Avoid Disaster When Selling Put Options [REAL LIFE NIGHTMARE]

In this video we are talking about how you can avoid disaster or at least how you can manage disaster when selling put options. When you are selling options you need to be able to manage the trade when things turn against you. I will be sharing with you an example that is happening tp me right now.

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This communication/content is for informational purposes only and is not intended as personalized investment advice, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon for purposes of transacting in securities or other investment vehicles.

[sunlite]

Selling a put option is a bullish transaction. Other than trading with the expectation of buying back the option at a lower price ....you expectation is to buy the stock at a discount. ( Colleting the premium.)
When the market goes against you and the stock declines ---get out!!!!
Great when it works. In March 21 I had several puts. ( 10 contracts ea.) The market seemed to turn and I dumped everything including my longs. Every one of those stocks declined further.
In you case get out and move on. rolling down is like doubling down on a losing position SB just closed 130 stores in the USSR. They will be closing more in the US as neighborhoods crumble. Your mistake was looking at the numbers and not the stock.

[fostroggalf]

Another option you might consider, if you have the extra cash in the account, is to roll down and out but add a second contract to get a lower strike closer to the current price. If the price keeps dropping or doesn't rebound you'd be on the hook for 200 shares instead of 100, but if you like the stock it might be something worth looking at. If you don't think it's going to continue dropping and the current price action is more of a reaction to recent news about stopping stock buybacks and it will rebound in the coming months, it's something to consider. I wouldn't advocate doing it with margin, but if you've got the cash on hand already it might be worth it to avoid taking the loss. Even if you end up getting assigned, your cost basis will be a lot lower and you might be in a position to sell covered calls.

[davejohnson]

UNCLE JOE- Close the position and use it as a tax loss. Buy back into SBUX next month so you avoid a wash sale : ) . 2% yield is dog crap as the FED Increases Rates. SBUX most likely keeps going down. Dont count on it popping until inflation is under control.

[sactojlm]

As someone else mentioned, you gotta check the Greeks before making your trade. My assumption is that you had a high delta. Before selling a put option, I try to keep the Delta under .20 and be satisfied that I want to own the underlying at the strike selected regardless if the trade goes south. In other words, I will forego the juicy premiums in exchange for smaller losses as long as I want to own the underlying.

[stevedrais]

Thank you for a real life scenario. Have had advice that sell put is a no lose strategy -if your on the wrong end 'just roll it out and youll be good'. Now I understand what scenario doesnt allow that. sometimes its just best to eat the loss and move on

[sagig]

Appreciate your transparency Joe. It happens ... the stock market works against us sometimes. Hopefully it's not a big deal for you. The way I see it: the only reason for you to buy back and realize the loss on the position is if you changed your view on SBUX perhaps cause of that they're not doing buybacks or for another reason. If you still like that stock tho, no reason to accept the loss. It's a bit tough call between taking the stock assignment or rolling. The risk of rolling vs taking the stock assignment is if the price will continue to tank, then you'll lose worse on the new put than on the stock. With the market these days ... anything can happen. If it were me and I would still like the stock, I might've just taken the assignment and sell a covered call at $92 strike, which has much less risk for you and will also give you a premium. If eventually somehow it makes it to $92 then you sell your call and break-even (more or less).

[AD-cywx]

What was the Delta of that put option you sold? Sounds like you were pretty close to the money with an aggressive option?

[InfiniteQuest]

I would definitely look more into covered calls as I mentioned in the last video. You have a real aversion to selling a call at the wrong strike or buying it back for a loss or something(?). The thing is, if you are willing to roll a put option, that is actually 100% exactly equivalent to taking the stock and selling the same strike call. They are the same (except for margin requirements). So I don't see how you are willing to roll the put but not willing to take stock and sell calls. I think you'll be able to make a lot better options decisions once you get past this covered call barrier. I personally agree with rolling, but I'm just trying to correct an incorrect notion here. A lot of people have trouble with this idea. Anyway, I think most of us are in similar situations right now with the big downturn lately. You're not alone!

[aligregg]

Thank you for the transparency!! Im in a similar situation with HUT8, $12 puts exp in July (had to roll 6 months out for a credit) and stock is like $6 today, I haven’t looked, makes me sad lol. Regardless, in your situation, you can at least collect dividends! If I were in this situation, I would take assignment. I’m going to take assignment on HUT8 in July when it rolls around.

[DerMeister]

Yeah, I started buying at 91 based on the startegic plan and buybacks, and then Howard the Moron comes in like the kool aid man.
I had some covered calls on Tesla go deep underwater on my leading up to Thanksgiving 21. I sold the contracts (1085 strike) around the 16th, huge price run up, it would have cost me 12k to close the position to 'save' my shares, but I had a resistance level calculated, was able to roll the calls into the next week (holiday week), sure enough, the price ended the week around 1082. Stressed me out bad, but instead of losing 12k to hold my shares, I walked with about 3.5k in gains.

That pointed out a couple things for me:
1. Have a plan....
2. Have the patience for the plan.
3. Understand your loss tolerance levels.
4. Calculate your technical price levels for support and resistance when selling the options and sell your strikes accordingly--which I had done, and they held, just had to roll and let the momentum cool.

It also highlighted another issue--I already had a plan with selling CC, and had a set time (for theta) and a set percentage OTM for the strikes relative to the security price--I violated that which caused me to get into the pickle in the first place!

[sledsever]

My thoughts as a rando on the internet:

Thanks to Joe for bringing this issue up and for coverage on other topics in the channel, especially all the dividend ETF comparisons.

Here’s the lessons I learned the expensive way:

- Chasing premiums can be a trap. Slow down a bit when it comes to options.

- Know your goals before you sell a put – or a covered call.

- Have a plan beyond waiting for expiration.

You can do all the right things and still have the market, or business decisions, go against you as it did here with Joe. Sometimes it’s just bad luck.

My one criticism of Joe’s trade is it was always a pretty risky move with a high delta. He was always going to be in the money, but it didn't have to be this deep in the money. As always, it depends on your strategy.

If I was going to hold the shares for the longer term, I’d consider eating the $900-1000 now and roll down to catch the near 19 month-low price for SBUX. Unless this thing keeps tumbling (anything is possible) you’ll be able to sell calls for a long time until it makes sense to let it get called away.

[tonya]

Lol. I got the same option with the same strike, same stock. I rolled that bad boy to 91 strike to May 6th, and gave back $40 from my $195 profit. I'm still up but I have to fight back. My strategy is to keep rolling this down amd out until Sbux recovers. Don't worry Joe we got this!! Just keep selling puts and let's get that premium!!

[waterfoker]

The best way to understand when to sell puts is first to analyze the company. What is it's realistically lowest price, there's intrinsic value so it would never go below some price. Also you wanna build up the price like a pie, say some factor adds X$ to the price. Adding up all those factors including "sentiment" gives you the current price. Then you have a play book so whenever you see news about something wrong, you will know what factor to discount and therefore a good estimate on how much it will drop. Also selling puts is best after a 5+% drop. Don't chase a bull run with selling puts, the risk reward is bad. Look for asymmetric risk reward. I.e. if after you do your analysis, Starbucks won't drop below 70 due to intrinsic values, then your downside is only $10 (current at 80), but your upside is much higher maybe back to previous highs. So that would tell you that at $80, it is a good time to sell puts.

[shmulikanglister]

Taking a loss is the hardest thing in trading. Rolling down to a lower strike but still way higher than current price with only a month away is betting on a sharp rebound in the stock. In this market climate I'd say that's wishful thinking. If you believe in the stock, just get assigned and start selling calls far enough oom and into the future in order to recoup your loss little by little, without getting assigned the calls on lower strikes. This way you'll lower your cost basis and feel better.

[johnsnow]

You could write covered calls on the stock that is assigned to you.

[jakewhite]

Any idea, Joe, what the delta was for that option at the time of writing the contract?

[garyhull]

Same boat with SCHW but not as bad as SBUX. Going to own me some Schwab at $85. Start selling covered calls to make up the loss. Thanks for the videos!

[happyhamster]

I just got lambasted a few days ago with TCDA. It was trading steady around 10. All the deltas were under 20 so I sold 7 put contracts, 2 @ 7.5, 3 @ 5 and 2 @ 2.5. The stock plummeted 95% the following week down to .60. It was a 4 week contract. I’m figuring when all said and done right now it will cost me about $1200 to buy them all back. Should I do it now with about 3 weeks left or wait. I’m not sure if the contract price will go up or down the longer I wait. Thanks

[twloughlin]

I've never wanted to play in the options space. It's not for me. My choice here would be to have the 100 shares assigned to me and then hold the company long term. Unless you really think that in 5 years SBUX will be less than $80, holding on to the shares long term may yield you the best return overall. What's happening to SBUX right now might be quite similar to what happened to Chipoltle in 2015. Check out the latest Joseph Carlton show. He talks about what's happening to his own current investment in SBUX and why he's holding the stock long term.

[ballhogjon]

By rolling out to may at the 92.5 strike you're adding .50/share of risk. I always try to find a strike price around the .20 delta that is also available in the back months so I don't have to do what you're suggesting and adding more risk.