Put-Writing or Selling Naked Puts

The retail sector (XRT) has been a big underperformer in 2017, losing 7% year-to-date. And many retail stocks including Target (down 26%), Urban Outfitters (down 21%) and Kohls (down 24%) have performed much worse than the index. However, yesterday, as the S&P 500 was heading to a 1.2% loss, a trader was aggressively selling April puts in many retailers. Here were those trades:

Seller of 3,500 Dicks Sporting Goods (DKS) April 44 Puts for $0.40 – Stock at 47.25 (willing to buy 350,000 shares at 44)
Seller of 3,500 Ralph Lauren (RL) April 75 Puts for $0.85 – Stock at 78.15 (willing to buy 350,000 shares at 75)
Seller of 7,000 Gap Stores (GPS) April 21 Puts for $0.31 – Stock at 22.70 (willing to buy 700,000 shares at 21)
Seller of 18,000 Kohl’s (KSS) April 35 Puts for $0.55 – Stock at 37.35 (willing to buy 1.8 million shares at 35)

This trader is putting on positions looking for a bounce or for the stocks to not fall much further. And if the stocks continue to fall, he’s willing to buy the stocks at a lower price than they are trading at today.

I’m not yet interested in stepping in front of the selling in this sector (especially after Sears Holding (SHLD) released bad news this morning) However, I thought I would bring these trades to your attention if you are looking for trade ideas.

If you are unfamiliar with put selling, here is my options education article on the subject.

Put-Writing or Selling Naked Puts

A Put-Write strategy, also called “naked puts,” is used when a rise in the price of the underlying asset is expected or a significant decline is not expected.

This strategy is often used by traders who are willing to enter a long stock position in a stock at a lower price than the stock is currently trading at.

This strategy is the sale of a put at a specific strike price with the potential for loss until the stock hits zero. The maximum profit on the trade is the amount of premium received. Think of it as writing insurance against a big fall in the stock or index. Every month you collect a small premium.

If I were to sell a put, and the stock went below my put’s strike price, I would be assigned 100 shares per put I’ve sold, thus making me long 100 shares per put sold.

For example, if stock XYZ is trading at 110 and I’m willing to buy the stock at 100, I could sell the XYZ 100 strike put for $1.

cot-put-sale-3-22-17

If the stock were to close above 100 at expiration, I would collect a maximum profit of $1 per contract sold, or $100 per 1 contract.

If the stock were to close at 99 at expiration, I would break even and be long the stock.

If the stock were to go below 99, I would lose $100 per contract sold per point below 99.

As I said, this is a great strategy to collect yield in a stock that you would be willing to buy.

Take for instance Facebook (FB). With the stock trading at 70 today I might say to myself “I’m willing to buy FB for 65 a share.” Because of this, I could potentially sell the April 65 Puts for $1.75. If FB closed above 65 on the April expiration, I will simply collect my $175 per put sold.

However, if FB were to close at 64 on the April expiration, I would be assigned on my put, making me long 100 shares at 65 for every put sold.

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