Should you use margin when selling puts?
If you're new, or relatively, new to writing or selling puts, I would say no.
When it comes to leverage and short puts, I recommend you keep everything on a cash-secured basis when first starting out because that's the safest and most conservative route.
In a worst, worst case scenario, the most horrible thing that can happen is that you end up owning the underlying shares at a price that's above the current market price (but still at a far lower cost basis than your fellow stock only investors).
But if you incorporate margin and can't right the ship before you run out of margin, you're going to end up locking in your losses. Actually you're going to end up locking in extra losses.
There's a mathematical principle I like to point out that illustrates how flexible and forgiving writing puts can be.
Here it is: If you have unlimited capital, and the underlying stock doesn't trade down to zero, you should never lose money selling puts.
This is based on another put selling principle - something I call the Double-Half Principle:
In repair situations, by doubling the number of short put contracts you have in a position, you can effectively cut in half the distance between the current share price of the underlying and the strike price of your in the money short put(s).
Let's suppose you wrote a $30 put on a stock and then, before you know it, the stock has crashed and burned down to the $20 share price level.
Your $30 put is now $10/contract in the money. It contains $10/contract of intrinsic value (or $1000 since each contract represents 100 shares of the underlying stock).
And since you wrote the put - i.e. you're short the put - you're short the intrinsic value. You now have a $1000 liability on your trade (plus whatever time value remains on the position, which is not likely going to be very much when the short put is that deep in the money).
But here's the deal - two contracts that are $5/contract in the money have the same total intrinsic value ($10/contract or $1000) as your single $30 short put that's $10/contract in the money.
So you can roll or exchange your single $30 short put for 2 contracts at the $25 strike and maybe even get a small net credit if you go out far enough and recapture some time value.
But isn't that risky since you just doubled the size of the trade and it's still not repaired or out of the money?
As always, you want to take everything on a case by case basis. Do this on a stock like Enron that trades down to zero, or do it too soon, or do it when you have too little capital to commit, and you certainly can make matters worse.
But in general, what's riskier?
Being on the hook for 100 shares of a stock at $30/share, or being on the hook for 200 shares of the same stock @ $25/share?
What's more likely to happen - and guaranteed to occur first - the stock rebounding to $25 or the stock rebounding to $30?
Time and time and time again, I've worked my strike price lower - through very specific techniques conducted in a very specific order and with very specific timing - and successfully exited a short put trade with decent to good (and sometimes great) gains even though the stock is still trading materially lower than my original entry point (and definitely below my original strike price).
Eliminate trading and investing losses and see if your life doesn't get a whole lot better.
Trade management and trade repair is what separates the Sleep at Night High Yield Option Income Strategy from all the generic put selling approaches and hit-or-miss services that are out there.
Other services never seem to talk about their bad trades - but I won't shut up about mine because I know those are the key. How you deal with the difficult trades is what really determines your long term success.
It's that unlimited capital that's the key. But who has unlimited capital?
Margin gives you access to extra capital that you don't have, so that can definitely help, but you have to be careful because if you use all your margin and the trade still isn't repaired, then you've just made matters worse.
It's sort of like having a fire in your kitchen.
Margin can be like having a fire extinguisher. But if the fire extinguisher is too small - or the fire in the kitchen is too large - then maybe you're going to wish you would have focused on getting all the family members and pets out of the house instead of trying to put out the fire.
I'm probably making it sounds scarier that it is, but I do think it's important to gain some experience trading on a cash-secured basis before incorporating margin.
The worst use of margin, in my view, is to use it to aggressively boost your returns. That's like getting drunk with your friends and blasting each other with the fire extinguisher as part of the festivities.
If a real fire breaks out, and your extinguisher is empty, you're not going to have any good choices.
Of course, if your short put trades do get into trouble and it seems like your money is catching fire, the last thing you want is a small, single use fire extinguisher.
The Sleep at Night High Yield Option Income Course gives you complete training in advanced short put fire fighting methods.
And best of all - when you sign up for the Sleep at Night Course (when it periodically becomes available) - you get Lifetime Membership in the Leveraged Investing Club (and the insane amount of extra bonuses and ongoing services that entails) for free.
Lifetime Membership in the Leveraged Investing Club is like having your own personal fire department on call 24/7.
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%