Selling cash secured puts is a great strategy. It’s also one of the most forgiving strategies around. You do not have to accept a loss. It’s very easy to adjust a losing cash secured put. You can use several strategies to turn it into a winner.
Losing cash secured puts can be manipulated in many ways to turn it into a winner. The most common way to do that is to use the wheel strategy. The wheel strategy involves accepting assignment and then selling covered calls.
Not everyone wants to accept assignment and sell covered calls against their shares. A lot of people sell options because they do not want to own shares at all. If you are one of those people who want to avoid assignment on cash secured puts, I will teach you how to do so. You will learn how to adjust a cash secured to avoid assignment.
How To Avoid Assignment On Cash Secured Puts
Avoiding assignment is the name of the game with cash secured puts. You want your position to expire out-of-the-money. If your cash secured put is in-the-money at expiration, you will be assigned shares.
So how do you avoid getting assigned on your cash secured put?
Well, if your cash secured put is in-the-money at expiration, you need to find a way to get it out-of-the-money. In fact, you want to get your position out-of-the-money as soon as it goes in-the-money.
No, I’m not crazy! It’s possible to get your position out-of-the-money with a few simple steps. All you have to do is adjust your cash secured put. You need to roll your cash secured put to later expiration and lower your strike.
It’s very easy to do! Let’s look at how you can roll your cash secured put:
How To Roll A Cash Secured Put
To roll your cash secured put, you have to close your current position and open a new one with a later expiration. You need to pay attention to the price and strike of the position you are closing. Your new position is going to depend on these two things.
Your Rolling Order Should Cost You Nothing
When you create a rolling order for a losing cash secured put, the leg that you are opening should be equal to or greater than the current price of the leg you are closing. So if your cash secured put is trading at 5.00, the new leg you open will need to be trading at 5.00 or higher.
For example:
You currently have a cash secured put on XYZ with a strike of 25. XYZ is currently trading at 23. Since XYZ is trading at 23, your cash secured put is in-the-money. Let’s say that your cash secured put is trading at 3.00. That means the new position you open should not be worth less than 3.00.
You don’t just pick any contract to open; that can get you into serious trouble. Picking the strike of your new cash secured put is also very important.
Picking The Right Strike
When you are creating your rolling order, you need to make sure the strike of your new cash secured put is equal to or lower than the strike of the position you are closing. So if your cash secured put has a strike of 50, you need to open a new cash secured put that has a strike of 50 or less.
Let’s see what this looks like by building upon the previous example:
You currently have a cash secured put on XYZ with a strike of 25. XYZ is currently trading at 23. Since XYZ is trading at 23, your cash secured put is in-the-money. Let’s say that your cash secured put is trading at 3.00. That means the new position you open should not be worth less than 3.00 and should have a strike no higher than 25.
What Does Rolling A Cash Secured Put Do?
Rolling a cash secured put lowers your capital at risk and it gives you more time to be right. If you roll your cash secured put properly, you should easily be able to take $200 in capital off of the table. Adjusting a losing cash secured put can clearly save you money.
Here is how it works:
Moving Into A Farther Out Expiration Gives You More Time
It could be that your analysis is spot on and you just need a little more time for it to play out, or it could be that the overall market sentiment is poor right near your expiration. No matter what the reason is for you being in a losing cash secured put, the answer is to create a rolling order.
If you think you’re going to need 2 more months for your trade to recover, then you can roll your position two months out. Not only will you give yourself more time to be right, but since you are going so far out, you probably will receive a decent credit for doing so.
Rolling your cash secured put will let you avoid assignment and collect more money in premium.
Lowering Your Strike Takes Money Off Of The Table
Adjusting your cash secured put to lower your strike will let you reduce your risk on the trade. For every 1.00 you lower your strike, you reduce your risk by $100.
If your cash secured put is in-the-money, you need to get it out-of-the-money. The only way to do that is by rolling it down and out. Rolling your position down and out will put you in a better position.
Let me illustrate this with an example:
You opened a cash secured put with a strike of 30 and collected 2.50 in premium on stock XYZ. XYZ is trading at 27. The position is in-the-money and now trading at 3.50. You decide it’s time to adjust your cash secured put. So you create a rolling order.
You do the following:
- Close the original position for a 3.50 debit.
- Open a cash secured put with a strike of 25 for a credit of 4.00.
Your original cash secured put had a risk of $2,700. After your adjustment, your risk is now only $2,250. By doing rolling down and out, you lowered your risk by a total of $250!
Wrapping It Up
Making adjustments to a cash secured put will help you hack away at a loss while avoiding assignment. All you have to do is keep rolling your cash secured put to avoid assignment.
Trading really can be that simple. Rolling cash secured puts can help you be right even when you’re wrong. Stop losing trades and start using cash secured puts. But don’t stop there! Here is a guide for other great theta strategies.
Did you like this post? How do you make adjustments to cash secured puts? What do you do to avoid assignment? Make sure to let me know!