Short put is deep ITM. Advice!

M

macanoni

Hi,
I am a newbie and not an option trader. Normally I do buy and hold on stocks/ETFs I like. I watched a bunch of option webinar via Fidelity. So I decided to try some basic option trades. I mainly focused on stocks that I like to own, but think they were too expensive at current price. So I sold put a few options at strike price that I was willing to pay for. 3/4 of the time, my options expired worthless since the stocks were still above my strike price. The other 1/4 of the time, I got assigned and was assigned the stocks that I wanted. This time, with the market taking a deep dive, the stock that I still believe in got hammered so badly, my option is deep ITM. I have rolled it out another month to buy me some times (same strike price so I have a tiny net credit). I still like the stock, but I am bearish short-term and bullish long-term. As such, I am wondering what to do next if my stock will still not reach the strike price in a month time. Should I just cut my loss and buy back the option? Any advice is greatly appreciated.
 
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macanoni said:
Should I just cut my loss and buy back the option? Any advice is greatly appreciated.
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Traders should always cut losses, if they don't have a definite plan and strategy and process of attack and reasonable end game goal expectations.

You don't necessarily want to leave the future and trade just lingering, flapping, in the wind -- you want control, expectations and understanding. The market and a trader is no place for prayer, hope and gambling and crossing your fingers and holding a lucky leprechaun doll.
 
1. Hope is not a professional strategy. 2. Selling options means you are the insurance business which is a business best left to professionals. Think about it. If you sell a put option you are giving away the upside for the option premium received. If the stock explodes to the upside you have missed the upside move. If the stock collapses you have a large loss.
 
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macanoni said:
This time, with the market taking a deep dive, the stock that I still believe in got hammered so badly, my option is deep ITM. I have rolled it out another month to buy me some times (same strike price so I have a tiny net credit). I still like the stock, but I am bearish short-term and bullish long-term. As such, I am wondering what to do next if my stock will still not reach the strike price in a month time. Should I just cut my loss and buy back the option? Any advice is greatly appreciated.
More...

Since I used to wheel quite actively, I've been in your situation several times - and the meaningful answers come down to non-technical factors. That is, no one can help you decide; there's no "right" or "wrong" answer here, only what you think best. But I may be able to give you some directions to explore so that you can come up with the answers you decide are best for your situation.

#1: You've lost the money; your P&L is what it is. It's gone, no matter what you do. One of the best pieces of advice I received in my early days is to think of my trade P&L on a mark-to-market basis - that is, account for profit or loss at the end of every day (instead of deluding yourself with "well, if I hold it long enough..." or "it should come out right at the end", etc.) The current trade can't make that lost money "back" for you. How does this help? Well, here's the real decision you have to make once you have this perspective: if your opinion of the trade you're in is that it is likely to be profitable going forward, then stay in it. Otherwise, get out. Current P&L should have no bearing on that decision.

#2: In practical terms, you're better off than if you had bought the stock initially by the amount of premium you've collected. I realize that this isn't much comfort - but trading in stock or options involves risk. Your decision to sell a put in this particular underlying resulted in a loss, which shouldn't be surprising; this is a very likely result (close to 50/50.) The question is, did you have a plan for what to do when (not if) this happens? If not, you must come up with one - and it must be based on specific metrics. "If the stock does not go up by X within Y period, or goes down by Z amount, I will get out." Having to develop this while you're stuck in a trade that's losing money sucks (personal experience speaking here...), but is absolutely critical. While you're at it, develop a specific plan for what to do with your puts, too.

#3: Review your put selling criteria and your mental state around it. Currently, they suck - and I'm not saying this to be mean, but to get you to think. When you sold your put, you surely thought "hey, even if it blows past my strike and I'm forced to take this stock, I'd be OK with it!" - right? But now, it turns out you're not OK with it - because that mental state has a lie buried in it. You're "OK" with it because the stock is where it is at entry and because you believe, too strongly, that you can predict your success with it - but in reality, you're not OK when it actually happens. The important thing to do with that is to add some rational cynicism about that buoyant mental belief to your mental state at the time of entry, and to start getting a better image of what you would actually be OK with.

#4: Unless you have some strong specific reasons for them, your "bearish" and "bullish" projections don't mean squat. Clearly, your neutral-to-bullish prediction for this stock was wrong. Do you have a significantly better, more reliable reason to think that you'll be right this time? If not, start working on one. It could be quantitative, it could be technical analysis, it could be that your uncle's veterinarian's poodle's third cousin happens to know somebody who knows something... but randomly going long the market without a meaningful directional clue, especially in the currently bearish/mixed/crazy vol environment, is going to hurt you and keep hurting you.
 
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Only advice I can give you is to not sell options unless you know exactly wtf you are doing. It is the exact definition of picking up pennies in front of steam rollers.

You have a really high win rate...but...most major movement happens outside rth...options don't trade at that time so you wake up one day and the underlying has gapped so hard against you the opening price on your contracts is sickening.

I think some people can sell options with great success but It's dangerous...spreads probably the way to go at least at first...wish I had started there at least.
 
Thank you all for the advice, especially BlueWaterSailor's. Your points gave me some insights into how to proceed. I will evaluate the situation and make my decision, including having a game plan. To answer you on point 4, I looked at the fundamentals and I think the stock is very solid and will do better, just not in the next few months. Like I said, I am not a trader, I usually buy and hold after I studied the fundamentals.
 
BWS's reply was spot on.....
It helps that you are the first to say you are not an option trader...

First and foremost,there is no such thing as option repair.See BWS responce.
You dont make a trade to get out of a hole you dug and fell in...
You do trades to make money,as in place a trade that has the highest expected return.

In 1 million years.would you ever roll your put,i.e sell a calander as an opening position??
If not,why do it? Does it stand on its own??

More to the point,you need to stick to your game plan,and effectively use options per your comfort level/understanding...

You appear to be a value type trader/investor as opposed to a growth/Momo guy...
You sell options at strikes that you would HAPPILY own the stock if put. Im assuming you are also achieving a decent return for selling the put .Why take 90% of the downside risk for a meager return if dead right???

The only thing you have to ask yourself at this point is has your fundamental valuation of the company changed.It appears not,so you should be content with getting assigned and owning shares.

IMHO,you traded exactly as you planned and were correct in selling the put as opposed to buying shares. Buffet does exactly what you do,but doesnt blink when Mr Market farts..

The only time I would be rip roaring mad if I traded as you do,is if i sold a put for 2 percent of notional,and the stock rallied 30 percent .Nothing worse than being dead right and not making real money..FWIW,selling low delta puts does not backtest well in bull markets..DUH :)
 
Vic Niederhoffer sold Put options in the S&P 500 index.....and made a ton of money for quite a while.
Then one day he blew up. Actually it happened twice.
Vic just wouldn't trade with a hedge in place....like long a OTM put.
 
Was it a naked short? Sorry, I'm watching football and may have missed it. If so, I can't believe they would allow you to make the trade (I think you have to be Level 3, and even then it's very dangerous).
I'm about as conservative as you can be (if you wanna play around with it and have cash you don't mind losing). I only trade spreads, just so I have defined risk - you know going in to it what your risk/reward is. Granted, I throw money on the wall, but you will lose more than you win. I don't have that "secret sauce" every some guys talk about.
Several guys on the board/thread will act like they make a million bucks a days. They're liars or they have humongous account and get lucky.
Just keep plugging away and doing whatever you want to do - options, stocks, etc. MANAGE YOUR RISK AND NEVER STOP LEARNING. And I know other people have said that, because it's great advice.
Personally, I've made WAY more money on a $20K poker account (money you're willing to risk it all), than I have trading options or futures. You just a lot more controlled risk, if you manage it.
 
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