As part of my learning process, I document my progress in learning options. The first focus is put options. This article will focus on managing put options.
Why manage option positions? A lot can happen after the moment that you sell the option. I do believe that it is worth wile to spend 10 minutes a day to see how your positions are doing. Are you still happy with the original reason to take on that position?
For the 2 cases for selling puts, I will describe my approach to managing these positions while they are open.
I just want to collect the premium
This has been until now the most common case for me. I have been writing put options in order to collect some premium.
As I have learned from others, it is all about managing winners. I have decided that I will sell my put options when I have reached 50 pct of my maximum profit (after all costs). I might get a little more aggressive in the coming moths in order to collect even more premium. Doing this helps me to stay focused on the goal: collect premium. Holding on to the options until expiration is indeed a risky action: you do not know what will happen in the next days/week. Did you expect the Aug 24 correction to take place? I did not.
In order to protect against these cases, I buy back my options – close out my positions – when I can get about 50pct of the original premium I received, factoring in all broker fees. The original premium I have received is the maximum profit I can make on a trade.
Here is an example: If I sell an option and I get actually after fees 35 euro in my brokerage account, then I will be happy to buy back the option at an all in cost of maximum 17,5 euro. This means that I make 50pct of the maximum profit.
In the case that the stock price drops far below the strike price, then I see only one way out: roll the option to another strike price and maturity date. I hope then to be able to receive extra premium for this.
I want to own the stock
This is a relative new reason for me to sell put options. I did it a first time on RDSA and a second time for UNA. Both options are at the time writing still open positions in my portfolio. I do not plan to manage these positions at all? unless the stock markets take a major hit.
How do you manage your option positions?
5 thoughts on “Managing put options”
I use options to boost returns and buy positions. For example: I will buy 300 shares sell 2 put options at a lower price and sell 3 call options at a higher price. If the stock goes up, the put option expire and the 300 shares are called away. If the stock falls, the call options expire and I buy 200 more shares at a much lower price.
I am still in learning mode, but using it as a way to buy stocks is one of my test areas. IF I can not pick up the stock, then I get the premium to keep.