Friday’s options expiration for September found my Intel Stock naked puts with fully 40 of my 55 naked put contracts now in the money as Intel Stock continues to remain under pressure and hanging on to the $23 support level. This means 73% of my position is now in the money and I could be assigned at any time.
I have been in this situation many times before and I am sure I will be caught like this in the future as well. In a variety of Intel Stock articles on my website, I have discussed my plans for rolling my naked puts. As Put Selling is my primary investment strategy I have a lot of different rescue strategies available to draw upon. Many of these rescue strategies for in the money naked puts I have developed over the past two decades. A lot of them have been well refined and on Friday I put two of the strategies into play on my Intel Stock in the money naked puts.
Intel Stock Naked Puts Rescue Strategies
Rescue strategy number one remains a favorite of mine. Instead of rolling down I like to roll out and reduce the number of contracts at risk of assignment. This is only possible when the naked put premiums are high enough to accommodate a reduction in the number of put contracts sold as I like to roll out for a profit each time. If Intel Stock should stay around the $23 price range, rolling and reducing put contracts that are in the money, as high as the $26 put strike will work.
If however Intel Stock should fall to $22 or lower, rolling the $26 put strikes and reducing the number of contracts will not work because put premiums will be too small to effectively end up with a credit each time I roll and reduce the number of put contracts at risk. Should Intel Stock fall to $22 or lower, that will be the time to roll my remaining $26 naked puts lower. This may easily take me into Put Selling a roll out to over a year out if I want to roll down for a credit, which is always my preferred method.
Rolling Intel Stock In The Money Naked Puts At $26
So let’s see how rescue strategy number 1 worked out on Friday with my Intel Stock in the money put options. With Intel Stock down, I bought back 10 September naked puts at the $26 strike that would be assigned as they are in the money. It cost $2.85 to buy back those 10 naked puts. Total cost to buy them back was $2869.50 with commission.
I then took this amount and divided it by 9 put contracts to reduce my Intel Stock naked put contracts from 10 to 9. This means I must earn $2869.50 / 9 put contracts = $3.19 per put contract.
The December 2012 Intel Stock $26 naked put was trading for $3.28. I sold 9 of the December $26 in the money naked puts for a total income after commission of $2933.75. This reduced my capital needed for this Intel Stock Put Selling trade by $2600.00, reduced the number of put contracts at risk of assignment by 1 put contract or 100 shares and earned a net credit of $64.25.
The difference between rolling down for a net credit and roll out and reducing is in the amount of capital freed. If I had rolled down to the $25 Intel Stock put strike the amount of capital at risk of assignment would be $25,000. This would have freed up just $1000.00 of capital. The amount of capital at risk with a roll out and reduction is $26 X 900 = $23400 fully $600 less and frees up $2600 of capital not $1000.00 that would be needed for Intel Stock.
Rolling Intel Stock In The Money Naked Puts At $25
Next I had to roll my 5 September Intel Stock naked puts at the $25 strike as they too were in the money.
I bought back my 5 September $25 Intel Stock Naked Puts for $1.85 for a total cost of $938.25.
I then followed the same steps as with the Intel Stock $26 naked puts. I took $938.25 and divided it by 4 put contracts since I wanted to reduce the number of put contracts from 5 to 4. This means that $938.25 / 4 put contracts = $2.34. I must sell a $25 naked put for $2.34 or better to break even.
I picked the January 2013 $25 Intel Stock naked put and sold 4 naked puts for $2.55 for a total income after commission of $1008.00.
Again the advantage is I am now exposed to 4 put contracts at $25 rather than 5 and I have reduced the amount of capital needed by a total of $2500.00. I ended up earning $69.75 on the rolling options trade.
Intel Stock In The Money Naked Puts Strategy 2
The second strategy I implemented on my Intel Stock sold puts was to reduce the number of October naked puts at the $24 strike. I was holding 15 Intel Stock naked puts at the $24 strike. I decided to close 4 of the October $24 naked puts and reduce my exposure from 5 naked puts to 4 naked puts. However with this trade I sold 2 naked puts out of April 2013 at the $24 strike and then 2 naked puts into January 2013 at the $22.50 strike.
I effectively reduced my exposure in Intel Stock by another naked put, reduced the amount of capital needed for this trade even further and earned another net credit with the rolling of the in the money put options. Here is how the trade worked:
I bought to close 5 Oct Intel Stock naked Puts at the $24 strike for $1.08. Total cost to buy to close was $553.25 after commission.
I then sold 2 April 2013 Intel Stock naked puts at the $24 put strike for $2.43 which returned $476.50 after commission.
Next I sold 2 January 2013 Intel Stock naked puts at the $22.50 put strike for $1.07 which provided $204.50 after commission.
Total capital earned was $681.00 for a net credit on the put options roll out of $127.75.
Intel Stock Rolling Put Options Outcome
To understand why I did the rollingof Intel Stock Naked Puts, here is the outcome of the day’s roll out.
The total amount of capital needed for the Intel Stock trade was reduced by $7,777.25.
The total capital increased to my Intel Stock portfolio was $261.75
The reduction in the amount of capital at risk in Intel Stock was $7,777.25
The number of Intel Stock shares I am exposed to has been reduced by 300 and the cost basis of the remaining shares should I be assigned on all the Intel Stock positions is down to $20.63.
Further, the number of Intel Stock naked puts that I am exposed to that are in the money has been reduced to 35 out of 52. This reduces the number of naked puts that are in the money to 67% and by rolling further out in time I have given Intel Stock more time to recover and possibly move higher allowing me to roll for better premiums, my other in the money naked put positions.
Intel Stock Put Selling Strategy In Play
You can tell from reviewing my two Intel Stock strategies that are in play that there are three goals to handling these in the money naked puts.
1) Reduce the capital In Use: by reducing the capital in use I am increasing the amount of capital I can use to sell more out of the money naked puts at lower strikes. This effectively lowers my cost basis in Intel Stock should I end up being assigned on some of my in the money positions.
2) Reduce the number of naked puts at risk of assignment: by rolling further out in time and reducing the number of Intel Stock put contracts I am reducing the percentage of in the money naked put contracts that are at risk of assignment.
3) Reduce Exposure To Higher Put Strikes: I am breaking up the sets of in the money put contracts to spread out the risk among in the money and out of the money naked puts which again reduces my capital to exposure of assignment at higher valuation. You can see that gradually I will be lower myself in the stock over a period of time.
To sum up then, the value of Put Selling against large cap dividend paying stocks is rather obvious. Intel stock has a strong balance sheet, a wide moat of cash, remains the leader by far in its field and is slated to increase its dividend for the next quarter. That said the stock continues to appear weaker particularly late last week and while it flirts with support at $23, if that should break, Intel Stock could easily pullback to $22.00 where there is better support. With the strategies I am using I am confident that any assignment in Intel Stock will result in covered call opportunities and further Put Selling ones as well. The steps I am taking with Intel Stock are the same ones done in Microsoft Stock two years ago and others in 2000 to 2003 during that prolonged bear market. It should be interesting to watch the outcome of my Intel Stock naked put trades in the coming months.
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