When many investors sell put options against stocks, they continually tell themselves that they would own the stock if it fell below their put strike. But when the stock does fall and leaves the puts they sold in the money they panic. We all know that sinking feeling. As the stock falls further they cannot sleep and they begin to look upon the trade as a disaster. Suddenly they decide they no longer want to own the stock. Most will buy back their in the money put options and take losses.
Why Taking Losses Hurts
When an investor takes a loss on an option trade such as naked puts or naked calls, iron condors, spreads or a multitude of other option strategies they hurt their portfolios in a number of ways. The first and most obvious is they have lost capital. This was capital that could have been used to earn more income and profits. The second pain comes from the fact that now with less capital they must earn the loss back, to restore their lost capital and move ahead. This means throughout this period of recovery their capital is not growing or compounding. They are losing the chance for further gains in the year while they try to recover their loss. Another problem with taking losses is the damage to confidence that it brings. Many investors who lose capital find that they begin to second guess trades and worry about another loss. They make mistakes. They close trades too early. Any downturn in another position and they close quickly for what they consider “smaller losses”, but still a loss. Eventually a lot of investors quit stocks and turn to what they perceive as “safer” investments such as ETFs. Many leave stocks entirely and turn to bonds believing at least with bonds they “cannot lose their capital”. But bonds have many other risks associated with them.
Dealing With In The Money Naked Puts
For many investors dealing with in the money naked puts left after a stock collapses is difficult both financially and emotionally. As small investors, we trade almost exclusively alone with very little support and limited information. We have finite resources and capital available.
But by having a solid plan available and the knowledge of how to implement that plan, investors gain emotional support and build confidence to trade better and retain profits as well as protect their capital.
This article presents the strategy I use often when a stock collapses in a bull market.
In The Money Naked Puts Strategy Article – YUM Stock, Cisco Stock, Intel Stock
This is a FullyInformed Members strategy article. The article examines three collapses in stocks. These are YUM Stock, Cisco Stock and Intel Stock to explain the implementation of the strategy to handle a stock collapse.
This strategy article on handling in the money naked puts is 3000 words in length and will require 8 pages if printed. FullyInformed Members can can login directly through this link to read the rest of this strategy article or Members can sign in to the full members site here. Non-members can join here or read the benefits of being a member.