Whenever I come across good examples of option adjustment strategies, I like to write a page about it. Theoretical examples are OK, but I find that real world examples of adjusting option trades make much better illustrations.
Admittedly, these examples are a bit of the cherry picked variety. When an option trade goes against you, you won't always have great choices at your disposal. But still, seeing a real world example, even if it is sort of a best-case scenario of adjusting an option trade is still a valuable exercise.
The list here is short now, but I will add to it when scenarios present themselves.
One thing you may notice with these examples is the small relative size of the positions. In these examples I'm only dealing with one option at a time, even though, for example, it would be more efficient from a commission standpoint to write multiple puts a time rather than just one.
There are a couple of reasons for that:
Even Warren Buffett has publicly acknowledged employing this strategy himself (involving shares of Coca-Cola as well as Burlington Northern prior to his acquisition of the entire company).
As you will recall, when you write a put you are, in effect, offering to purchase 100 shares of the underlying stock at a certain price (the strike price). In exchange for this offer, you receive a cash payment (called premium).
If the stock trades below the strike price at expiration, you are obligated to purchase the shares at the agreed upon price. Your cost basis on your 100 shares equals the strike price plus commissions less the premium received.
If the stock trades at or above the strike price at expiration, the put option expires worthless and the premium you received is yours to book as 100% profit and with no further obligation on your part.
Rolling Down - An example of adjusting a naked put position by rolling down.
Rolling Down and Out - An example of adjusting a naked put position by rolling down and out.
Naked Put Assignment (Part 1) - Overview of early put assignment and why it's not necessarily that big of a deal.
Avoiding Early Assignment on Naked Puts (Part 2) - Learn to recognize the scenarios that increase the chance of an early naked put assignment.
How to Repair an Early Naked Put Assignment (Part 3) - Don't let Mr. Market push you around. Learn an alternative technique to "Unassign" yourself.
KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares
Open Market Purchase Price: $20,071.83
Less Booked Option Income: $16,341.71
Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%