Target Stock – Understanding Rolling ITM Naked Puts and Closing Naked Puts Early For Optimum Return

2013 was an easy year for selling puts against Target Stock and there was one stock trade. By the year-end the return was 24.7%. This year though retail stocks look weak and the credit card debacle certainly has hurt Target stock. Meanwhile though I have continued with my strategy of selling naked puts. An investor wrote in recently to ask about his position. Let’s take a look at his Target Stock position and then explain what I think would have been strategy to employ.

Investor Position

The investor sold 2 naked puts for Feb 22 expiry at the $60 put strike. He earned over 1%. This was on Jan 7 before Target Stock pulled back. On the 21st of Feb, the Friday before options expired he bought back the 2 naked puts for Feb 22 expiry at the $60 put strike for $1.86. This represented a loss of $1.18 or 173%. These are the types of losses I mention frequently as being careful not to take. He then sold the April $57.50 puts for $1.55 which was less than the cost to buy back the $60. To keep the trade profitable he sold 3 naked puts at $57.50 but out to April. Let’s review his question and position.

Investor Question

TGT Stock is up big today (Feb 26 2013). I’m of the opinion that tomorrow (Feb 27) and over the next few days TGT Stock will give back some portion of the big gain today (i.e., consolidate) before proceeding higher. Thus, I’m considering buying back my APR $57.5 puts. Doing so would give me a small profit on the trade. I would then re-enter the position after the expected consolidation is complete. Does this make sense to you or would you suggest just holding the APR puts to expiration or until the premium is down to pennies? Or, do you have another idea on how to play this trade? (Below are his positions and what the profit would look like if closed for .55 cents)

target position from investor

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