When I sell put options I know the risk of a market pullback is always a possibility. A market correction such as we have just seen is not as common but any kind of catalyst can send stocks lower. But when I sell options I always have a plan in place to deal with a downturn so that I know in advance what my response would be. As well I have traded in the stock market since the crash in 1974 so I have been through a lot of corrections and bear markets. This has taught me to be patient, always have cash available to cover any possible assignment and to understand that not every trade will work in my favor. It has also taught me to have a very long outlook when it comes to stock investing. Stocks are probably the most emotional investment anyone will make. It far surpasses investing in real estate or art, coins and collectibles of any kind. Perhaps part of the reason for the emotional bond is because equities can fluctuate widely and wildly which immediately draws the angst or the joy of an investor.
The present correction has seen many of the naked put positions I trade in end up in the money. I am not concerned on any of my positions since I sell at price points that I believe have real value in a stock and I sell put options at or around support points so I know historically that stocks often revisit support and resistance points.
That being the case many investors have not been through severe corrections and often their nerves are rattled by steep declines. They begin to question their positions and their resolve. Instead just as I wrote in the article on rescuing naked calls yesterday, let comfort be your deciding factor. Let’s look at this investor’s question from August 26. These positions had fallen in the money and the investor worries:
“On Aug 19 I STO BMY naked puts Sept 4 expiry at $62.00 strike for .69 cents. I believe you received .70. You believe BMY will return to $62 by then?
Same question for JNJ. On August 11, there was a position taken in JNJ for 9/18, strike $97.5. Would you not consider rolling that yet?
On August 4, after reading the following, I entered a similar trade. My next trade will be to sell puts at the $85 put strike for August 28 expiry. I am expecting Facebook Stock to fall to around the $91.50 level which I think will push the $85 put strike to 50 cents this week. That is when I will sell 15 naked puts at the $85 put strike.”
That one expires Friday, and I received .58. No roll, or close early if there is a bounce tomorrow?
Aug 6 2015: You suggested a trade to STO DIS $100 put strike for Sept 4 expiry for $1.00. It was suggested that a close for a 50% profit would be good, but I have not yet had that chance since DIS has just gone in one direction. I did received the $1.00 for selling the put.
If you are not concerned about these, or any others I missed, then I will feel better, and can manage the trades myself, but when you mention you saw selling into the close, I am concerned that all may not be well in the near future.
They are all 7 put contracts except FB which is 10, and DIS which is 6.”
Understanding how to handle steep declines especially when you are holding naked puts or credit put spreads and watching a stock market implode is difficult at the best of times. But there are many strategies that can be considered to assist in keeping a trade profitable and an investor comfortable no matter what the market throws at them.
Strategy Discussion On Handling Naked Puts In A Market Correction
This strategy discussion article on handling naked puts caught in a market correction is 3100 words in length and will require 9 pages if printed. It is for members only.
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Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.
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