I was just assigned on some naked RCL call options resulting in a short stock position and I am concerned that the stock could rise quickly. Rather than lock in the losses, I was thinking of selling very deep in the money put options to protect myself against a quick upswing while enabling a small profit if the stock stays below the put strike.

Details include:

Stock assigned at $40.

Current stock price is $40.22, but could move higher when markets re-open.

Selling a $60 Put expiring in a week could generate a $21 premium depending what happens when markets re-open.

Does this strategy make sense? Should I choose an even higher strike tomoffer more upside protection?

I would be happy just making a few bucks or breaking even just to get out of this short position.

Any thoughts would be appreciated. Thanks


Cost basis of the short stock is $40.

Selling the $60 put for $21 obligates you to buy the stock at $60. It's a covered put but in term of risk, you're uncovered above $61.

The P&L is:

  • Maximum profit at expiration is $1 if RCL is under $60 at expiration unless you are assigned early, which is a good thing.
  • Break even is $61
  • Losses begin above $61 and you lose dollar for dollar per point of up move

On an expiration basis this doesn't seem like a bad position if you believe that RCL won't rise 20 points.

  • Potential problem before expiration?

If RCL rises sharply before expiration, the put's delta will decrease and your position will increasingly lose money. It's no big deal in the $40's but in the $50's, it starts to rack up.

You can do guesstimations based on current and future delta but because delta isn't linear, it's just a loose approximation. A good charting program would provide a clear analysis of the what ifs at different times and prices of RCL. An even better one would allow you to vary the IV. Since I can't graph this for you, here are some random guesstimates:

Let's assume that this is a two week put. The put's delta is about 80+ (position delta is -20). Assume that IV remains unchanged. A week from now at $53, you're down $200. A week from now at $60, you're down $500. Not looking pretty. How do you adjust the position at that time if that has occurred?

The short answer? You sold naked $40 calls, you were assigned and now you're short the stock at $40. The current price is $40.22 so you're down 22 cents. You did not mention the credit received for the short calls. If the credit received was greater than 22 cents then your net position is ahead at $40.22. Is it worth it to sink your teeth into this for another $1 of premium in this market? That's your call or in this case, your put :->)

PS My additional two cents is that in this volatile environment, I think that chasing premium is better done with spreads unless your intentional goal is to end up long or short the underlying.

  • Thank you so much for your response. The premium on my naked call was minimal as the stock price was well below my strike price at the time, so I am currently in a losing position on the trade.
    – Hank
    Apr 11 '20 at 17:56
  • The first trade didn't go well and walking away with a less than 22 cent loss isn't the end of the world. In general, I believe that it's not a good idea to contract Breakevenitis. Apr 11 '20 at 18:13
  • Yes, I would gladly walk away with only a $0.22 loss. I attempted to buy back the calls on Thursday, but the premiums were too high and I didn't get filled. Another responder indicated the CDC extended the no sail order, so maybe the stock retreats on Monday. After hours trading had the stock at $41.88, That is why I was considering other strategies in case the stock continued to move up.
    – Hank
    Apr 11 '20 at 18:23
  • Incidentally, I have a bunch of naked Puts at $12.50 expiring in a couple of months and that is why I entered into the naked calls which were way out of the money at the time. I was trying to reduce my cost base, but I see now that I made a dumb move and took on too much risk for too little gain. All part of the learning curve I guess.
    – Hank
    Apr 11 '20 at 18:28
  • Don't wait for options to open at 9:30 AM. Even 9:30 AM doesn't work because B/A spreads are much wider for much of the first 1/2 hour of trading. If you have approval for pre-market trading and your broker offers it, look to cover the stock early in the pre-market Monday morning if you want out. Place your BTC order even if price isn't there. You never know. Apr 11 '20 at 18:59

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