Hey traders, I’m currently in the middle of writing a naked puts tutorial for you…
But yesterday, one of my behind-the-scenes helpers came to me with such a great example of a naked put he just traded, I’m going to let him take over today.
Prepare to be amazed. I know I was.
— Jack
Hi everyone,
My name is D.A.. You can call me Dave.
I’m one of Jack’s behind-the-scenes folks who helps with the website and various other things.
I’ve been working with Jack for close to a year at this point and in that time I’ve learned a tremendous amount from him.
He’s actually the reason I’ve been using covered calls and naked puts in my trading.
When I heard Jack was going to be doing a tutorial on naked puts, I originally didn’t think I had much to add.
After all, Jack is a professional with nearly 40 years of experience and I’m just getting started in my trading journey.
But this past Thursday I sold 10 naked puts with a $15 strike price on stock ticker CDLX for $1.10.
Since each contract controls 100 shares, that means I collected $110 per contract.
And $110 x 10 contracts = $1,100.
That $1,100 hit my account instantly!
I’ve sold naked puts before, but this was the most I’ve collected in a single shot… What a feeling!
For the next couple of days, the stock was rising — away from the $15 puts I had sold, and towards the target I was expecting.
This Monday, it actually jumped 27% in a single day!
Things were looking great!
Uhoh!
And then something completely unexpected happened.
To make a long story short, before the market opened on Tuesday, CDLX announced that they were essentially selling more shares. (that’s not the technical term, but I’ll just leave it at that to keep it simple.)
This caused investors to start selling the stock like crazy.
What did that do to the stock price? Take a look for yourself:
Between the pre-market and the first hour of trading, the stock tanked 41%!
To say I was shocked is an understatement.
But that’s when Jack’s advice started ringing in my ears.
He always tells us to have an exit plan BEFORE we enter a trade.
And thankfully I followed that advice before I ever entered this trade.
I like CDLX. I believe in it for the long term. That’s the only reason I sold naked puts on it in the first place.
So even though it dumped off massively, I stood my ground.
It ultimately found support above $12 and climbed back throughout the day yesterday.
Today, I’m happy to report the stock is at $14.46 as I write this and looks like it’s continuing to rise.
And while no one knows what the future holds, I am completely confident because of the lessons I learned from Jack.
Lessons Learned
- Don’t Panic! – When I woke up Tuesday morning and saw CDLX dropping like a rock, I was shocked. But I did not panic! Imagine what situation I’d be in if I sold at the bottom.
I would have paid twice as much to close the trade as I originally collected to get into it and I’d be kicking myself right now!
Instead, I stayed calm and remembered that I only sold this put because I was comfortable owning the stock. - Own It – Jack always tells us we should NEVER sell a naked put on a stock that we’d be afraid to own. If you get assigned the stock, you should be happy. That means you picked up the stock at a discount.
In the case of CDLX, I received $1.10 per share to own CDLX at $15. If I subtract $15 – $1.10, that gives me a cost basis of $13.90 if I was to be assigned. (more on that below) - Still haven’t been assigned – To keep things simple, I didn’t mention this before, but I actually sold a total of 30 puts across 3 different accounts.
And despite the fact that we’ve dipped below the $15 strike price of the puts, and I have 30 in-the-money puts outstanding, I still haven’t been assigned the stock!
I’m still too much of a newbie to tell you why. Maybe Jack can weigh in on that in the future. But to my understanding, early assignment* is fairly rare, since most options are bought and sold rather than executed.
*Early assignment refers to the fact that you can be “put” a stock before the expiration date if the option buyer decides to exercise that option. - Sell covered calls – If I were to be assigned the stock, the very first thing I would do is sell calls against the stock. Jack wrote a couple of articles about this which you can find here.
It’s essentially the opposite of a naked put. When you own a stock, you can sell people the right to “call it away from you” at a certain strike price.
And when you sell that right, you collect instant cash, just like I did when I sold the naked puts.
This ends up reducing your cost basis even further!
Above, we talked about how my cost basis is currently $13.90.
If I were to be assigned the stock at the $15 strike price that I sold, I could sell a covered call for $1.00, and my cost basis would go down to $12.90.
By continuing to sell covered calls, I would keep lowering my cost basis.
Closing
Jack has told me that in all his years of trading, naked puts are one of the things that scare people the most.
So I hope I’ve managed to ease some of the fears you may have had about naked puts.
But it’s not just about blindly choosing to be brave. As you saw above, I was able to be brave because of the work I did ahead of time.
I didn’t simply sell a naked put on a stock that offered me a high premium.
I picked a stock that I fully believed in and would not mind owning if push came to shove.
Even more important, I think, is the idea that you need to pick your exit plan ahead of time.
Knowing that I had the cash on hand to cover being “put” the stock stock allowed me to execute my plan with extreme confidence.
Which leads me to my final lesson I’ve learned about trading: Don’t get in over your head.
If worse comes to worse, I don’t want to lose several thousand dollars. But I am not trading with tomorrow’s grocery money or next month’s mortgage payment.
I’m only trading with money that I’ve specifically set aside for learning and growing as a trader.
Remember, I’m still a student in this game.
But thanks to Jack’s guidance and this ride with CDLX, I feel a whole lot more confident about navigating the options market, even when things get bumpy.
This experience was a great reminder that knowledge is power, and a well-defined plan is your best defense against unexpected turbulence.
Ride the waves,
D.A. (Dave)
