This is the fourth and final part in a series of 4 on generating income while handling in the money naked puts. This article focuses on YUM Stock which trades under the symbol YUM.
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.
YUM Stock is unique in that Rob’s position is sitting just in the money at $72.50. Since holding the naked puts at 72.50 one day before expiry may seem ideal, it can actually end up either way on expiry, just one day away. YUM Stock could fall on Friday and leave the position at risk of assignment or less profitable or more difficult to roll down or it could end up out of the money and Rob could walk away with the entire put premium he collected when he sold the Aug 29 expiry $72.50 puts in the first place.
This article looks at how I approach this type of trade when the puts sold are so close to being out of the money with just one day to spare.
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. This final article is 1900 words in length.
Generating Income While Handling In The Money Naked Puts Part 4 – YUM Stock
Part 4 of this strategy article takes the lessons learned from Part 1 and applies them to the trade in YUM Stock. By reviewing the YUM Stock discussion investors can begin to see just how easy it sometimes is to make decisions on how to keep income flowing in while still successfully managing the risk of holding in the money naked puts especially when the stock sits so close to allowing the naked puts to expire out of the money. This YUM Stock article focuses on handling a naked put trade that is within hours of either being assigned or having it expire.