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Tales of a Technician: Naked Puts Run Amok

June 1, 2017

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Tales of a Technician: Naked Puts Run Amok

Let’s talk trade management ideas for naked puts run amok. As I see it, there are two ways to implement the naked put strategy: tactical or systematic. You can sell puts on single trade setups as a one-off play or you can sell them monthly on a stock that you want ongoing exposure to.

Trade management with the former approach is simplest because it usually involves exiting the trade quickly when proven wrong. For example, let’s say you sold June 32 puts in XOP on May 18th to capitalize on a potential bottom in oil stocks.

Well, so far you’ve been wrong. And if you’re using a touch of the $32 strike as your signal to exit then you’re a whisker from being stopped out. But, hey, at least the pain will end and you will live to fight another day.

But what if I’m looking to sell puts in XOP systematically? Perhaps I want ongoing bullish exposure to the sector. What do I do in months like this where XOP gets monkey-hammered?

First, I hedge with short calls.

Second, I roll down those calls to bring in more premium.

Third, I roll my short puts (and typically the short calls) out to the next month.

Here’s how it might have looked. I suggest referencing a chart of XOP to follow along.

May 15th: Sell June 34 puts @ 57 cents (In hindsight the entry timing was terrible, but it was time to roll the previous months’ puts, so per the system, I rolled into June puts).

May 25th: Sell July 37 calls @ 38 cents (there wasn’t sufficient time remaining to sell any OTM June calls so I sold July instead)

May 31: Rolled Down: Bought back the July 37 calls for 14 cents (capturing a $24 gain) and sold the July 35 calls for 39 cents.

So now I’m short the June 34 puts and July 35 calls. The ideal scenario will be for XOP to bounce back towards $34 by June expiration. If it doesn’t I’ll resort to rolling out to July to acquire an extra month of time for XOP to get its act together.I’ll probably drop the short put to $33 or $32.

Will I keep losing if XOP continues plumbing the depths? Yes! But here’s the thought process. First, XOP is already down 28% from its recent highs. It won’t keep dropping at the same pace. Second, I’m in this pup for the long haul as I think XOP eventually heads higher. Third, the position is small enough to allow me to sit through the occasional bad month (like now) and still maintain my position. by using options as my vehicle I’m certainly losing less money than if I were simply buying and holding XOP shares for the long haul.

Finally, one silver lining is my losses are far less than if I were buying and holding XOP shares because I’m using options as my vehicle. I’m a much bigger fan of systematically selling puts versus straight buy and hold.

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3 Replies to “Tales of a Technician: Naked Puts Run Amok”

  1. JodyFerreira says:

    I loved this. I learned alot. Thank you

  2. Nicholas Kingsbury says:

    Like your thought process. Completely agree with you last sentence.


    Thanks Tyler, it’s great to see how you process the information available.
    Being from Texas, I see the Oil Industry a little differently.
    The World-Wide Oil Industry has changed in the last couple of years:
    1. Consolidation of technology is allowing a vast reduction in the cost
    of exploration and pump out.
    A few examples:
    > Christmas-Trees have been standardized reducing the cost of
    going from exploration to production.
    > Drilling rigs are being automated to where one person at a
    computer screen can now run an entire rig. No roustabouts required to
    man-handle drilling pipe, etc.; a robotic rig can do all the work.
    > The new robotic drilling rigs can pickup and move themselves to a
    new drilling site without the labor formerly required to tear-down and
    rebuild a drilling rig.
    2. The Permian Basin in Texas and a corner of New Mexico, I believe is
    now considered the second largest reserves in the world, behind only
    the Saudi’s reserves. The take-away is that OPEC can no longer
    control world pricing for oil; as we are seeing right now with the results
    of their restrictions on production. U.S. and Canadian producers are
    now in a position to control pricing, “if they want to”.
    3. The cost of production from the shale reserves has fallen substantially.
    What this means is that shale oil can be extracted profitably at lower oil
    prices than in the past. I drove through the Permian Basin on Sunday, and
    saw 8 out of 10 pump-jacks producing oil at the current prices for crude.
    a few years ago at the current prices, all of the pump-jacks were sitting idle.
    4. Barring a world catastrophic event, or the U.S. and Canada deciding to curtail
    production, I don’t see how crude can get to and maintain pricing in the
    50 to 80 USD range. Maybe I’m all wet; but, I just don’t see it happening.
    5. One other technological break-through keeping crude prices down is that the
    fuels industry now knows how to directly produce diesel and gasoline from
    microbes without any refining. This is economically feasible in the +50 USD range.
    For more info. on this do a Wiki search on Joule Unlimited, the biotechnology
    company that pioneered the concept. The process uses CO2, gray-water, microbes,
    and sun light.
    6. One more thought:
    In 1972 the economists told us we had less than 75 years of crude left in
    the whole world. Oh, Doom N Gloom!
    Today, 45 years later, we have more known/proven reserves than at any time in history.

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