Put Selling is a strategy of selling someone else the right to give me their shares in a stock at my select price. As well Put Selling is a strategy to earn income while waiting for those shares to reach my established price. Going one step further, a Put Selling ladder is a way to earn income while working my way up and down within a stock as it moves up and down in a trading range.
Microsoft stock has been in my portfolio since after the Tech bubble crash. For more than 10 years now, Microsoft Stock has provided me with double-digit returns while at the same time given me little need to worry about the underlying company. It has been a great combination which has allowed me to sleep nights while I earn substantial income off Microsoft Stock put options.
This year, 2012 has been no different for Put Selling Microsoft Stock. While analysts this year have pumped the stock through media outlets, I have stayed with my Put Selling ladder and moved up and down following the trend in either direction in Microsoft stock.
Microsoft Stock Put Selling Ladder
The Put Selling ladder on Microsoft Stock provides a very nice layer of security since I am always holding a variety of put strikes which I adjust as Microsoft stock rises or falls. Earlier this year Microsoft Stock was rising and my Put Selling was at higher prices. Lately Microsoft Stock has been back falling and I am now rolling lower and continuing with Put Selling but at lower strikes. By having a variety of put strikes and keeping sold put contract volumes at reasonably small levels I have earned about 22 percent this year through Put Selling Microsoft Stock.
Put Selling Ladder Is Easy To Maintain
The Put Selling ladder idea on Microsoft Stock is pretty easy to maintain. When the stock moves higher I close my lower put strikes and move them up to usually just lower than at the money. When Microsoft Stock falls I bu back the higher puts as they fall in the money and sell more puts at a lower strike to cover the cost to buy to close the higher put strikes that have fallen in the money and to earn more income than was spent buying the higher put strikes back.
To understand better let’s look at this chart, which is from the Microsoft Stock 2012 Trades full chart which you can access here.
On November 6 I had closed all my naked put positions in Microsoft Stock as it had roared back to $30.00 in what definitely looked liked a one day bounce, which it was. On November 7th Microsoft Stock fell back and I was Put Selling Microsoft Stock once again. On that day I sold Naked puts at December $28, Jan $27 and jan $26. Note how each one was lower than the previous. Sort of like stepping down the rungs of a ladder.
Note too how I sold 3 naked puts at $28 and $27 which were the closer to being at the money while I sold more naked puts at the $26 strike, which on Nov 7 was further out of the money. Last, look at how the higher strike, $28 was also in the closest month – December.
The roll downs and the other Put Selling trades are in the chart below. I have marked my comments so you can follow along to understand further the Put Selling ladder strategy.
COMMENT KEY A:
On November 7 I had sold 3 naked puts on Microsoft Stock at the Dec $28 put strike for .59 cents.
On November 13 Microsoft Stock plunged and I bought back the December $28 for $1.24 and spent $380 to close the puts.
At the same time shortly after, I sold the Feb $28 naked puts for .98 cents but I increased the number of put contracts sold to 5 naked puts which earned $480.00.By adding the two extra put contracts when I was Put Selling, I took the original loss of $380 and covered that loss and added another $100.00 in income. This then was a profitable trade and moved me lower and further out in time.
COMMENT KEY B:
On Nov 7 I sold 3 naked puts for Jan $27 for .79 cents.
On Nov 16 I bought these back as Microsoft Stock was through the $27 strike. I paid $1.17 for the 3 naked puts costing a total of $359.00 to close these naked puts. To cover that cost and still earn profit on the roll down and out, I sold 6 naked puts for Feb at the $25 strike for .70 cents each. This brought in $409.00 which covered the cost of the $359.00 and earned a bit more profit.
COMMENT KEY C:
On November 7 through Put Selling I sold 5 naked puts for January at the $26 naked put. This earned a total of .53 cents or $255.00
Note how on November 7, this was the lowest strike I sold and I sold the most naked puts at this strike making sure that the higher strikes had smaller quantities sold. This is because on November 7 Microsoft Stock was at $29.10 and the $28 and $27 were the closer put strikes I sold. The $26 was the furthest out and would require another 10% correction in the stock to put the $26 in the money and at risk of assignment. By keeping smaller quantities at the money or slightly out of the money, I can increase those quantities in order profitably roll my naked puts down should the underlying stock fall through those strikes, which is exactly what happened.
Presently I am still holding the January $26 naked puts as the stock has yet to fall below $26. Once it does these too will be bought back and then rolled out, lower and additional put contracts bought to roll down for a credit.
| Date | Stock Price At Time of Trade | Action | Comm. | Capital In Use | Gain/Loss |
| Nov 7 | 29.10 | Sell To Open (STO) 3 Naked Puts Microsoft Stock Dec $28 for .59 (not change in Commissions to $1.00 plus $5.00) Status: BTC Nov 13 3 NP for $1.24 and rolled 5 NP to Feb $26 for .98 See Comment Key Marked A | 8.00 | 8407.95 | 169.05 |
| Nov 7 | 29.10 | Sell To Open (STO) 3 Naked Puts Microsoft Stock Jan $27 for .79 Status: BTC Nov 16 for $1.17 and rolled 5 NP To Feb 25 at .70 See Comment Key Marked B | 8.00 | 8107.95 | 229.05 |
| Nov 7 | 29.10 | Sell To Open (STO) 5 Naked Puts Microsoft Stock Jan $26 for .53 See Comment Key Marked C | 10.00 | 13010.00 | 255.00 |
| Nov 13 | 27.18 | Buy To Close (BTC) 3 Naked Puts Microsoft Stock Dec $28 for $1.24 Status: Sold into Feb at $26 and increased naked puts from 3 to 5 put contracts. See Comment Key Marked A | 8.00 | (380.00) | |
| Nov 13 | 26.80 | Sell To Open (STO) 5 Naked Puts Microsoft Stock Feb $26 for .98 See Comment Key Marked A | 10.00 | 13010.00 | 480.00 |
| Nov 16 | 26.55 | Buy To Close (BTC) 3 Naked Puts Microsoft Stock Jan $27 for $1.17 Status: Sold Into Feb at $25 and increased number of put contracts to 6. See Comment Key Marked B | 8.00 | (359.00) | |
| Nov 16 | 26.40 | Sell To Open (STO) 6 Naked Puts Microsoft Stock Feb $25 for .70 See Comment Key Marked B | 11.00 | 15011.00 | 409.00 |
Lots To Like About Put Selling Ladder In Microsoft Stock
There is a lot to like about a Put Selling ladder. They are easy to adjust if an investor learns to roll early as soon as the stock falls through the naked puts they have sold. If the stock climbs back then the investor can consider buying back out of the money puts that fall quickly in value and then start to move back up the ladder again.
A put ladder offers opportunities to continue to earn income while waiting for a stock to recover. As many stocks trade within an easily identifiable range, Put Selling ladders can be set up in advance so that an investor knows exactly what strikes they will be rolling to and how much more capital is going to be required to protect his position.
Through using a Put Selling ladder an investor can continue to earn net credits on his roll outs and keep his capital requirements under control. With capital under control and a variety of puts sold at ever lower strikes, the investor knows that the risk of assignment on all positions is greatly reduced. While some put positions might get assigned, but staying ahead of stock movements by rolling early, an investor can keep his capital always working and possibly avoid assignment of shares for not just months, but years.
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