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.
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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.
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
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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.
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