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Author: bertjay33 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1202  
Subject: Options in trouble Date: 12/3/2012 11:48 AM
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I'm a rookie at options, and need advice. I have puts for December 22 on Microsoft and on National Oilwell Varco. In both cases, the stock price has dropped below the price where I can break even.

My questions: Should I cut my losses and get out of these puts, and if so how? Or should I let them take their course and acquire the stocks for their dividends or future growth?
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Author: Zumba Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1107 of 1202
Subject: Re: Options in trouble Date: 12/3/2012 3:52 PM
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bertjay - I presume you sold puts on MSFT and NOV? Do you have the money in your account to purchase the shares of both stocks?

In order to decide whether to take your losses and get out or take delivery of the stock, you should decide how much you need the money. Are you ok with having money tied up in both stocks for months or even a few years? Both are very good companies and I have little doubt that their stocks will move back up over the next few months.

But I could be wrong. I sold puts with a SP of $25 on AEO in 2007. The stock tanked, I was put the stock, then sat on it for years as the stock went as low as $6. I finally started selling calls on the stock and eventually had it called away from me for a loss. The stock recently hit $24, but it took the stock 5 years to get back to that level. I was also short puts on GES a few months ago when the stock tanked. I took the loss and walked away because I didn't want a repeat of my AEO fiasco.

Selling puts can be a great way to make relatively quick money, but it can also be an easy way to lose money fast. It's important to decide in advance what your goal is - to collect premium or buy the stock at a discount to the current price. Either way, be sure you have a plan before you sell the puts. If your goal is to simply collect premium, sometimes it's better to sell a put spread so that your max loss is pre-defined at a more manageable level than with the naked short put.

Paul

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1108 of 1202
Subject: Re: Options in trouble Date: 12/3/2012 4:36 PM
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bertjay33,

You wrote, I'm a rookie at options, and need advice. I have puts for December 22 on Microsoft and on National Oilwell Varco. In both cases, the stock price has dropped below the price where I can break even.

My questions: Should I cut my losses and get out of these puts, and if so how? Or should I let them take their course and acquire the stocks for their dividends or future growth?


You want actionable advice on a specific investment? I don't think anyone's crystal ball is that good. You need to weigh the pros and cons and make your own decision.

As for, I'm a rookie at options, and need advice. I have puts for December 22 on Microsoft and on National Oilwell Varco. In both cases, the stock price has dropped below the price where I can break even.

Perhaps I don't understand. If you "have puts", why do you think that a put taking its course will result in you acquiring the stock? If you bought a put, an exercise will result in you selling (short?) shares to whomever wrote the put at the strike price. If the current price is below the strike, you are in the money - you should be able to sell shares below the current market price. If that is your position and you're worried the share price will go back up, I'd close the position by selling the puts. In this case the put is moving in your favor.

If what you meant instead was that you SOLD cash-covered puts and the stock price has fallen, then you basically have the same problem as if you had purchased the stock at the strike price back when you purchased option contract. Do you cut your losses and close out the contract? Or is it still a good investment? In either case, you've incurred the loss in your account and the real question has nothing to do with how to deal with the option - it's a question of whether or not underlying security is still a good investment. And if you sold a cash-secured put for a security you didn't originally want to own, then I think you were crazy for writing the put in the first place... (What I mean is your opinion about the stock could certainly change over time; but you shouldn't have pulled the trigger on a cash-secured put unless you were willing to buy the stock at that time.)

- Joel

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Author: jkens Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1115 of 1202
Subject: Re: Options in trouble Date: 12/20/2012 1:47 PM
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If this person sold the puts and the stock continued to fall, at expiration would he automatically be put the stock at the strike price in which he entered the trade or does someone need to initiate this action?

In other words, can the put expire in the money and him not be required to take the stock?

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1116 of 1202
Subject: Re: Options in trouble Date: 12/20/2012 6:31 PM
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jkens,

You wrote, If this person sold the puts and the stock continued to fall, at expiration would he automatically be put the stock at the strike price in which he entered the trade or does someone need to initiate this action?

In other words, can the put expire in the money and him not be required to take the stock?


My understanding is that it depends on the policies of the broker holding the account holding the put. As I understand it, most brokers will automatically exercise options at expiration that are more than a certain amount ITM. How much that is varies by broker; but it's usually not much more than the amount required to cover a commission.

But I suppose you could get lucky...

- Joel

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Author: jkens Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1117 of 1202
Subject: Re: Options in trouble Date: 12/20/2012 7:10 PM
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Joel,

I'm wondering about hits as I sold some Jan, 13 puts and the price of the stock is now below what I sold them for.

I would not mind at all taking ownership of the stock even at a lower price though I understand I will be at a loss if the options are exercised, or "put" to me.

What I am curious about is this. Lets say I sold the options for $1 and they expire in the money at $1.50.

If the stock is not put to me, and I have already collected my $1 when I first sold the puts, and they expire at $1.50, am I required to pay the .50 difference?

Or if it seems they are going to expire at that price closer to Jan expiration will the stock be put to me?

It seems to me since the options are now worth more and the stock price is below my strike the stock could be put to me at any time, just curious why it hasn't been, or is that common.
Thanks.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1120 of 1202
Subject: Re: Options in trouble Date: 12/21/2012 5:02 PM
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jkens,

You wrote, What I am curious about is this. Lets say I sold the options for $1 and they expire in the money at $1.50.

If the stock is not put to me, and I have already collected my $1 when I first sold the puts, and they expire at $1.50, am I required to pay the .50 difference?


What are you talking about here?

From the context of your post, I assume $1 is the PREMIUM you received per share, correct?

Is the $1.50 the current premium offered for the same contract? Or is that the strike price of the underlying stock? No, I doubt that its the strike price because you usually won't find options on penny stocks. So I'm assuming you mean that on the day of the contract expiration, the option was quoted at a $1.50 PREMIUM.

If that's your question, there are three possible outcomes. To help illustrate the ramifications, lets fill in some missing numbers with ones I'll make up. Let's assume you sold 10 PUTs and the strike is $25/share.

1. You close the put contract by buying it on the market for $1.50/share. Total cost: $1,500. Total realized gain(loss): ($500) less two commissions.

2. You let it ride and the option is not exercised. Total cost $0. Total realized gain(loss): $1,000 less one commission.

3. You let it ride and the option is exercised/assigned. Total cost: $25,000. Total realized gain(loss): $1,000 less commission. Total unrealized gain(loss): ($1,500) less commission. Net gain(loss): ($500) less one commission.

The odds of scenario #2 happening probably aren't good with an ITM option. But if you have the cash on-hand, taking the chance and holding the contract might be worthwhile ... assuming the stock price doesn't tank the next day.

However with scenario #3 you have to remember that you're tying up a bunch of cash. If you don't have that cash on-hand, the broker will take the money out of your margin balance. You need to be careful about that for the usual reasons that it's rarely wise to buy a stock on margin...

BTW, I think the answer to your original question is, No. If you've sold a put, the only reason you would be asked to cough up more cash is if the stock is put to you. At that point you would pay the strike price times the number of contracts and receive the shares in exchange.

Also, It seems to me since the options are now worth more and the stock price is below my strike the stock could be put to me at any time, just curious why it hasn't been, or is that common.

A person holding an option doesn't always exercise just because it's in the money at the moment. In fact, most options traders would prefer to sell the contract to realize the gain rather than exercise before the expiration date. This is because the option holds both intrinsic and time-value and the only way to realize the time-value of the option is to sell the option to someone else. So the odds of you being assigned before the expiration date are slim because the contract holder would just sell both the put and the stock on the open market to realize a better return than exercising the put.

- Joel

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Author: jkens Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1122 of 1202
Subject: Re: Options in trouble Date: 12/26/2012 12:14 PM
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Joel,

Thanks for the very educational and informative response.

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Author: altstrat91 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1126 of 1202
Subject: Re: Options in trouble Date: 1/10/2013 11:22 AM
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selling naked (meaning unhedged) puts is a very powerful tool that if utilized properly can drive you annualized ROR. however where it goes hay wire, is usually the leverage factor. folks get drawn in by the premium. stock X surely can not drop by this amount by this date. (and i am not saying this is what happened to the OP) - i am talking theory and also real world experience here, as i myself actually blew out an account years ago when i was running a very aggressive naked short selling themed options strategy.

this is the take away here >> i would recommend you sell puts in this fashion, the same way you would utilize a buy limit order. in other words, you actually want to accumulate and/or hold the position, not because the stock is higher beta with juicier premium.

say you want to buy Pfizer in the next 90-120 days, but you do not want to pay current market price. You want to pay a $1 or $2 less. So instead of putting in a buy limit order for 300 shares at said price, sell 3 put contracts (the equivalent of 300 shares) instead.

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