Recently I received an email from an investor seeking help with his naked put positions on Gilead Stock (GILD).
This is an interesting email as the investor is aware that the dividend that is released tomorrow, often means investors who are deep in the money, have a good chance of being assigned shares, after the dividend is received by the investor who owns the short put contracts that were sold. The investor, David, is in such a position.
Let’s review his question and look at some possible answers. Some parts of the question have been adjusted for readability and to match today’s prices.
Investor Questions:
Hi Teddi,
I wanted to thank you again for your excellent advice on my ODP position. I took the loss as you suggested, and it definitely was the correct move. ODP is at 3.61 today, and if I would have tried to roll out my put, I would have been trying to repair this trade for a long time.
I also wanted to follow-up with you regarding my Gilead position. As you outlined in your May 19 2016 article in which you state that it is important to stay ahead of dividend dates, as deep in the money puts are often assigned right after dividends are collected. As GILD is approaching ex dividend on 6/14/16, I am trying to determine the best rescue strategy, and would appreciate your wisdom and insight. I would like to avoid assignment, with the goal of recovering my capital so that I can make appropriate future trades. I would like to keep this account mostly as a pure put selling portfolio, as it is the only account I have for options trading. As previously mentioned, I am restricted to stock trading in my main account since it is a 401k PSP and I am not allowed by my employer to trade options in it. I actually own some GILD in that account, so I am not opposed to owning GILD, but owning stock in my small IRA limits my ability to utilize options strategies. This GILD trade, however, consumes the vast majority of the funds I have available in my Roth IRA.
To recap, prior to discovering your site, I sold 2 $99 July naked puts on GILD when it was trading at $104. Thus, I have $19,800 in capital in this trade. It then tanked to $85 after the earnings announcement. It has since dipped lower and recovered slightly to $84.03 today. In the interim, I had rolled to 2 $97.50 Aug 19 expiry puts for a very insignificant credit. These 2 puts will now cost me $14.55 each to close today, for a total of $2910.00.
You have described one of the fastest ways to recover is through reducing the number of puts to reduce capital in use, and you have suggested rolling up and out, rather than the typical down and out, in order to accomplish this. The Jan 2017 Leap $110 put strike is trading for $27 today, and the Jan 2017 leap $115 put strike is trading at $31.10. The 52-week high on GILD is $123, set back in June 2015. Would you consider either of these as viable options?
How would you rationalize which one would be the better choice? Do you find that rolling up and out like this is typically beneficial in the end, or do you often have to employ further repairs?
What other repair strategies would you consider? Would you act on this now, with ex dividend approaching, or would you continue to wait for the stock to recover more before employing any repairs, considering that my current puts are Aug 19?
Thanks again for everything you do. I am learning so much, and only wish I would have discovered you sooner. Much appreciated!
David
Some In The Money Options Rescue Strategies
When selling options for income or to grow a portfolio, the chance of a trade failing always exists. I always feel that protecting the capital is paramount but so too is not taking a loss on the trade but instead work the trade to free up the capital that is trapped in the declining stock, but make sure the rescue remains profitable.
Here are some rescue strategies David may want to consider…….The rest of this strategy article on rescuing deep in the money naked put options is for FullyInformed Members
Gilead Sciences Stock – Rescue Strategies On Deep In The Money Naked Puts
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Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.
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