This week I got the dreaded 3am email from TD Ameritrade….
“Option Assignment Alert: Immediate Attention Required”
This is not the best way to start off the day, but as an options trader this is going to happen. The body of the email will explain you have been "assigned" the following position:
PEP Aug 25 2023 182.5 Put
SO Aug 25 2023 70.0 Put
I was put both of these stocks from some put sales that were deep in the money (ITM). BTW for all my Tasty Traders you get a very similar email, just slightly different words: the subject reads: “ Assignment/Exercise In Your Account” I know this well…
I want to keep things real because I can write about when things go right (most of the time they do). But I think the real value is talking about when things don't go as planned. Here a Good Kids Trading (GKT) we want you to be prepared to handle a trade when it doesn’t go exactly as you planned!
The aim of this post is to ease any fears you might have about getting assigned shares from the puts you sell. The key to being a good options trader is having a game plan!
This is my game plan: My Put selling Strategy
When I sell puts on companies, I generally have two strategies:
1. I sell puts on down days on companies I like and I don’t mind holding a while
2. I sell puts on companies with high IVR (which is a measure of volatility).
Therefore, I have two general management plans:
1. For companies I don’t mind owning I let the short put ride until they hit profit (50% of the credit I received) or I take the shares (this is over simplification for brevity).
2. For the companies I don’t really want to own, I will roll out the puts if they start getting tested. I roll them out in time and try to keep rolling them away from the money to avoid assignment. I always roll for a credit (so this means I’m getting paid more money to be right). I refer to this as rolling for hope. I’m hoping for a bounce so I can get out of the put. If I’m assigned shares at least I’ve reduced my cost basis some.
This is my plan, but you should make your own plan! You don’t have to copy me or anyone else, there's more than one path. You might even decide to close a short put if it's losing at 200%. If you get one of these emails (assigned shares) and you don't have the means to hold onto the stock, selling the shares right at the market's opening is an option. It might lead to max loss, but it's a solution.
But for the companies I like, I’m generally fine with getting shares. Why? Because put sales lets me buy low and ideally (hopefully) sell high. Even after trading for as long as I have buying low can still feel a little nerve-wracking. The world is panicking about how "XYZ stock is plunging" or that "the market's in crisis." Yet, with a strategy in place, selling puts means you're strategically buying low since you've agreed to take shares at the strike you set.
Trade Review
This week, I was assigned shares of both SO (Southern Company) and PEP (Pepsi) this week I tried to buy the dip, by selling some puts but sometimes the dip keeps dipping!
Let’s walk through not just the trade, but my mindset too. And, just so you know, I post every single one of my trades in GKT’s discord. To see it all unfold live, join us at: goodkidstrading.com/join.
PEP Aug 25 2023 182.5 Put
Back on Aug 14 I sold 182.50 puts and got a credit of .91. This trade was a loser from the start. Here's a chart with some notes:
PEP, has recently dropped almost 10% from it’s recent high! There were eight consecutive down days. So, when TD Ameritrade sent me an “Option Assignment Alert,” I wasn’t shocked. I’ve seen this song and dance for years. In bullish markets, these alerts might be rare. But in bearish times, they're more frequent unless you keep adjusting your positions. PEP is bullish on the weekly chart.
There is a dividend next week, so I have purposefully not rolled this position out in time so I can collect the dividend. Since the stock is so beat up I have avoided selling calls as soon as I was assigned, but this is definitely an option. It’s a personal choice you can make. If you sell a call and it gets in the money (ITM) you can get called away before the dividend, so just be aware of that. For now I’ll hold these shares and I will look to sell calls once we get closer to the ex-div date (which is about a week away).
I'll keep everyone updated in discord. You should join the community, it's free!
SO Aug 25 2023 70.0 Put
SO is a utility (they are actually the provider for my electricity) and since treasuries are paying such a high return right now utilities are beat up. People are choosing to investing their money in the US government instead of utilities.
This trade is a little more complicated, I sold puts to get in before the dividend, but I made a mistake and chose the wrong one...
So I realized this before the dividend, and I was able to close some of my puts for wins, then I bought some shares and sold calls and I collected the dividend. Have I mentioned like three times this is all posted in GKT's discord in real time? Ok good... So you have joined right?
I decided to keep the 70 puts open (they were losing obviously)...
But I look at it like this, I have almost 3.00 in premium collected. Eventually (hopefully) this stock which is making money will appreciate in value. So I will continue to collect the premium and hopefully some share appreciation as well until I'm called away.
As with any trades its important to not let a ‘loser’ get out of control so I have a line in the sand for both PEP and SO where I will buy puts to protect my position or I will just take a loss and sell the shares I was put.
Being assigned shares might feel scary if you are new to put selling, but for me it’s actually part of my plan. It’s not my first option, but I’m ok with taking the shares and selling premium until my shares are called away, or I have to cut the loser and move on. I hope today’s blog helps you understand the process a little bit more and maybe you aren’t as apprehensive if maybe you were worried about assignment. Happy Trading good Kids
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