A discussion surrounding today’s topic can get both complicated and lengthy. So let me state at the outset what my focus is. I’m going to walk through how I think about trade management with a portfolio of bull puts and naked puts using the scaling in & out method that I teach in my Team Phoenix Trading Lab.

It has treated me and the team extremely well since launch and I’m confident it will continue to generate profits.

Suppose you have a variety of bull puts and naked puts that have suffered over the past few weeks. I know my portfolio suffered a mild drawdown as bull positions were tested. Let’s assume I had on the following:

• Naked puts: XLE, IWM, EEM, DIS, SLV, RIOT, PFE, BAC, BSX, GDX,
• Bull puts: AMD, DKS, WMT

Here are seven steps outlining my trade management plan:

Step One: Make sure I don’t have too many positions. I do that by assuming everyone goes against me simultaneously. Will I have the ability to follow my plan and add size at the appropriate times? Will I be able to allow assignment and take ownership of that many stock positions? If so, then stay the course. If not – if I’ve been leaning a little too long into the market strength – then I might be quick to close a few of the positions to free up capital and reduce risk so I can confidently add size on the rest of the positions.

Step Two: Monitor each position to see if the naked put/credit spread values rise to 1.5x the original premium received. If I’m lucky, I won’t have any positions go this far against me. But usually, during more severe pullbacks, most of my positions will move to this point. When they do, I look for a trigger to signal the stock is turning higher – then I enter Tier 2.

Step Three: Rinse & repeat step two for Tier 3 if the naked put/credit spread values rise to 2x the original premium.

Step Four: My stop loss for any bull puts that I’m not allowing assignment (which is usually all of them) is the short strike price. If we fall that far, then I get stopped out. Worst case, I will have entered all 3 tiers and I incur the planned loss on all three. Best case, we got some kind of bounce along the way which allowed me to take profits on one or two of the tiers before ultimately getting stopped out of the rest.

Scaling into bull puts can usually handle a 3% to 5% market drop and still profit. It’s the 5% to 10% declines without any bounce in the middle that are the hardest to handle. In situations like those, it’s ultimately position sizing that saves me with bull puts. That is, risking 1% or less per position and making sure I didn’t have too many positions on.

Step Five: The only difference in the management of naked puts versus bull puts is that I may allow assignment as a way of remaining in the position in hopes that time and a recovery in the stock price will eventually bail me out. In the case of the ten naked put positions mentioned above, I’m assuming I have enough capital to buy shares of each one if assigned. If I couldn’t, then, I’d probably take a loss on them once the strike was hit. I much prefer selling few enough contracts (or holding few enough positions) that I could take ownership of everything. That way, I have the most management flexibility.

Step Six: For whatever stocks I’m taking ownership on, I have two options. First, allow assignment over expiration weekend and then sell covered calls on Monday. Second, close the short put on expiration Friday and simultaneously buy shares and sell a covered call. Which strike sold depends on how bullish I am. If the market is weak and my confidence level low, then I’ll sell a higher delta call (say, 0.40) to capture more premium. Otherwise, I’ll stick with around a 0.30 delta.

Step Seven: All selloffs are eventually buying opportunities. It’s not a matter of if, but when. As such, I’m always on the lookout for either quality uptrends that have pulled back to support, or tickers that get oversold with an IV spike to setup a Fade the Fear trade.

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