The Pros and Cons of
Short Put Trade Repair

I rarely, if ever, book a loss at the end of the day selling puts.

No joke.

I can't say that I never book a loss or never will, of course, but it's pretty close.

And those rare losses that I do book - or conceivably will book in the future - are most often small, incidental, or strategic in a way that somehow benefits my portfolio.

But even in the event that I do end up booking a real, unequivocal loss on a cash-secured put trade, because I've been generating more and more net option premium income and perpetually lowering both my strike price and breakeven point on the trade the entire time it's been open, my losses will pale in comparison to the stock-only investors who entered their holdings at the same time that I entered mine.

Consistent Short Put Trade Repairs

So how can I be so confident and achieve such a high degree of success and consistency?

The answer is two-fold:

First, selling or writing cash-secured puts is a strategy that lends itself to repairs and adjustments. Because you can continue adding time to the trade, and because you're the one selling that time, it can be a very forgiving trade.

Of course, at the same time, an in the money or underwater short put position isn't going to repair itself.

And therein lies the second reason for my confidence and track record - I literally spent years perfecting the short put trade repair process (unfortunately, I've had my share of practice over the years).

I developed and implemented and fine-tuned a number of tactics and techniques over the years and eventually tied them together into a cohesive and systematic 4 Stage Short Put Trade Repair Formula (spelled out and demonstrated clearly in a 28 page PDF included in the Sleep at Night High Yield Option Income Course).

It really was years in the making (not to mention a vindication of the idea that we should actively study and learn from our mistakes instead of running from them or pretending they never happened).

The 4 Stage Repair Formula is comprehensive while at the same time elegant and straightforward - it takes the guesswork out of the trade repair process, eliminates anxiety, and all but guarantees you'll get the most efficient use out of your capital during the repair process.

Option Trade Repair - Too Good To Be True?

So what's the catch here?

Never losing money on a trade sounds way too good to be true.

Options are always about trade offs, I'm fond of pointing out, and repairing an in the money short put position is no different.

And as someone who has always been too stubborn to willingly accept losses on my short puts and has never gone down without a major fight, I feel uniquely qualified to comment on both the pros and cons of repairing troubled short put trades.

Drawback #1 - Patience and Uncertainty

Repairing naked puts can require patience and the willingness to accept a certain level of near to intermediate term uncertainty.

The trade will most definitely need to be extended in order to successfully repair it, and at the outset you can never be sure how long it's going to take.

I've had trades that I repaired with only one roll or adjustment. But I've also had other that took close to a year to successfully exit.

The thing to keep in mind, however, is that with the customized trade repair process I use, the goal isn't simply to avoid a loss - it's to also still be profitable when the dust finally settles.

And that naturally leads to the next drawback . . .

Drawback #2 - Smaller Returns

It shouldn't come as a surprise - fixing a troubled short put position isn't going to result in returns that are as good as the trades that work out as originally planned.

These are general guidelines, of course, and every trade has to be taken on a case by case basis, but when selling cash-secured puts, I personally target 15-25% annualized returns on my trades assuming everything goes according to plan.

If it does, great - I get my 15-25% annualized return.

If things go particularly well with the trade, the underlying stock spikes higher at some point early on so that I'm able to lock in a majority of the trade's potential gains in a fraction of the time. That often results in much higher annualized ROIs and it frees up my capital for the next opportunity ahead of schedule.

But what about when things don't go my way and I need to repair the trade?

Again, there's not a one size fits all answer, but in general, I find that I can still often walk away at the end of the day with at least a mid to high single digit annualized return on my cash-secured capital (that's real capital, not a math trick involving a calculation based on margin).

For example, in 2014, I had a short put trade on EBAY that totally went against me. It took 163 days to repair and exit it and the returns were lackluster to say the least: 6.17% annualized over those 5+ months.

Other documented repairs from the same year were less involved and produced better results:

  • A 63 day "bad" KO trade that still saw me book am 11.79% annualized gain
  • A 74 day trade on a falling CVX stock that still resulted in 12.96% annualized returns
  • A 13.42% annualized return on a 50 day MCD trade where the stock dropped 5% shortly after I entered the trade

Drawback #3 - Increased Use of Capital

One of the most effective techniques I've found to help repair an in the money or undetwater short put trades involves expanding the number of contracts in conjunction with a roll to a lower strike price.

Please note - I am not advocating the indiscriminate doubling down on a risky trade. Do this on an Enron or WorldCom type stock and you're only going to magnify your losses.

(You also don't want to do this too early in the process - for reasons detailed in the 4 Stage Short Put Trade Repair Formula, you'll get much better and more efficient use of your capital by employing this tactic - and in the specific way I advocate it - only later in the process.)

Still, for some new to the process, it can feel like they're adding to their risk when they expand the size of an underwater trade.

But if you're also significantly lowering the strike price in the process - which in turn lowers both your breakeven as well as the point at which you're successfully and profitably out of the trade - are you really increasing your risk?

Drawback #4 - You Run the Risk of Looking Like an Idiot . . . Until the Very End

There are many option trading strategies where the adage "Let your winners run and cut your losers short" makes sense.

I would argue that selling cash-secured puts on high quality companies when they're trading at technically and fundamentally attractive prices isn't one of them.

Until you've been down that trade repair road yourself a few times, the experience of sticking with a losing trade where the underlying stock continues trading lower and lower can make you look and feel foolish.

Of course all that changes if and when you make it to the other side, the trade sucessfully exited, and more money in your brokerage account than you had before you initiated the trade.

If we're disciplined with the selection and set up process (also covered clearly in The Sleep at Night High Yield Option Income Course), then we're going to eliminate a lot of the need for future trade repairs right there.

And at some point, it simply comes down to math. Unless the underlying company is in the process of going out of business, Mr. Market can drive the price of a stock only so low.

And I have found that as long as I follow my 4 Stage Short Put Trade Repair Formula, he runs out of gas long before I do.

The Pros of Repairing Your Short Puts

The advantages of taking losing trades and turning them back into winning trades may seem self evident.

But let's really consider what that means.

It means I don't have to worry or stress or get that sick feeling in my stomach when a trade goes south on me.

It means that no matter what happens to me in the short term, I know that when the dust settles on a trade and all is said and done, I'm going to be wealthier and closer to my financial goals, not farther away.

It means that when I go to sleep each night, I do so knowing that the financial deck is always stacked in my favor.

It means that I don't have to play the same crazy, crapshoot games that 95% of other market participants are subjected to.

It means I win in another way - in the really smug feeling I get knowing that the standard rules of trading and investing don't apply to me.

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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%