Selling in the money put options generates enormous returns that far exceed selling out of the money puts. Throughout January 2013 for example, I have sold in the money put options on Clorox Stock as the stock has been rising. The strategy of selling in the money put options makes a lot of sense when you understand the risks that are associated with the strategy. A stock like Clorox Stock makes an ideal candidate for in the money Put Selling with its $2.56 annual dividend, strong history of earnings growth, and past record of trading within definable ranges.
But no strategy works forever on the same stock as conditions change. It’s fine having a strategy for put selling in the money options, but investors also need a strategy for rescuing the in the money put options when the stock takes a tumble and leaves the investor holding naked puts that are then deeper in the money and at a high risk of having shares assigned.
The most important aspect of any strategy has to be consistent profits. I like consistent profits and I also like keeping those profits even when the trade turns against me. To be able to handle selling in the money puts for what is always larger income returns, investors need rescue strategies that can get their capital returned safely to them with their profits still intact. These rescue strategies have to be consistently successful and cannot rely on luck. To that end, investors need to know the rescue strategy they will be using BEFORE they commencing selling in the money put options for income. Part of this article is a FullyInformed Members strategy article.
Put Selling In The Money Options With Clorox Stock
Clorox Stock has been in my online portfolio since 2009. I have been put selling against Clorox Stock over all that time. For most of that time, Clorox stock traded in a fairly narrow range. This made Put Selling straight forward. Even if the stock fell, I was not concerned since if assigned shares, I had a lot of confidence Clorox Stock would recover back to that narrow trading range.
This all changed on December 31 2012. The stock opened the day at $72.53 and has been on an incredible run up that today saw Clorox Stock close at $79.16. This is a 9% gain within a month which for Clorox Stock is unusual.
Clorox Stock 5 Year Daily Chart
Below is the 5 year daily stock chart for Clorox Stock. You can see that in general the stock has been on a long-term uptrend following the market collapse in March 2009. I have marked the 4 primary put strikes that are the central focus of the Put Selling I have done since 2009.
Put Selling For Income Strikes Over 5 Years With Clorox Stock
A. The period during the 2008 to 2009 bear market was excellent for Put Selling for income against Clorox Stock. I was primarily Put Selling the $52.50 and $55.00 strikes. In March 2009 Clorox Stock fell to a low of around $45.00. Most of the time during the bear market I was selling in the money put options for income. The returns were huge because volatility was so high which increased put premiums. I sold small quantities of put contracts repeatedly and would buy to close them each time Clorox Stock rose and then sell to open in the money put options after Clorox Stock had fallen again. I was never assigned shares.
B. The second most common Put Selling strike was at $60 which was the main put strike I sold in early 2008 and throughout 2009 and even in 2010. In 2008 when I was busy Put Selling for income, I ended up with 10 in the money put options at $60.00 when Clorox stock collapsed below $50.00. I rolled those out further in time but only down 1 strike to $57.50. I then used additional capital and margin to continue Put Selling for income at much lower strikes while waiting for Clorox Stock to recover.
C. The third period saw me Put Selling primarily at and around the $65.00 put strike. This period of Put Selling for income lasted from mid 2010 to mid 2012. It was an excellent period and substantial returns were made. Again I sometimes found that I was holding in the money put options that I had sold at the $65 strike as Clorox Stock would wander back to $62.50 before recovering beyond $65.00. This happened several times until mid-2012 when Clorox Stock moved higher still.
D. The last period of Put Selling for income in Clorox Stock saw Put Selling at and around the $70.00 put strike. This has been the least profitable as far as Put Selling income was concerned as lower volatility from mid-2012 reduced put premiums for out of the money strikes poor. But that has changed with January of 2013.
Put Selling In The Money Options For Income on Clorox Stock in January 2013
Starting Dec 31 2012 you can see how Clorox Stock has taken off throughout January 2013. The four principal Put Selling trades for the month are shown in the Clorox Stock daily chart below. On Dec 31 I sold the $70.00 put and that was the last out of the money Put Selling I did.
On January 7 2013 with Clorox Stock at $74.25 I sold in the money put options at the $75 strike for Feb 16 expiration. On January 18 with Clorox Stock now up to $76.10 I sold the Feb 16 options expiration, in the money put options at the $77.50 strike. On January 31 with the pullback in Clorox Stock I sold the in the money put options at the $80 strike for Feb 16 with Clorox Stock at $78.40.
On February 1, Clorox Stock continued its climb and pushed up to close at $79.16. This has left all my in the money put options except the Feb $80 naked puts, out of the money.
Put Selling In The Money Options Strategy
If you look at the Clorox Stock trades for 2013 through this link you can see that Put Selling in the money options for income is profitable. This is of course because Clorox Stock is rising which leaves the in the money put options sold, eventually out of the money and allows me to capture almost all the put premium earned.
Put Selling In The Money Options for Income is not a strategy for investors who NEVER want to owns shares of Clorox Stock. The risk of assignment is very high when Put Selling in the money options. Should Clorox stock pull back and I am still holding the in the money puts, they could easily be assigned.
There are some simple strategies I use to avoid damage to my portfolio when Put Selling in the money options against major dividend paying stocks that are in a rising pattern.
Strategy: Buy To Close In The Money Put Options Early
I rarely let in the money put options expire, particularly as the stock rises. For example, on Feb 1 2013, the Feb 16 options expiry, $75.00 naked puts were trading for .20 cents. Since I sold the $75 puts for $1.60, buying them back for .20 cents was not a hardship. Buying back early makes a lot of sense especially when the profit is so high with 2 weeks still left in the trade.
This serves two purposes. The first is if the stock should plummet I do not have to worry about being assigned on too many shares. Second it releases the capital and allows me to continue Put Selling at higher strikes. For example, through Put Selling since December 31 I have earned $4827.00 but I am still using the same amount of capital in the trade which is about $100,000 plus at different times some margin for short periods of time. This is a return of 4.8% for what could be about 6 weeks of trading.
By closing early when the naked puts sold fall to below .25 cents, it frees up my capital so I can continue to keep Put Selling in the money options as the stock climbs. This allows me to earn the larger put option premiums of the next set of puts I am selling at higher strikes as I follow the rise in Clorox Stock and then close the previously sold naked puts as they end up out of the money or nearly out of the money for little cost. In other words, it is rarely worth holding for .20 cents when I can use that capital to earn $2.00 or more over the same time period.
Strategy number 1 then works very well on rising stocks, but they must be rising to reduce the put premiums on the lower strikes as I continue Put Selling the higher put strikes to follow Clorox Stock higher.
Strategy: Reduce The Number Of Put Contracts Sold At Higher Levels
If you look at the Clorox Stock trades for 2013, you can see that I sold 10 in the money put contracts at the $75 level but only 5 at the $77.50 level and just 3 at the $80.00 put strike level. This is because as the stock climbs away from support I want to protect myself in the event that Clorox Stock falls.
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