I have become semi-obsessed with options and the income they can generate since I first learned how to sell naked puts. However, selling naked short puts has risk and one of those risks is being assigned the stock you “bet” against. There are are two main strategies that everything else builds off of. The first is just taking the stock; I took this route with my Under Amour trade. The second is known as rolling.
What Does it Mean to Sell a Naked Put?
Discussing an option “out” of a unprofitable trade means nothing if you don’t understand the underlying trade itself. A naked put is one of the simplest of all options contracts. When you sell (short) a put you are collecting a premium to take the risk that if a particular company or stock goes under the strike price it can be assigned (or put) to you.
- Currently trading at $50
- I sell a put for $25 (.25 x 100 shares – all options contracts are 100 shares) that in 1 month the stock will be above $40
- If at the end of the contract – day of expiration – the stock is below $40 then I have the two aforementioned options, I can take the stock or I can roll it.
What is Rolling an Options Contract?
Rolling an options contact (whether that be a naked put, covered call, etc.) is nothing more than kicking the can down the road. You are taking another bet that in the future you’ll be right. As options playbook explains,
When you decide to roll, you’ve changed your outlook on the underlying stock and fear that your short options are going to be assigned. The objective is to put off assignment, or even avoid it altogether. It’s an advanced technique, and it’s one you need to thoroughly understand before executing.
When you roll a short position, you’re buying to close an existing position and selling to open a new one. You’re tweaking the strike prices on your options, and / or “rolling” the expiration further out in time. But rolling is never guaranteed to work. In fact, you might end up compounding your losses. So exercise caution and don’t get greedy.
My Experience with Rolling a Short Put that was In the Money
With my Under Armour trade I decided to keep the stock and keep selling covered calls until it was called away. I have been doing that for about 6 weeks. Unfortunately, the position is still open. This time, I decided that I would kick the proverbial can down down the road for another week.
My original trade:
- On 11/23 I took the position that URBN would not be under $31.50 on 12/16. For that “bet” I received a premium of $25 (.25 * 100)
- On 12/16 it was under the strike price so I bought that contract back for $73 (loss of $48)
- On 12/16 I sold the same contract except I moved back the expiration date to 12/23 (a couple days from the date of this post) for $108.
As of this post I am up $60 ($25 – $73 +108). However, that trade is in the red! As of the publishing of this post URBN is at $30/share. So, again, this Friday I’ll be left with the decision of whether to roll and just be assigned the stock (the sticky part is I have another separate trade at a $32 strike price for 12/23 already). If I “ignore” and get assigned I’ll have 200 shares of URBN with an average of cost basis of $31.75. I like the trade but not enough to hold $6,000 worth of Urban Outfitters.
Do I roll again? or do I get assigned the stock?