Revive Your Trades: My Put Selling Repair Method

When selling put options you are eventually going to have one that misbehaves.

Don’t worry, it happens.

When the time comes you need to be prepared and have a strategy of how you manage and roll your cash secured puts.

In this article, I am going to share with you a repair method that I use. It has saved me so much pain and I hope it helps you become a better put seller.

repairing a cash secure put option

Someone asked me a great question recently on Twitter in my DMs. I thought it was so good that I put together my below method so others can learn from it too.

Before we dive in, here was the question I received:

Hi Kevin, I wondered if you can help me.

I wrote 2x contracts on COIN at $90 – with expiration date 18/08/23.
COIN was at over $100 recently. Now it’s trading at $88.04. This is a 5% position in my portfolio.

I wanted to roll next week but was unsure of what rules to follow. How do you decide whether or not to roll out or roll out and down the strike?

Anon.

When should you roll a cash secured put option?

Pay Attention To Time Value

When a trade is in the money on you (the stock trades below your put strike price), you should wait until most if not all of the remaining time value has gone before making your move.

Generally, the less time value you have to buy back when rolling a position, the wider the spread will be. You want that spread to be as wide as possible which ensures you can roll for a credit and still get paid again.

The Role Of Spread Width

You can think of a roll as a “spread” between what it costs you to buy back the expiring position and what you collect when setting up the new leg of the trade.

When should you roll your put option to a lower strike price?

Criteria for Successful Roll to Lower Strike

If a trade is ITM (In-The-Money) and time value is dwindling to nothing, then you should always try roll out and down to a lower strike price.

A good rule is to start looking to roll when there is just 10-20% of time value remaining.

But, only if you can still achieve the following two criteria:

  1. You want to be able to generate a net credit, (e.g. collecting more premium for setting up the new position than what it costs you to exit or close out the old position).
  2. You don’t want to kick the can down the road too far in advance. Usually 2-3 months should be maximum. If you roll out further in time, your tool kit becomes more ineffective when trying to make further repairs to your positions.

What if you can’t achieve those two things?

If you can’t roll down and out for a net credit within three months or less then you should consider looking to roll to a same strike further out for a net credit.

This allows you to work your breakeven/ cost basis lower.

Campaign Structure: The Path to Informed Decisions

You should manage your cash secured put positions in a campaign structure. This will allow you to make more informed decisions and more profits.

What Is A Campaign? 

A campaign is a bunch of transactions we make one after the other involving a specific stock.

There’s a big advantage to grouping trades together like this.

It helps you easily see how much money you’ve earned from all the different trades you’ve done with a particular stock.

This information helps you choose the right price for selling covered call options if you are assigned the shares. This way, you can pick a price where, given enough time, it’s unlikely you’ll end up losing money overall if you have to close the campaign.

A campaign is like putting all your trading activities for one stock together in a single report. It helps you track your overall income and make smarter decisions about future option trades.

In simpler words, it’s a way of adding up the money we make from selling secured put options, covered call options, receiving dividends, and the profit or loss from the actual stock, all in one total for that campaign.

Principles For Success: Lowering Your Cost Basis

Every time you are trying to repair a put position that has acted out, you want your cost basis/breakeven price to be going down.

To achieve this you want to be collecting a net credit and lower the strike price each time you roll a position.

The strike price guides you to what share price level you will be able to exit the trade.

And within the life of the trades within the campaign structure, you can see all of the accumulated net premium you have collected to date.

Triumph Through Resilience: A Long-Term Winning Strategy

By repairing trades and sticking with them, even when they have gone against you, you’re able to still collect premium and come away from the campaign in profit and victorious!

This is the key to a long term winning option trading strategy.

I hope this article was helpful.

Happy investing!

Read Also: When To Roll Deep In The Money Puts

Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

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Kevin S

Kevin S

Greetings, I'm Kevin! I am now a full time options trader and investor. I am thrilled to have the opportunity to share my knowledge and expertise with you. My objective is to assist you in navigating the complexities of option trading, regardless of whether you're a beginner or an experienced trader looking to enhance your skills. I'm excited to accompany you on your journey to mastering the art of option trading. Let's make this year an extraordinary one for you!

About DividendOnFire.com

Welcome to Dividend On Fire, we are a site dedicated to options trading! We specialize in helping investors generate passive weekly or monthly income through selling cash secured puts and covered calls.

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