[Investor237]

Hi jamie2025,

Teddi often recommends using only 35%-40% of available funds to trade. She recommends keeping the rest in bonds and cash. That way cash is available when a correction hits.

This article discusses the cash portion of a portfolio:

https://www.fullyinformed.com/members/the-cash-portion-of-my-portfolio-put-selling-with-margin-strategy/

Having said that, despite following the above rules, I have had some difficulties/worries about having enough cash in my portfolio during corrections. I suspect this is a common problem.

I have been discussing this with Teddi recently on the Ask Teddi forum. Teddi recommended that I post a few trades and she would look them over and give some recommendations on their management, with the goal being to have enough cash to rescue trades during a correction and still have cash to profit from the correction.

My searching my name, you will see 3 recent posts describing trades in MA, PYPL and VZ. Teddi is working on writing an article addressing the issue that you bring up. Follow those 3 posts and Teddi’s answer/article should come up soon.

[Investor237]

I understand that quality stocks recover (you have drilled that point into my head repeatedly…LOL). The issue is that there is no way to know WHEN they will recover. By rolling out at the same put strike, it may take longer for the stock to recover above the short strike…thus keeping capital tied to the trade for an undetermined period of time. The capital tied to the trade is earning little to no income. Case in point, your first two ITW rolls (in the referenced article) earned no income.

My thinking was that by rolling out, AND DOWN, I can shorten the time it takes for the stock to recover above the short strike and therefore shorten the duration of time that capital is tied to a given trade.

I completely understand your point about having confidence in a stock. But confidence does not predict the length of the recovery period. By rolling out at the same strike, capital is tied to the trade for the entire length of the recovery period (6 months? 1 year? 5 years? who knows?) and probably earning very little. In your ITW trade, your rolls did not free up a tremendous amount of capital, for other trades. Also, the bulk of your gains were made by purchasing stock and selling higher…that is a completely different strategy than selling puts.

That was actually the focus of my questions when posting my 3 trades. My 3 trades (MA, PYPL, VZ) ended profitably, but I felt that my capital requirements increased with each roll, and that my capital was tied to the trade for a long time (several months). That is why I am curious to get your opinion on those trades. Perhaps you will say that I managed them correctly…since they ended profitably. and perhaps my “concerns” are just part of the game. But, perhaps not. Perhaps there was a better way for me to rescue my trades that would have required less capital and less time. Nonetheless, my worries were that increased capital was required and that capital was tied for a long time. These trades did not occur during a market crash, so luckily I was earning income from my other trades. However, if it had been a market crash ALL my positions would need rescuing and if I follow the same pattern as the 3 trades in question, I would have run out of capital and be forced to take losses.

One of your suggestions is to sell less puts. At the time when I initiate positions, the sum total of ALL my positions combined (many different stocks), total less than 40% of trading capital. So I don’t feel that I am initiating positions that are too large. Do you disagree? However, when one position (out of many) required rescuing, my capital requirements, for that one position, increased drastically. That leaves little capital available for other positions. What if a second position requires rescuing, or a third?…I will run out of capital.

I have trouble with the idea of using a stop-loss (other than the short strike itself, which I feel IS a stop-loss). I fear that it would lead to many unnecessary losses and make the entire portfolio unprofitable. Very few uptrends are straight up. Stocks move up in a zig-zag pattern. A stop-loss has a high chance of taking me out of a position during the regular ups and downs of a stock. Yes, we can discuss where to set the stop loss, but that becomes a whole other discussion…one which swing traders, and position traders, have not found the perfect answer to.

I have been a member of Fullyinformed, and trading option put credit spreads, for exactly 1 year now. The overwhelming majority of my trades (>95%) have not needed any adjustments, and have been profitable. I am fully aware that it has been a very easy period for put credit spreads due to the roaring bull market. However, even though it has been an easy period, most of the stocks that I had positions in have fluctuated widely after I had initiated my positions. But despite those fluctuations, they remained above my short strike. Given that we are earning relatively small premiums per spread (a lot of your trade alerts earn $0.50 – $0.75 per spread), it takes very little movement in the stock to double the premium, even though the stock may still be far away from the short strike. If I had used a stop loss (for example: buy back if the premium doubles), I would have been stopped out of a very large percentage of my trades, and the majority of my trades would have ended with losses, rather than gains. Perhaps I am not understanding how to apply the concept of a stop loss properly, or perhaps using a stop-loss, other than the short strike itself, is not a profitable way to trade put credit spreads. Maybe that could be an interesting topic for a new article (hint, hint ?).

I know that you have put a lot of work and effort into the Best Bets Tool, and other tools on your website. However, I became a member to acquire new skills and learn how to trade on my own. I don’t want to use, black-box systems or tools. That is, for me, counterproductive to learning how to trade on my own.

These posts have led to very interesting discussions, but we have strayed away from my initial question. The main questions that led me to post those 3 trades was that I noticed that, during those rescues, my capital requirements increased substantially (often due to having to widen the spread because of the high cost of long puts) during the rolls, and that my capital remained tied to those trades for a long period of time, until the stock recovered enough for me to exit profitably. Given that these difficulties occured in a strong bull market, this worried me, because it would be worse during a severe correction, when most of my positions might have needed rescuing. This would lead my portfolio to run out of capital for the rescues. You suggested looking at a few of my trades to see where I might have made mistakes that led to increased capital requirements, or to having to stay with a trade for a long period of time.

[Investor237]

Saying that MA will hold up is an assumption. Even near-perfect fundamental analysis cannot predict the future price of a stock. Obviously, there is no way to know for sure that MA will bounce back to above the short strike. If I roll out at the same put strike, and MA continues to decline, my short strikes will end up very deep-ITM…what do I do then?

In several of your articles, you recommend to close and roll short puts when the price of the stock goes below the short strike. One of your explanations being that even if you end up being wrong, and the stock moves back up, your capital was protected, and your position still ends up being profitable.

[Investor237]

I forgot to mention that usually I am only able to check prices and place trades during the last hour of trading.

Sometimes, however, I manage to sneak a peak at the market during the day. Unfortunately, looking at my trades during the day seems to work against me. My positions seem to go against me significantly intra-day, only to come back at the close of trading. So whenever I look at my positions during the day, I seem to make adjustments to my trades, that I would not have needed to make if I had not looked at the market during the day. This happened several times throughout the trade in MA.

This seems counterintuitive to me. The best time to rescue a short put is when the stock crosses below the strike price (at least that has been my understanding from reading all your posts). However, in this trade, doing that has cost me a lot i.e. I rolled trades intra-day that would not have needed to be rolled and would have expired OTM.

The obvious solution would be: DON’T CHECK THE MARKET DURING THE DAY! However, that seems risky…what if I miss a sharp downturn, that I could have caught sooner, before my short puts got so DITM?

[Investor237]

I read your post on posting PDFs of your account. Every difficulty that could have occured, did occur. LOL

As per your recommendation, I have selected 3 trades to post. These are the trades that I feel have tied up my capital.

I will be posting them as 3 individual posts titled “Trade Management” followed by the stock symbol.

I am really looking forward to your feedback on what I did wrong, or right.

[Investor237]

Thank you for your input Jamie2025. Your reasoning is sound and I agree.

My initial naked calls expired the week BEFORE earnings announcement. I was expecting the stock to possibly move after earnings announcement, as most stocks do. Unfortunately CLX decided to move drastically the week PRIOR to earnings and I got caught in the whipsaw. The hazards of trading!

[Investor237]

Thank you for you answers Teddi. I guess that I will have to be patient and continue trading to gain more confidence in managing the portfolio as a whole.

I will look through my records for some trades that tied up my capital and will post them on this thread (or do you prefer I start a separate thread?) for your suggestions on how I could have done things differently.

I looked at the “Portfolios” section of your website. There was a lot of compiling and formating that went into those posts. You separated, and calculated, trades by stock symbol, and much more. Obviously that took up a lot of your time. What I was suggesting was more basic…since your broker is Interactive Brokers, I was suggesting that you simply print, in PDF, your Account Summary and Trade Confirmation reports nightly and post them, as PDF files, to a section of your website. No need to calculate or format anything. Members can then sift through the reports and extract the information themselves. I don’t mean to press the issue. If you feel that doing this will be too time consuming I completely understand. If not, it could be a really useful teaching tool.

[Investor237]

You are very transparent with your trading capital and the positions that you put on. Would you consider adding a section to the website where you would post your account summary and your trade confirmation report nightly (or even weekly)? These reports are easy to generate from the broker’s interface and could simply be posted as PDFs (or any format which is easiest).

That would allow me, and probably others, to see how the overall portfolio is managed (i.e how much capital is in use and how that fluctuates during various market conditions, how many positions are on, when and how positions are closed or rescued, etc).

That would allow me to answer many of my questions by seeing the “bigger picture” of how your portfolio is managed on a daily (or weekly basis).

[Investor237]

Thank you for your reply Teddi.

I understand what you have explained, in theory. I seem to have difficulty seing all this materialize in practice.

In the last year of trading put options, I have had positions turn against me, during corrections. Although I managed to rescue the trades profitably, I noticed that in most cases the capital required to roll my spreads forward increased with each roll, sometimes quite drastically. I think that I had one position where the margin requirements allocated to the rescue of that one position increased 6 fold.

We haven’t had a major correction since March 2020. But given the fact that my margin requirements increase significantly when I need to rescue 1 or 2 positions, I can only imagine how impossible it would be to rescue ALL positions in a severe correction.

I am not trading very aggressively…at the time when I initiate my positions, my total margin requirements for all my positions combined equal about 35% of my capital. Yet when 2 or 3 positions need to be rescued…the rescue dramatically increases my margin requirement. My capital gets tied up in the rescue and is unavailable to initiate new positions.

So, I understand everything that you explained in your answer, but in practice my capital requirements have gone up significantly with the rescues that I have had to perform…and we haven’t had a major correction or bear market. So that is why I seem to not be able to understand how to manage the overall portfolio.

[Investor237]

Hi Teddi,

I noticed that the formating of the table in my original post got distorted once posted. I have attached an Excel file with the table.

Attachments:

You must be logged in to view attached files.

[Investor237]

Thank you for the article Teddi.

I agree with hache02: The repairs take at least 1 year and lock money into that trade. It is frustrating to be locked into a position for so long, not knowing what will happen to the underlying during such a long period of time (no one has a crystal ball).

I think that I will take your suggestion Teddi and get out of the stock.

[Investor237]

Thank you. I hope that your trade works out as well!

[Investor237]

OK. I understand.

I have been waiting for an up day to sell DITM calls, but CLX just seems to be declining day after day…very frustrating!

I look forward to reading your article.

[Investor237]

My capital is not intact. At the current stick price, I have close to a $14,000 loss. Are you saying that I should lock in that loss?

[Investor237]

Hi Teddi,

Currently, my break-even price is down to $214.20 per share for CLX. I own 500 shares.

I have no covered calls.

I only have 5 long puts at the $180 strike for the Feb 26th expiration (these puts were bought for protection).

I have read your articles on DITM calls. However, the premiums on the CLX calls do not amount to much more than the difference between the strike price and the current price of CLX. So if I sold DITM covered calls right now, and the price of CLX increased, I would be locking in a loss. With the current premiums, I find that it would be difficult to roll my calls up and out for a profit.

[Investor237]

To limit how low you are willing to sell an option, you should enter it as a limit order.

Look on the IB website, they have explanations for all their order types.

[Investor237]

Hi Teddi,

Have you been able to come up with any ideas?

[Investor237]

I didn’t want to own shares of CLX, as it seems to be in a decline. My goal when initiating the trade was a quick (4 DTE) naked call trade in a declining stock. Unfortunately, CLX shot up 2 days after initiating my position, and I had to buy shares of CLX to cover my naked calls. I am still trying to understand why CLX experienced such a sudden, but short, increase a full week prior to earnings.

In an ideal world, I would like to get out of CLX, without taking a loss, and to do it quickly (not several months out)…lol. I know that this is unrealistic, but it gives you an idea of my thinking.

It seems that CLX is in a continuing decline, so it is probably not wise to own shares in a declining stock. Also, these 500 shares are using up capital that could be used for put selling. Because of these shares, and a few put credit spreads, which will be expiring next week, my margin requirements are currently at $85K, which is 37% of total capital…doesn’t leave much room for put selling. I would like to get out of the position quickly (before the shares decline much further), but without taking such a huge loss…if that is possible. If not, I am open to exploring other ideas.

[Investor237]

Hi Teddi,

I understand that you weren’t able to see this post sooner.

My TOTAL account balance (in USD equivalent) is currently: $225,700

Of that, CDN $199,000 is in Canadian Dollars.

Prior to purchasing the 500 CLX shares, my USD balance was: $86,000. Now, after purchasing the 500 CLX shares, and after their significant decline, my USD balance is: -$22365.00 (that is a negative balance).

At today’s closing price ($184.14), I have US$92,070.00 tied up in CLX shares. That is 40.1% of my total account to be exact.

In your last post, you indicated the possibility of turning this back into a credit put spread. This trade was never a credit put spread. It was naked calls, which I had to cover by buying shares of the underlying.

I look forward to reading your repair ideas.

[Investor237]

OK. Thank you.

[Investor237]

Thank you for the advice Teddi. I wanted to see if I should consider trading earnings, or not.

[Investor237]

To Teddi and other traders…

Is it possible to trade earning using the RIC when one can only trade during the last hour of trading?

This would mean that I cannot exit the trade by playing the intra-day ups and downs. Does that limit the profitability of the trade, and make this kind of trade not really feasible?

[Investor237]

Thank you for the quick reply Teddi. It sounds pretty straighforward…I guess that is why there is no article on it ;-)

If you are not able to watch the market during the day, would you put in a stop order to purchase shares at your break-even price?

In the original scenario, where the stocks rises above the short call strike (which may be a few weeks out), you then purchased shares of the underlying, and then the stock turns lower…at what point do you consider buying back your short call and rolling down? There is time left before expiration…do you wait to see if the stock turns back up? or do you roll if the stocks drops below a certain price? By looking at options chains, it seems that when the short call strike becomes far OTM, it becomes very difficult to roll down ITM and get enough premium to avoid losing money on the overall trade.

[Investor237]

Yes Teddi…that was the article where you recommend against high priced stocks (> $100) because you say that in a severe decline they may be harder to repair.

In your recent article on repairing KHC, you recommend against lower priced stock (< $40) because their lower volatility makes them harder to roll (i.e. repair) with a profit.

These two statements are a bit contradictory.

Am I to conclude that the sweet spot is between $40 and $100?

[Investor237]

Thank you very much for the article Teddi. I will read it a few more times and decide on which strategy to choose.

One point regarding low priced stocks (below $40). I recall reading in a few of your posts/articles that you recommend lower priced stocks for investors with a smaller portfolio. You had also mentioned, in the past, that an option trade in a lower priced stock is easier to repair than a trade in a high priced stock (ex: AMZN). Also, you have placed numerous trades in INTC and T (both low priced). Could you clarify that a little please. Your comment on low-priced stocks in this article seems to contradict your earlier suggestions.

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