Selling Naked Puts: Accepting Assignment

One of the more difficult situations for naked put seller occurs when the option is in the money on expiration Friday. I have suggestions for both traders and investors.

Investors

One good strategy for you, an investor who wants to own shares of a specific stock, is to write (sell) one put option for each 100 shares you are willing to buy. By choosing an appropriate strike price, the trader is assured of an acceptable outcome. (Either buy the shares or keep the premium as a consolation prize.) At least buying stock was acceptable at the time the trade was made. If it ever becomes unacceptable (probably because the stock price has declined too far), the investor should repurchase the put option, forget about trying to recover losses, and move on to the next trade.

When the put option is ITM, accept assignment. Translation: do nothing and allow an exercise notice to be assigned to your account. Once you own stock, you may write covered calls or simply hold the stock. This plan works most of the time when you have a long-term outlook.

However, it may be a good plan for a long-term investor, but it is a poor plan for the short-term trader.

Traders

You, the trader, should have a different mindset, and almost never want to own the underlying stock. Do not accept assignment. Cover the short put position, regardless of whether you earned a profit or incurred a loss.

You sold the puts to earn a trading profit. When any trade does not work as anticipated, the winning trader cuts losses and finds another trade.

I know that the advice is often given that it makes sense to accept assignment on short puts and write covered calls until the stock is eventually sold and then begin the process again by writing a naked put. When the plan doesn’t work; when a severe bear market (or some company-specific news) crushes the stock price, the trader loses a lot of money. This is not how a trader operates. The trader is not someone who gets married to a position for the sole purpose of refusing to realize a loss.

A trader is someone with a short-term trading plan. That plan includes a target profit and a maximum acceptable loss. The trader takes that profit when it becomes available. The successful trader understands the importance of limiting losses and accepts such losses when they occur and never holds losing positions hoping they will eventually become profitable.

Remember

When you make a trade remember who you are and make a trade plan that is suitable for your investing style.

New (2014) ebook

New (2014) ebook


Writing Naked Puts

http://goo.gl/eswuZV

One Response to Selling Naked Puts: Accepting Assignment


  1. Fatal error: Uncaught Error: Call to undefined function ereg() in /home/mdwoptio/www/blog/wp-content/themes/canvas/includes/theme-comments.php:63 Stack trace: #0 /home/mdwoptio/www/blog/wp-content/themes/canvas/includes/theme-comments.php(19): the_commenter_link() #1 /home/mdwoptio/www/blog/wp-includes/class-walker-comment.php(179): custom_comment(Object(WP_Comment), Array, 1) #2 /home/mdwoptio/www/blog/wp-includes/class-wp-walker.php(144): Walker_Comment->start_el('', Object(WP_Comment), 1, Array) #3 /home/mdwoptio/www/blog/wp-includes/class-walker-comment.php(139): Walker->display_element(Object(WP_Comment), Array, '5', 0, Array, '') #4 /home/mdwoptio/www/blog/wp-includes/class-wp-walker.php(387): Walker_Comment->display_element(Object(WP_Comment), Array, '5', 0, Array, '') #5 /home/mdwoptio/www/blog/wp-includes/comment-template.php(2225): Walker->paged_walk(Array, '5', 0, 0, Array) #6 /home/mdwoptio/www/blog/wp-content/themes/canvas/comments.php(43): wp_list_comments(Array) #7 /home/mdwoptio/www/blog/wp-includes/commen in /home/mdwoptio/www/blog/wp-content/themes/canvas/includes/theme-comments.php on line 63