Put Selling against stocks is my principal investment method. I enjoy Put Selling both from a profit perspective and from a fun perspective. I realize that may seem odd to a lot of investors, but I look at my investing like a business and if you don’t enjoy running a business then you should look for a job elsewhere.
In my business of investing it is fun everyday to study my stocks looking for Put Selling opportunities to make a profit in my business. But one of the areas that I am very careful in is Put Selling against stocks that I would never own. There are many pitfalls in the stock markets and one of the more common ones that most investors do not see is errors by the exchanges.
Put Selling Against Stocks You Would Never Own
In the flash crash of May 2010 I ended up with a pile of naked puts as I was busy Put Selling on that day when the flash crash happened. Later I received a variety of notices which covered everything from cancelling some put trades which I did fight and lost, to being sold some naked puts are prices I had not been offering to sell at. It was a weird day and by and large most never really were fixed by my discount broker or the exchanges in question.
Overall I was not too disappointed since I only put sell against stocks I would own. However imagine if I had been Put Selling with an intent to capture the income from the puts BUT with no intention of ever owning shares. Now imagine on a day like the flash crash and being sold naked puts on a string of companies you had no intention of ever owning.
Put Selling and Mini-Flash Crashes
A lot of investors don’t realize that everyday exchanges make mistakes. Today was an excellent example when Granite Construction Inc., which trades on New York under the symbol GVA collapsed 12.5% for 1 minute before the exchange realized their error and moved to fix it. They announced they would review and possible adjust some trades. Granite Construction has a market cap of 1.3 billion and revenue of 2.2 billion. They have 1400 employees and a book value of $20.66. They have a cash flow of $3.17 per share and earnings to date of $1.17 per share.
Put Selling against Exchange Errors can be dangerous
I point out these statistics to show that this is by no means a little company. Yet these min-flash crashes happen almost daily in one stock or another. As long as the stock recovers and you are happy to be holding the naked puts you suddenly got sold, then by all means, it was a great trade! But far too often these little mini-flash crashes place investor concern on edge and the stock slides for a few weeks to possibly longer.
As well when I am Put Selling I am seeking a certain put strike for my Put Selling. For example in GVA Stock above perhaps I would be seeking to sell the $34, only to find out that within a minute the stock is trading below $31.00. There does need to be some better safeguards in place not to just “adjust” trades after the exchange has made an error but also to make sure the error is not made in the first place.
Put Selling Stocks I Would Own
This is why I stay with stocks I would own if assigned. When Put Selling against stocks, I prefer taking away the chance of a mini-flash crash as one issue to be concerned about. By Put Selling only stocks I think are worthy of owning in the event of a decline, I can rest easy even if a mini-flash crash should hit a stock I am trying to do Put Selling against.