There are many events that can happen that will tumble stocks. All stocks tumble at some point. That is the nature of investing.
Selling naked puts can often see a trade end with large losses when a stock you have sold puts against, suddenly tumbles.
Office Depot Stock Problem
An investor wrote in wondering about a position he has in Office Depot. When he sold the put strike, the company looked like a merger between it and Staples would happen. When it failed, the stock collapsed leaving the investor with a deep in the money naked put position. Let’s review his questions and see what some of the answers might be.
Underwater – Deep In The Money Naked Puts
The stock is Office Depot. The question has been edited for reading.
Investor Questions:
I got lured by premium on a quick weekly, selling a single Office Depot (ODP stock) May 20 expiry $6 put when the stock was at $6.30. I was unaware, but this was right before a merger ruling with Office Depot and Staples that went sour, and ODP is now sitting at $3.33. This put expires tomorrow (May 20). I can’t figure out if I should just cut my losses and buy back the put, or if I should just get assigned and hopefully make up my loss over time through capital appreciation and selling covered calls while waiting for the stock to appreciate. Do you have any advice to offer? Thanks – David
Suggestions and Dips
When selling options for income or to grow a portfolio, the chance of a trade failing always exists. The goal then must be to protect the profit and rescue the capital that is being used. If an investor takes enough losses, the compounding effect of growth slows until the portfolio begins to decrease in size. I hate losses. I will work just about any trade available to the point where I have learned how to minimize losses so they cannot impact my portfolio.
Here is the decision-making process David may want to consider. These are key to becoming a successful investor……The rest of this strategy article on rescuing deep in the money naked put options is for FullyInformed Members
Office Depot Stock – Decision-Making On Deep In The Money Naked Puts
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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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