Long before we purchase the stock, and along the way as it is rising, there are still other things we can do to take advantage of the “magnified movement” in the option price.
As the stock rises and gets close to the $15 strike price, the value of the put goes down. If it’s awhile before the expiration date and the option is going for 50cent, we could buy it back. What does this mean? We buy a $15 put for 50cent. Now we have the right to sell the stock at $15. The option costs $500 for ten contracts (plus commissions). You’re now creating a “wash” situation. You sold 10 puts, now you’ve just bought 10 puts and to your broker’s computer it’s a wash. They both go off the screen. You now have no obligation to perform.
You would only buy back the puts if there is plenty of time before the expiration date for the stock to go back down. If the stock is near $15 and climbing, or above $15 with a small chance for a significant decrease, don’t buy the put. Just wait for the option to expire and you get to keep the whole $2,000. Your profit, if you buy back the $15 put for 50cent ($500 for ten contracts) is $1,500. Don’t unnecessarily spend money you don’t have to. However, let’s keep going. What if there is still plenty of time before the expiration date and the stock has shown a lot of volatility? It’s at $15.50, the put options are 25cent, you spend $250 to buy them back. You have a clear profit of $1,750, minus commissions. Now, the stock falls back to $14. At this time the $15 puts are going for $1.25. You sell another ten put contracts and generate $1,250, then one of the following happens.
1. The stock stays down. Your basis is now $12 ($15 minus $3: $2 for the original put sold, minus 25cent for the put buy-back, plus $1.25; the selling of the second $15 put). That is a super wholesale price.
2. The stock rises above $15. You get to keep the premiums and you have no further obligation.
3. If there is still time to buy back the put again, try it again—repeat the process. Note: I’ve done two puts, but never three in one month. It’s possible, but highly unlikely. The stock would have to be really volatile, having a lot of quick movement. Look at the following charts and plays:
We sold puts at $15 and the stock went way up. We also had calls on this play.
A good covered call stock can also be a good one for selling puts. We sold the $10 puts, then the stock hit $19. Profit $1,000.
We sold the $15 puts. We actually got the stock put to us, but I like this company and don’t mind owning the stock.
