the Jan $100.00 put.  By rolling the puts sideways at the same strike and further out in time this would overall reduce my cost basis in CVX stock to $93.46.  (based on figures for August 18 2011)  This though offers the least amount of flexibility.

Idea 4: CVX Stock

My last idea would be to buy back the Aug $100 puts in CVX Stock for $7.45 X 300 = $2235. I then would look to see what 3 strikes I could stagger my next set of puts at and split them up. For example I might sell 2 Jan $97.50 puts for $10.40 = $2080.00 and then I would sell 1 X January $75 put for $2.75 = $275.00 = for a total income of $2355 or $120.00 in income.

My total income would be $656.00

If assigned shares = 200 X $97.50 = $19500

100 X $75.00 =    $7500

Total capital = $27000.00 less 656.00 = $26344.00 / 300 = $87.81 per share in Chevron stock.  And my capital is still earning income until I am assigned. If just the $97.50 get assigned and the $75 put expire, then I can sell another 6 month put contract out on CVX Stock for more capital again. Meanwhile if I am assigned the 200 shares at $97.50 which I expect I would be unless I kept rolling them early, I can sell covered calls AND earn the dividend,  again reducing my cost basis in CVX stock.

With idea 4 I would definitely be watching my, in the money strikes. If the opportunity arose such as a bounce back up, I would buy those puts back and examine my income and then sell puts further out either at the same strike or lower again, say $95.00, 6 months out.

Idea 5: CVX Stock

My final idea is perhaps I decide I don’t want to be in CVX stock at all, long term. I just buy back the August puts for a loss and call it a day.  Or with the volatility this high, I buy back the August $100 puts,  but try to earn something to assist with the loss by selling the January $75.00 put for $2.35 X 3 = $705.00. This means I have sold a far out of the money put to help cover some of the loss of buying to close the August $100 puts.

I have already made $536.00 when I sold the August $100 puts and combined with $705 from selling the January $75 put in CVX Stock I have made a total return of $1241.00.

My cost to buy back the Aug 100 puts (as of August 18 2011) in CVX Stock is $7.45 X 300 = $2235.00 less $1241.00 = a loss of $994.00. This is still a large loss as a percentage, but at the $75.00 put strike, I am a lot more comfortable in CVX stock if it should plummet that low.

Looking at the chart for the last 5 years I see that in the 08 – 09 market crash the stock got down to the upper $60.00’s. Based on this knowledge and the fact that the price of oil fell steeply in that market crash, I would be quite comfortable with owning CVX Stock at $75.00.

Looking at all the ideas, I don’t know which one I would pick because it all depends on what my ultimate goal is. Do I want the stock eventually? Do I want to just roll as long as possible but realize that at $100.00 I sold near the historic highs for this stock so I need to work my way lower before accepting shares. Or does the market volatility scare me and make me want to jump ship, take my loss and get out? It all depends on the goals, objectives and strategy being employed. I do know that consistency is the only way to win with stocks and to leave emotion out of my trading.


The reader decided that Idea 1 suited his purposes best. Here is his reply email:


Outstanding analysis!  I’m going with Option #1.  CVX stock is a good one for the long haul for many reasons as energy is always needed and the dividend is great.

Your response is so thorough that I’m going to have to read it several times and put it into a spreadsheet to visualize the concepts.  I just retired so I’m selling puts and  slowly accumulating shares in high dividend paying stocks like Chevron stock.

I look forward to seeing this CVX Stock trade, on your website.

Thanks again,