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“How to Manage Put Sales After a Gap-Up in Price” – Ask Alan 139

Alan answers a question posed by David, who asks:

Alan, When AVCO was trading at $238, I mistakenly sold the out-of-the-money $235 put for $6. I didn’t realize that there was a June 1st earnings report which caused the stock price to move up to $254. I’m not sure how to manage this position at this point in time.
Thanks for any help.
David

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#139, “How to Manage Put Sales After a Gap-Up in Price”

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

11 Responses to ““How to Manage Put Sales After a Gap-Up in Price” – Ask Alan 139”

  1. Blair October 11, 2017 4:34 pm #

    My first ever book on investing was a book entitled “It’s that Easy”. It was a paperback about a guy who earned a small salary, saved his money each month, and did something called covered call writing. I knew next to nothing about investing, so I gave it a read. He talked about picking stocks from Value Line and subscribing to an options service that mailed him a letter each week with all the available options, and brokerage fees of $400 per trade (the book predated the Internet). By writing covered calls he was able to retire early and live off the income. Of course this was not for me, I wanted to invest in the hot stocks; so over the next couple of decades I bought high and sold low. I did have a couple of winners, but more losers than winners. Last December just after Christmas, I was laid off from my job. Shortly thereafter, and being very depressed, I began to search for a job and somehow during one of my searches I stumbled upon the Blue Collar Investor. I took a quick look and assumed it was just another Internet guy trying to hawk his system. I recalled the book I had read years ago and decided I would reread it and check out BCI. After watching all the Youtube videos, I signed up for the trial and read several of the books. The more I learned, the more it made sense. I have since gotten another job, but to be honest I am now making more money selling CC than I am at my job. I am much happier too! The reason I am posting this is because in Canada we just had Canadian Thanksgiving. If I hadn’t lost my job, I never would be found the BCI. Strange how life works.

    • Alan Ellman October 11, 2017 7:42 pm #

      Blair,

      Thanks so much for this generous post. You made my day and that of the entire BCI team. Having both an active and passive income source definitely enhances the quality of our lives. It means a lot to us to know we played a small role in this outcome.

      Happy Thanksgiving!

      Alan

    • Roni October 13, 2017 11:48 am #

      Blair,

      The same happened to me before I found and adopted Alan’s Covered Calls methodology.

      Cheers – Roni

  2. Alan Ellman October 11, 2017 7:04 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:

    http://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  3. Andrew October 13, 2017 1:05 pm #

    I am watching one of my stocks (KEM) skyrocket to the moon – up over 20% in this contract cycle. I noted today however, that the time premium went up. Does time premium (theta?) include both time left on the contract and volatility?

    • spindr0 October 13, 2017 4:42 pm #

      Andrew,

      An option’s time premium is based on six variables: volatility, stock price, share price, time remaining, dividend (if any) and the risk free rate.

      Theta is the rate at which an option loses its value as time passes. It’s a measure of time decay and it speeds up as expiration gets nearer.

      As for KEM’s time premium going up, you have to differentiate between:

      1) An increase in implied volatility increases the amount of time premium in all options

      2) Proximity of share price to strike price: The amount of time premium is greatest at the strike price. The more OTM the option is, the lower the time premium. The more ITM it is, the higher the total premium but the lower the time premium component (the larger part of the premium increase is due to the increase in intrinsic value).

      The numbers from option pricing model would demonstrate these relationships more clearly than words which are often imprecise. :->)

      • Jay October 13, 2017 8:35 pm #

        Spin,

        We prefer to hear from knowledgeable people but absent that your posts will do :). Thanks for being here. – Jay

        • spindr0 October 14, 2017 8:03 am #

          Jay, I know that I set a low bar but with evolution and movement up the food chain, there may yet still be hope for me. ;->0

          • Jay October 14, 2017 11:23 am
            #

            Spin,

            Speaking only for myself with a strong hunch I may also be speaking for others your decades of options trading experience is of immense value here and I am glad you found our comment community. Jay

      • Andrew October 14, 2017 9:51 am #

        Thank you Spin. I appreciate your response as I am always eager to learn more.

        • spindr0 October 14, 2017 11:58 am #

          Andrew, You’re welcome. I’d add a few other scenarios.

          The most common reason for an increase in time premium of all options is higher implied volatility.

          From put/call parity:

          If there’s a pending dividend, it increases the value of the put and decreases the value of the call because they’re pricing the pending reduction of share price into the options by the amount of the dividend on the ex-dividend date. This share price reduction is done by the stock exchanges.

          For ATM options, a call will have a higher theoretical value than the equivalent put by the amount of the risk free rate (assuming no dividend). An increase in the risk free carry rate increases the value of the call compared to the put. Interest rates are low and pretty much going nowhere so most would dismiss this situation as a non event. However, sometimes stocks become hard to borrow for shorting and the borrow rate is dramatically increased. This in turn raises the value of the calls, relative to the puts.

          The point of all of this is that any time you see puts offering a much higher yield than the respective covered call of the same strike and expiry, or vice versa, look a little deeper to make sure that you’re executing your option strategy with a full understanding of what’s happening… or may happen.

          Spin

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