Hi Freeus and David Colby:
One of the main risk of selling naked puts is that one can go overboard because it seems like an easy money. My online screen is not consistent with what is the buying power etc. If I call my broker, I have to wait for 20 minutes before getting a real life person, and then wait another 10 minutes to get the margin department (no direct line, just one ohone number). The tendency is to immediately use ALL the proceeds of the sale to buy stock. Considering that money is an easy money, one tends to buy speculative stock or momentum stock at the peak. Then a few days later, when the market goes south, the margin call comes knocking.
On 1/29/99 I sold 10 Mar100 Dell puts at 9 5/8 (pre-split). Would not you buy Dell at 90 when Dell was at 100+ and earnings coming out? Hindsight, it was a wrong move. But at that tie, when I made the decision, based on all available information (Dan Niles was not even in the picture), it would be a correct decision. Actually I was going to sell Feb put instead of March, but the premium for Feb was much lower.
You know the rest of the story. Now I am short 20Mar50. Dell closed at 42+. So I am behind. My post split cost is 4 13/16 while the option is selling at 8. Good thing that I have not spent all that money from the proceeds.
What would I do?
1. As long as there is time premium is not negligible, the option is less likely exercised. So I have until Friday to ponder the next step.
2. Roll the option with the same or less strike price. I am more for time premium.
3. Which month and strike price? Probably May with the same strike price.
4. Cover and take the loss which frees up the margin, and sell put on a different stock like CMGI which has premium as big as Dom DeLouise.
5. Don't do it all at once. I have until Friday. So I will probably cover half.
6. Just check Dell's stock. Hey it is possible that I might not have to do anything afterall.
Good Luck to both of you.
Paul |
