Learn about the different choices you have if your cash-secured put option goes in the money and when it makes sense to accumulate, liquidate, or roll your position.
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:
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.
Explore our expanded education library.
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.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Because they are short-lived instruments, Weekly options positions require close monitoring, as they can be subject to significant volatility. Profits can disappear quickly and can even turn into losses with a very small movement of the underlying asset.
Rolling strategies can entail additional transaction costs, including multiple contract fees, which may impact any potential return.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.