With options expiry one day away an investor, Rob, has emailed wondering what would be the best choice to make to keep him profitably earning more option premiums on a number of naked put positions that are in the money. The problem this investor has is if he were assigned on all these naked put positions that are in the money, he would use up all his available capital. While covered calls could help sometimes when in the money naked puts are too deep, generating income is more difficult because the stock is assigned at too high a price.
A Balancing Act
What this investor faces is the problem of balancing the risk of in the money naked puts being assigned against the risk of further stock declines against continuing to generate more income. It can be perplexing and indeed frustrating to watch your capital get drawn down by stock ownership and watch the amount of income being generated decline rapidly. But there are strategies that can be used that will assist in continuing to generate income and assist at managing the risk of stock ownership as well as a further decline in the underlying stock.
Let’s review Rob’s questions and then look at some specific strategies. Changes to his question which I have made are in brackets.
Questions On Keeping Option Premium “Rolling In”
I would like to keep getting option premiums. If these (naked put positions) were PUT (assigned) to me it would take most of my Capital. I would sell any stock once I get a few dollars profit. Here are my positions:
August 16 2014 expiry:
Aflac Stock: 4 naked put contracts at $62.50 put strike
Coca Cola Stock: 7 naked put contracts at $41 put strikes
BBT Stock: 7 naked put contracts at $38 put strike
August 29 2014 expiry:
YUM Stock: 3 naked put contracts at $72.50 put strike
Thanks for your input Teddi
The rest of this article is for members.
Generating Income While Handling In The Money Naked Puts Part 1
Part 1 of this strategy article is 3200 words in length. FullyInformed USA Members can directly access this article here or they can sign in to the USA members site here. Non-members can join FullyInformed USA here or read the benefits of being a member.