Hey traders,
Whenever I talk about naked puts… people love the idea of “selling a promise” as I like to call it…
But the conversation inevitably turns to, “Yeah, but what if I get assigned the stock?”
I’ve often talked about how hard it is to get assigned a stock, even when you want to get it assigned to you.
I’ve sometimes gone months selling put after put without being assigned.
But to give you an up-close look at how hard it is to get assigned, there’s a live example going on right now that I think you’ll find interesting.
Last week, one of my behind-the-scenes crew took over for a day to talk about his experience selling naked puts on CDLX.
A few days after he sold the put, the stock plunged 40%…
Read below to see how it’s going for him.
— Jack
Hi everyone,
D.A. here again.
If you haven’t read part 1 of my naked puts example using CDLX, I suggest you click here to read it first before continuing.
This is a trade that I’m actively in right now with 3 different accounts.
My goal in telling updating you about this trade as it’s unfolding is to show you that naked puts offer a huge opportunity for creating an income stream.
And even when something unexpected happens, as happened with CDLX last week, there’s no reason to panic or close the trade.
If you read my first article on this trade, you’ll see that if I had panicked as CDLX was dropping 43% in a single day, I would have been my own worst enemy.
Because while CDLX did drop as low as $12, it was only there for a short time — I’m talking less than 90 minutes.
Imagine locking in a several thousand dollar loss simply because I couldn’t check my emotions at the door!
Where We’re At Now
Ok so let’s talk about where this trade is right now.
Since it plunged down 1 week ago, CDLX has been below the $15 strike price put I sold for a total of 4 trading days.
For most people, this is the “nightmare scenario” that keeps them from ever trying to sell naked puts.
If you ask me, it’s more like a pleasant dream. And I’ll tell you why:
- First and foremost, I believe in CDLX. I believe it is going up in the long term and that is the very first step to selling a naked put: A complete lack of fear about being assigned the stock.
- Secondly, I still have not been assigned the stock. As I said in my other article, I can’t tell you exactly why that is. Maybe Jack can dive into that one day in a future article.
- Third, I’ve got $1100 in my account! Don’t forget I got into this trade by selling ten $15 Puts for $1.10.
Since each put controls 100 shares of stock, that’s 100 x $1.10 = $110 per contract x 10 contracts = A grand total of $1100 cash in my account immediately upon selling the puts. - And lastly, I have a plan in case I get assigned the stock. If I were to be assigned this stock, I would immediately turn around and start selling covered calls.
This would further lower my cost basis which is already at $13.90/share because of the puts I sold. Jack wrote an article about how he does this.
What’s Next?
No one knows what the market has in store for us next.
And while some traders might be nervous about CDLX still being below the $15 puts I sold, you can see that keeping your head on your shoulders and having a plan goes a long way towards making smart decisions.
As long as CDLX doesn’t stay grounded forever or go belly up like Enron, I’m golden.
As Jack says, I’m using a stock to create a cash flow for myself:
- Selling naked puts, to bring in income.
- If I get assigned, turning around and selling covered calls.
- If and when I get called away, my cost basis will be dramatically reduced, which means an increased profit.
Stay tuned. I plan to keep you updated on how this trade is working out for me every so often.
Today I had 2 main goals:
First, to show you that a week after the stock dipped below $15, I still haven’t been assigned.
And second, showing you how having a plan can help me keep my emotions in check.
Remember, staying calm and collected is key to navigating the ups and downs of options trading.
I’ll be back soon with another update!
Ride the waves,
D.A. (Dave)
P.S. This article is Part 2 in a series. You can access Part 1 here and Part 3 here.