Capiche: Accumulate, Liquidate, Procrastinate? Put Sellers and the Roll Decision

At some point, a cash-secured put may go in the money. How should you play it?

Selling a cash-secured put starts with the idea that you’d be prepared to own a stock if it fell to a certain price. Suppose FAHN is trading at $100, and you’d love to own it at $94. So you sell the 95 put for $1, making your effective entry price $94 (not including transaction costs). If FAHN stays above the strike through expiration, you keep the premium and could repeat the process.

But what about when FAHN approaches—or goes through—the strike before expiration? What do you do? Consider your choices:

1. Accept the assignment. Cash-secured put sellers often refer to this as a stock accumulation strategy. You sold that 95 put because you’d like to own FAHN at an effective price of $94. You get assigned and buy the stock. 
2. Buy back the short put. You liquidate the position, take your losses, and move on.
3. Roll it down and out. It’s a diagonal spread. Buy in your short option and sell a lower strike in a deferred expiration date. Depending on the net premium, you can lower your effective entry point.

Which strategy do you choose? It all comes down to your objectives. Did they change? Remember, you started with the premise of “I’d love to own FAHN at $94.” Still in love? Are the fundamentals (earnings growth, competitive dynamics) and/or technicals (support level, trend) still intact? If so, maybe this is a good entry point.

If you still like FAHN, but you’ve lowered your entry target, the down-and-out roll might be just the thing. But now it’s a matter of choosing the right option. What’s your target and time frame? Is it $92 and two weeks? Or $85 and two months? Weekly options and tight strike prices give you plenty of flexibility. 

Always be sure to follow your objectives. Don’t roll just because you don’t want to book a loss. That’s one of those cognitive boo-boos that can be mentally and financially draining.

And if you decide to liquidate and move on, let it be a learning experience. Was your underlying premise wrong from the get-go? If so, the accumulation strategy may not have been the right one for you. Perhaps consider a vertical put spread instead—you’ll take in less premium, but you’ll have defined risk. Your loss will be limited to the difference between your strikes, minus the premium, plus transaction costs.

A put rolling strategy works the other way too. If FAHN has been rallying—and you’ve been periodically selling FAHN puts—you might raise your target accumulation point along with it. Some traders track all the premiums they’ve collected to raise their target. It’s a way to participate in the upside exposure without owning the stock outright. But if and when it returns to your target, remember to check your objectives before deciding whether to accumulate, liquidate, or roll.

Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.