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Selling Puts Is Superior To Covered Calls
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Jul 9 2011 / Strategy Article

4 Basic Rules For Selling Puts

RULE # 4 - Close Early When The Opportunity Arises

NDEX
Rule #1

Rule #2
Rule #3
Rule #4
 

My 4 Basic Rules For Selling Puts (Naked Or Cash Secured)

 
Rule #4 - Buy To Close The Sold Puts When The Opportunity Arises

If I sell a put and the put premium decreases to the point where, for 10% or less of what I made I can close the put and sell another one, I take my profit, buy to close the put and consider where or when to sell another put. If there is less than a week to options expiry I rarely close unless there is some concern that the stock may fall and place my puts in the money, making assignment of the sold puts probable. 

Closing early is the strategy I am using as of January 2011 due to the stock market recovery having pushed many stocks into what I consider over valued territory. I call this strategy "the cautious bull".

There are three main advantages to closing early.

1) The investor's capital is immediately available for selling more puts or for taking advantage of other opportunities.

2) By closing early the investor has locked in his profit and eliminated the chance of the stock falling, placing any sold puts in the money which would most likely see an assignment of the stock.

3) By closing early, should another opportunity to sell puts immediately arise, the investor may garner more premium since there are additional weeks before the next options expiry. To possibly explain better, if I am in September and have sold October puts with 4 weeks to expiry and I close those puts at the end of September, then November premiums are usually higher since there are now extra weeks before November options expire. If I wait until October options expire, then there are fewer weeks before November options expire which can often mean lower option premiums. 


Avon Products Inc., (AVP) since November 2010 has fit Rule #4 perfectly. Below is the chart from November 2010 to July 2011. Here are some of the trades to show how Rule #4 was being applied.

November 3 2010 - Stock Price - $28.75 - Sold 10 Puts December $27 at .40
November 30 2010 - Stock Price - $28.55 - Sold 10 Puts January $27 at .75
December 7 2010 - Stock Price - $29.70 - Bought to close Dec $27 puts at .04  - PUTS CLOSED EARLY
December 20 2010 - Stock Price - $28.66 - Sold 10 Puts February $27 at .75
January 4 2011 - Stock Price - $30.20 - Bought to close January $27 puts at .07 - PUTS CLOSED EARLY
January 19 2011 - Stock Price - $28.50 - Sold 10 Puts March $27 at .70
February 7 2011 - Stock Price - $29.35 - Bought to close February #27 puts at .05 - PUTS CLOSED EARLY

Avon Stock Chart Nov 2010 to July 2011

You can see from the above example, that by closing early the investor locks in his profit and releases his capital to again take advantage of selling puts with additional time premium. For example by closing on February 7 2011 rather than waiting for options expiry on Feb 18, there is an additional two weeks of option premium when selling puts into March. If the investor waits until Feb 18 when options expired, there is the possibility that the stock might fall putting the option into the money and making assignment of the shares an almost certainty. As well, the March put premiums may be lower as there is only 4 weeks to March expiry rather than six.


Summary

Those are my 4 basic rules for put selling. While over the years of investing, I have developed and tweaked a number of different naked put or cash secured put strategies, these 4 basic rules have remained constant.

A few things worth mentioning. Many traders feel it is not worth selling a put for less than 1% a month, I disagree. I sometimes sell puts for less than 1% a month as part of a longer term strategy. I also sometimes use margin to sell puts when I believe the chance of assignment is low or there is a collapse in stock values and I want to take advantage of short term opportunities. Remember if you hold a lot of sold put positions and the market pulls back, you can end up being assigned on more positions than you had wanted. Only place trades you are comfortable being assigned on, should the stock tumble. Remember Rule #1.

Selling a put for anywhere from .50 to a few dollars will not assist if the stock tumbles and you end up paying two, three or four times what you made to buy back your put positions. Remember that selling options is a strategy of small profits that compound over time to create larger profits. Slow and steady is the plan. Investing isn't a race but a long term commitment.

Article Index
Go To Rule #1
Go To Rule #2
Go To Rule #3
Go To Rule #4

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13 Rules For Selling Puts For Profit And Avoiding Assignment
Understanding Selling Puts
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Tools For Picking Naked Put Strikes
Why Sell Puts

 

 
 

 
 

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