[Investor237]

Thank you very much for the article Teddi. I will read it a few more times and decide on which strategy to choose.

One point regarding low priced stocks (below $40). I recall reading in a few of your posts/articles that you recommend lower priced stocks for investors with a smaller portfolio. You had also mentioned, in the past, that an option trade in a lower priced stock is easier to repair than a trade in a high priced stock (ex: AMZN). Also, you have placed numerous trades in INTC and T (both low priced). Could you clarify that a little please. Your comment on low-priced stocks in this article seems to contradict your earlier suggestions.

[Investor237]

Thank you Teddi. I look forward to your reply. I obviously want to rescue this trade, but I also want to learn from it and improve my “rescue skills” so that I can better manage future trades.

[Investor237]

Thank you.

[Investor237]

Yes my question was to all the participants in this thread.

Thank you for clarifying.

[Investor237]

When you are all referring to 25% margin, are you referring to the broker’s maintenance margin requirements when holding a naked put (or put credit spread), or are you referring to using borrowed funds (margin) on top of the capital in your accounts?

[Investor237]

Hi Teddi,

Yes I read that series of articles. It was excellent. I seem to have understood how to properly roll the short put (time will tell). It is the long put that is causing problems because it requires me to widen the spread in order to find sn inexpensive put to buy.

I would also really appreciate your input on my capital allocation that I described in my reply. I thought that I had correctly understood your suggestions from a few weeks back. However, with our recent exchanges I am unsure. I would really like to ensure that I properly understand how to calculate how much capital to allocate so that I don’t get overextended. I can start a separate thread for this subject if you prefer.

I really look forward to your reply.

[Investor237]

I don’t think that I am overextended. As you had recommended, I only use 40% of my capital to trade options. Meaning the width of all my spreads added together will equal 40% of my capital.

My account has $220,000. The total of ALL my spreads (difference between short put and long put) does not exceed $88,000 ($40% of capital) when initially placed (usually during a quiet market, like now). However, the cost to cover assignment on ALL short puts would be much higher than $220K. My understanding, from your answer to my question about capital allocation and margin a few weeks back, was that this is OK. I understood that I did not need capital to cover potential assignment of all my short puts because I would roll the positions and they would not all be assigned. Did I misunderstand? Given the numbers above, do you consider me to be overextended? (Yes I closed my MA position when it was profitable.) Should I have enough capital to cover potential assignment of ALL my short puts?

For example, right now, my margin requirements are $36,700 (sum of all my spreads). This represents only 17% of my capital. However, the capital required to cover assignment of all my short puts (disregarding the long put portion of the spreads) is $438,200, and I am only using half of the 40% of capital allocated to trading. Is this wrong?

Back to rolling the long puts…despite being conservative in my use of capital (I think), when a pullback happened, rolling my positions required an increase in capital because I had to widen the spread on each position in order to find inexpensive puts to buy. You recommend decreasing capital in use when rolling. I was unable to do that. That is what prompted my recent question (using MA as an example). I was able to lower the strike price of my short puts, but because premiums rose so much, I had to go much father OTM to find a low-priced long put to complete my spread. This widened the spread on each position. What started as a $2000 spread became a $5000 spread, then a $12000 spread on the second roll. All because the long put was so much farther OTM. Had the correction kept going lower, I assume that the width of the spread on a single position would consume so much capital, that it would have been impossible to keep rolling all positions.

[Investor237]

OK. Whenever you have a chance, I would really appreciate your input. I know that the same situation will occur with the next correction. I want to be prepared. This situation did not happen only in MA. I had to roll options on a few different stocks during this recent correction. Most of these rolls required me to widen the spread to find low-priced long puts.

I have capital to pay for MA (for example), but I don’t have enough capital to pay for all shares of ALL the various put credit spreads that I place in various stocks. I had asked you in the past if I needed to have the capital to cover assignment of all my short puts (in my put credit spreads). You had answered that no, I did not need that capital, as the chance of being assigned on all positions was extremely low. In light of that previous statement, I am confused by you now recommending that I should have enough capital to pay for stocks when selling options for income. The two seem contradictory to me.

[Investor237]

Hi Teddi,

Thank you for the links to the articles. I had already read them, but I re-read them again since you specifically recommended them.

Unfortunately, it doesn’t seem to help my issue (or I am unable to see how it does).

In fact, in two of the articles (PYPL, and WYNN), you face the same problem that I do:

In the article on PYPL (Mar 20, 2020), the reader initially has 4 $13 wide spreads (103/90), thus $5200 capital requirement. In the “Setting up the next credit put spread” section, you recommend that he sell 4 $100 puts and but 4 $70 puts. He now has 4 $30 wide spreads…he has just increased his capital requirements to $12,000 for the trade.

That is exactly the problem that I faced. As the stock collapses, the premiums get richer and one needs to widen the spread to find a “low-priced” long put to complete the spread. This increases capital commited to the trade rather than decreasing it.

In the PYPL example, in a single roll, the capital required jumped from $5200 to $12,000. One may need to roll a second, or third time. Most likely the put premiums will keep increasing and the investor will have to keep widening the spread in order to purchase low-priced puts. That is what happened to me in several trades. I think that, this time, I got lucky because the correction didn’t last very long. Had it continued, the capital requirements would have become too large for me to keep rolling. I am sure I will face the same problem during the next correction and I want to know how to deal with it in advance (rather than cont on luck). Could you please give me some guidance?

[Investor237]

Hi Teddi,

I still need your advice on this matter please. I was not looking for advice on that specific MA trade. I was using the MA trade simply as a concrete illustration of my problem. I encountered the same problem when rescuing positions on other stocks.

The question/problem I was asking about is the following:

When rolling out (or down and out) a put credit spread during a correction, I have difficulty rolling the long put. Rolling the short put is “fairly straighforward”. However, because the premiums become so rich during a correction in a stock, it is difficult to find a low-priced long put to complete the spread. To find such a low-priced long put (for the long leg of the put credit spread) I have to go much further OTM which increases the width of the spread, which INCREASES my capital requirements for the trade, rather than decreasing it.

This problem occured while rescuing positions in various stocks during the recent correction. How do you address this matter?

[Investor237]

Thank you.

FYI…I used MA to illustrate my problem. However, I encountered the same issue with other stocks as well.

[Investor237]

Thank you for the feedback.

[Investor237]

Thank you for taking the time to write the article to answer my questions Teddi!

A further clarification if I may….even though you are willing to own the shares if assigned, by not having a long put in place your brokerage will require that you have enough capital on hand to cover all short options (should they be exercised). This poses a problem:

It uses up capital rapidly (in your NVDA example…1 option will require $50,000 of capital), decreasing the amount of cash or margin available to setup other positions, thus limiting the number of positions that you can setup, until a long put is bought. By limiting positions, you may be limiting total return on the portfolio.

Has that not been an issue, due to the large size of your portfolio?

[Investor237]

Teddi,

The long put serves as protection for the short put, in the case of a decrease in the stock price.

As you mentioned, you frequently sell your short puts and then wait to buy the long puts. At that moment in time, your short puts are naked.

Should the price of the stock decrease (which could be minor or a sudden severe drop), your short puts were unprotected, and at risk of large losses.

I understand that you are trying to obtain a lower price for your long puts. However the stock price might decrease, thus increasing the cost of those long puts (rather than decreasing them), but more importantly this puts the position at risk for large losses.

This approach seems to contradict your teachings of being prudent. Can you please explain?

Thank you,

[Investor237]

This reply has been marked as private.

[Investor237]

Hi Teddi,

I was not asking about any specific trades that I have on now. My questions were about a trading portfolio in general. I was simply using my current portfolio as an example. When my current trades are closed, the new trades will create the same situation (i.e. the cost to cover all the short options, if exercised, is larger than the value of the portfolio, but the total cost of the spreads is well within the value of the portfolio). I am trying to understand if this is a typical, and acceptable, situation and does not cause issues in a severe downturn?

Let’s use your portfolio as an exemple. You use 1.2 million as your trading capital. Is the MAXIMUM number of positions that you have on at any one time limited by the sum total of all your short puts (if exercised) or rather by the total of all the spreads (short put minus long puts)?

Let’s assume that each one of your spreads is $2000 (short put minus long put). So you put on 5 spreads in AAPL, 5 in JPM, 5 in AMD, etc. You could put on up to 600 of those spreads and be within your limit of 1.2 million. However, if the short puts of each of these same spreads were to be exercised, it would cost 6 million. Is that what you do? Is that OK? Do you limit your MAXIMUM total positions by the total cost of all the short puts (if exercised) or by the total cost of the spreads?

If my question is not clear, let me know and I’ll try to formulate it a different way.

[Investor237]

Teddi, thank you for the detailed artice that you wrote in reply to my question. I appreciate it.

A few clarifications:

You mention that if assigned shares, I can use the various rescue strategies. My worry is that if I am assigned so many shares (on multiple credit spreads during a rapid collapse) they will be liquidated by the broker, to meet margin requirements, before I have a chance to apply any rescue startegies. In that situation, my loss is locked-in. No?

You also say that the more likely scenario is that if the cost to BTC the short options increases too much, some will be bought by the broker, to meet margin requirements. Once again, if this happens, my loss is locked-in before I have a chance to repair my trade?

When you recommend to use 40% of capital on stocks….that 40% represents the total margin requirements (total of all the spreads) rather than the total cash to cover assignment of all short options? Is this statement correct?

i.e. if I have a $100,000 portfolio, I would sell put credit spreads where the sum total of all the spreads (difference in strike price between short and long put) equals $40,000, rather than focus on the cost of assignment of all short options?

Thank you for your feedback.

[Investor237]

Ya, it’s been a tough week for INTC. I hope that it quiets down soon.

I’m glad that you were able to roll.

[Investor237]

Teddi,

In this thread you mentioned that you’ll put together a post following your INTC trades, and now you mentioned writing a quick note tonight.

Where would I click on your website to see your latest posts?

[Investor237]

Thanks aby1818,

I was thinking of waiting too. Then I read one of Teddi’s articles and it mentioned that, if an investor does not wish to own the shares, one should roll the short put when the stock price hits the option strike price just below the short put. So I decided to roll.

[Investor237]

I rolled the Jul 31 52.5 puts to Aug 21 52.0 puts (I couldn’t roll for a profit at a lower strike). Yes it was a mildly positive roll (bought the 52.5 back at $4.45 and sold the 52.0 at $4.55).

I rolled the july 31 51.0 put to aug 7 51.0 put (a very positive roll). I decided to stay at the same strike. I am fairly new, and trying different approaches to see how they work out.

[Investor237]

I rolled my puts to August 21, but they are still ITM.

That is always the issue….we ASSUME that a bounce will come, but what if Intel plunges to $45, then $40, then $30? Some great blue chip companies have plunged. I am never quite sure how to deal with that situation properly.

[Investor237]

Thank you for the clarification Teddi.

I am impatiently waiting for part 2 :-)

[Investor237]

Thank you for your feedback Teddi.

50%??? Do you mean that if I sold a put for $.50 and bought a put for $.05, that I should buy back the short put (and hold the long put) when it costs $.75 to buy it back?

[Investor237]

Thank you Teddi.

I read part 1 of your article and it is very informative. I am especially looking forward to part 2.

A quick question about part 1: You say that in the recent bear market collapse, the long puts (as part of the a put credit spread) brought in more profits. But your short puts lost more money (since they were at higher strike prices) than you would have made on the long puts. Could you clarify this please? Did you manage the short puts in a certain way to avoid them losing more money than was gained on the long puts?

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