The greatest fear of put sellers is getting put the shares.
For those of you who are unfamiliar with the jargon, getting put means the price of the shares fell below the strike price of the option that you sold, and you’re now obligated to buy the shares.
Of course, in my world, getting put is one of the best things that can happen, since we look for 20% to 50% discounts on every put we sell. But I’ll talk about that another time.
Let’s focus on strategies for those of you who get put but really don’t want to buy the shares. You’re traders, I get it.
- Roll over a new position. Sometimes it takes longer than expected for a play to work out.You sold a put and you’re about to get put on the trade. You don’t have the cash to buy the shares, so you’re faced with a dilemma. Do you take a loss now or give the trade some more time to return to the plus side?If you choose the latter, here’s what you can do: Buy back the put that you sold and simultaneously sell a new put at the same or a lower strike price. You’ll take in enough money to cover your position, but you’ll have to wait a little longer to close it out.If shares go even lower, you could be left with a loss, and you may have to spend more time in the position. If shares recover, you’re back in the black without having to reach for your wallet to buy the shares.
- Initiate a covered call. In this case, you are put the shares at or before expiration. Immediately, you initiate a covered call position by selling call options against your position.The rationale here is that you wanted the shares at a lower price, and you got them. Now you can start generating income by selling call options to further reduce your cost and increase your potential upside.The only negative here is if the shares plunge below your comfort zone and the calls for sale don’t pay much of a premium. (See No. 4 below.)
- Buy and hold. You sold puts for the right reason – to own a company you want to own at a discount. That discount is determined by the premium you received for selling the put and the strike price versus the price the shares were trading at when you sold the put.You should be a happy camper because you bought a great company at a fabulous price. It may take time for the trend to turn in your direction, but ultimately if you bought a great company at a great price, you will be rewarded handsomely.
- Take the medicine. Not much to be said here. You get put the stock and you immediately sell it, realizing a loss.Put selling is no different from any other type of investing. Losses happen. The best you can do is follow a strategy that minimizes losses by focusing on great companies and being put at a huge discount to the original market price.
Put selling can either be intimidating or simple. The difference is whether you take the time to understand what you’re doing.
I can think of few strategies where the upside is what most investors consider the downside. I like to own my stocks cheap or get paid for trying!
Warren Buffett probably said it best: “Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”