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.
Financial freedom is a journey
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