"Gin, what do I do! My sell put got exercised and now I have 100 shares..."
This is one of the most common question I get from people who are just starting to learn about selling put options.
And in this blog post, I unveil the entire process of my approach to selling put options, so that you don't have to be constantly worrying about having your options exercised.
The "Blind" Put Options Seller
There are generally two types of people who sell put options:
- The "I only want to keep premium" category
- The "don't mind it being exercised" category
Now, its pretty obvious that in the first category, are the people who are constantly worried about their put options getting exercised. Because of that, they are always checking the share price of the stocks, and start to panic when their put options are going to be exercised.
"Oh no, the share price is below my strike price...I am going to get the stocks..."
The main reason why they choose to sell the put options is simply because they were blindly chasing option premiums without even thinking of the consequences of the options being exercised.
Most of the time, they are deploying the "hope-and-pray" method, so that their put options will not exercised and they will simply collect the premium.
And I could completely understand why people fall into the trap of selling put options blindly.
Most "gurus" will say this about selling put options,
"Selling put options are very safe, if it is about to get exercised, just roll the put option contracts! When the share price recovers, you will make a profit eventually."
Note: The term, "rolling" an option contact means that you close your current put option before expiry to avoid option exercise, and open a new sell put contract at a later expiry date. The hope is that when the share price eventually recovers, you would have made a profit from all the option premium you collected.
The question is, "What if it doesn't recover? Then you just have to be stuck with that huge loss in your portfolio." And needless to say, you are going to have a very stressful investing journey, constantly worried about share prices fluctuations.
Now, the good news is that investing does not have to be stressful - that is if you adopt the "I don't mind it being exercised" approach.
The Smart Way Of Selling Put Options
When we sell put options, we are effectively promising to buy 100 shares at the selected strike price before an expiry date.
So there is only two rules to this:
- Sell put options on what you can afford
- Sell put option on what you want to buy
It is literally that simple.
When I sell a put option, I make sure that it is a cash secured put option - meaning that I do have the cash to fulfill the obligation if the put option is exercised.
Secondly, sell put options only the stocks that I want - and not selling put options just for the sake of option premium.
To me, the option premium is only a consolation prize - the big reward is when the put options is exercised.
Why do I say that?
When I sell put options, it has to fulfill two criteria:
- The underlying stocks have to pass my 8-Point checklist
- The selected strike price has to be at an undervalued price
Let's take an example of Facebook.
In the above image, I sold a cash secured put option on FB at a strike price of 225.
This means that I am promising to by 100 shares of FB at $225 each. In return, I collected $425 worth of option premium.
I wouldn't have mind if the put option was exercised either way.
Why was it that I didn't mind it being exercised?
Because I knew that Facebook was considered undervalued at $225 - so why would I even mind if the option is exercised? I would have collected 100 shares of a quality company at an undervalued price.
But in the end, the put option was not exercised - and I simply kept the $425 of option premium as a consolation price.
Can you see that I was in a win-win situation like this:
- If the put option gets exercised - great! I get to buy 100 shares of a quality company at an undervalued price!
- If the put option was not exercised - great! I get to keep my $425 of option premium as a consolation prize.
Selling put options does not have to be stressful - as long as you know what you are doing, and you are not blindly chasing option premiums.
What's Next
Selling put option is only one of the strategies that I used and it is particularly effective when market becomes very volatile. The higher the volatility, the higher the option premiums.
If you like to find out more about selling put options, check out the Options Investing Hub and share with your friends and family about this resource 🙂
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