4 Stage Short Put Trade Repair Formula

Taking Losses Off the Table Selling Puts

The 4 Stage Short Put Trade Repair Formula is a 28 page special strategy guide included in the Sleep at Night High Yield Option Income Course inside The Leveraged Investing Club.

The 4 Stage Formula is designed to take the stress and guesswork out of the trade repair process while making sure that we get the most effective use of both our capital and time.

And it is effective.

And profound.

When I talk about trade repair here, I’m not talking about how long does it take to escape a trade at a breakeven basis?

Our goal is not to take a losing trade and fight and muscle our way back to some kind of draw with Mr. Market.

Our goal is take a “losing” or underwater trade and still walk away at the end of the day with more money than we started with.

Short Put Trade Repair Examples

The 4 Stage Short Put Trade Repair Formula has enabled me to repair rather simple positions that have gone moderately in the money on me as well as potentially catastrophic trades where the bottom fell out of a stock.

  • Like a 50 day short put trade on MCD where the stock fell 5% and yet I was able to walk away with a 13.42% positive annualized return.
  • It was also integral in repairing an ill-timed trade on DVN in 2014 just before the bottom fell out of the energy complex. The stock fell more than 22% on me in a very short time period.

    On paper, the final returns didn’t look that impressive – just 6.10% annualized over 233 days, but it sure beat the alternative, which was heavy losses. In this case, successfully repairing and then exiting the trade had another benefit – helping me avoid the next leg down in the stock (which was a LOT steeper than 22%).

  • Amazingly, the 4 Stage Short Put Trade Repair Formula also enabled me to repair a crazy trade on ANF that saw the stock fall 41.14% and yet at the point the position was repaired, my returns were an astonishing 17.59% annualized over 226 days.

    (I also chose to keep the position open after it was repaired to continue making even better returns on it.)

    I can’t take all the credit on that one – ANF options had a ton of implied volatility priced into them which definitely made the trade easier to manage.

    So the ANF trade results are not typical.

What do typical results look like then?

It’s obviously going to depend on the individual trade, how much and how long the stock falls before bottoming, and how much option premium is available, so take this as a good-faith estimate, but even in particularly challenging trades, I still find that I can usually walk away with at least mid-single digit annualized returns at the end of the day.

The Rationale Behind the 4 Stage Formula

When we find ourselves with an in the money short put position (meaning we’re theoretically on the hook to acquire shares at a strike price that is now higher than the current share price), we have two objectives on all subsequent rolls and adjustments.

  • We always want to roll and adjust for a net credit (meaning that we receive more for establishing our new leg or position than what it costs us to close out the old leg or position).
  • And, ideally, we also want to lower the strike price on our rolls and adjustments whenever possible.

The more we're able to lower the strike on our position over time, the less the stock has to "come back" in order for us to successfully exit the trade.

And the more net credits we record over the life of the trade, the more profitable our "losing" trade will be when we do finally exit the trade - even if the stock is trading materially lower at the end of the trade than it was when we first entered it.

The problem with traditional rolls down and out, of course, is that the more the underlying stock falls on us, the harder it is to achieve either of these objectives.

That’s where the 4 Stage Short Put Trade Formula comes in. Ironically, the harder the underlying stock falls, the more we’re able to adjust the strike price lower.

When Does the Trade Repair Formula Not Work?

The 4 Stage Formula assumes two things – that there’s an eventual floor on the stock (and it isn’t zero), and that you haven’t overleveraged the position to begin with.

If a stock trades down to zero, no amount of repair efforts will save you. That’s why – think of it as a pre-requisite – we place such an emphasis on working only with high quality stocks in the first place.

Realistically, though, selling short puts on quality companies, when you really understand the strategy and how to effectively manage it, is an extremely forgiving trade, and I’ve really only gotten myself in trouble when I overleveraged the position in some way.

Obviously I’m not guaranteeing that you and I will never book a loss selling puts, or that the 4 Stage Short Put Trade Repair Formula will make you bullet proof, but when you read the full strategy guide in The Sleep at Night High Yield Option Income Course, you will 100% understand the rationale and logic behind this approach and why it’s so effective.

But there can sometimes be an opportunity cost involved you need to be aware of.

If it takes 6 months to repair a trade and you "only" walk away with modest gains when the dust finally settles, your capital has been prevented from making better returns elsewhere.

Why Stick with Losing Trades?

So why stick with a losing trade in the first place?

Aren’t we supposed to "cut our losers short?"

There are two problems with that.

First, the philosophy doesn’t work particularly well with short put trades.

You're never going to make astronomical returns selling puts (or covered calls). So when you "cut your losers short" and exit an underwater in the money short put position, the losses you lock in are likely to be an amount several times over your original potential returns. That means you’re going to have to have a string of several successful, no-drama trades over the next several months (or longer) just to get back to even.

"Cutting your losers short" is, in my contrarian view, more suitable for lottery type trades where the potential payout is much higher (i.e. unrealistic on a consistency basis) and where you have one chance to be right or you’re going to lose a lot of money.

And second, when approached correctly, when you understand the dynamics of the trade and how to manipulate those dynamics to your benefit, repeatedly and as many times as you need to, you realize what an incredibly flexible and forgiving strategy writing puts can be.

It’s crazy, really.

If the starter in your car went out, or the battery, or if you got a flat tire, would you sell your vehicle for parts and go out and buy a new one?

It’s only when you can’t fix something that you should abandon it.

And in my experience, it takes a lot to total a short put trade.


Again, I’m not trying to overhype this or guarantee that you and I will never book a loss selling puts as long as we follow my formula to a T.

But it’s been a very effective resource for me and one with far reaching implications.

Because if you can – at some level – take losses off the table, you’re going to dramatically improve the long term material results of both your portfolio and your life.

When even worst case scenarios produce favorable outcomes, and when you can effectively protect yourself from the occasional catastrophic loss, you’re no longer playing by Mr. Market’s rules. You’re playing by your own.

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Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

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%