What Can You Do With Stocks That Are Put (Sold) to You After Your Puts Options Expire?

Selling cash secured puts is a moderately risky way options traders can generate options premium and dividend income. The risk is that the stocks will drop in price and be assigned with a loss.

By Donald E. L. Johnson

Cautious Speculator

• Even though the DJIA 30 stocks are up an average 3.3% in the last month, some stocks have declined so much that they were assigned and sold to puts options traders.

• Investors who sold CSP options for options premiums income but don’t want to keep the stocks can sell them at small losses or at profits on bounces They can sell covered calls and/or average their stock purchase prices down by selling more puts on the stocks.

• 16.5% of my expired puts were assigned this month. That more than 83% of my puts expired worthless and at a profit shows the benefit of diversifying by doing a lot of small trades. Some options trades work as planned. Some don’t.

• Check below to see my trades to turn losses on puts trades into breakeven and profitable stock market and options trades.

This month’s volatile markets probably caused a lot of sellers of cash secured puts (CSPs) to have some of their puts options assigned (sold) to them at their strike prices Friday as I did. With the small losses that we got with the stocks, we bought the stocks at discounts from where they were when we sold the puts. See below.

There are several ways to make options premiums income by selling covered calls on the stocks that were assigned. Of course, a lot of traders took their profits or losses on their expiring CSPs by buying back the puts before they expired and were assigned. I did that, too. See my trades below.

This five-year chart for DIA, the ETF that tracks the DJIA 30, shows that we’re still in a long-term bull market but that we’ve been in a bear market for going on 13 months.

The latest bear market rally may be over. On Friday, DIA was up an average of 1.2% but down 2.5 for the last five days. The 30 blue chips are up an average of 2.2% year to date, 3.3% in the last month and 13% in the last three months. Over the last year, the stocks are down 3.1%.

At the top of the DIA chart, the Relative Strength Index (RSI) has weakened to 47.45 and the Stock Charts Technical Rating (SCTR), is down to 46.3. These are momentum ratings, not trading signals. A SCTR under 40 on a stock or ETF suggests that before the rating sank it technically was a sell on its charts. Over 60 is a buy rating. DIA’s MACD, PMO, Slow STO and Parabolic SAR flashed sell signals Thursday and Friday.

Click on images and zoom in for more details and better views.

Average returns on DJIA 30 stocks over the last year were 4.1% and over the last five years were 7.7%. Total returns include dividend payments as if they were immediately re-invested, according to StockRover.com. Most DJIA 30 stocks have active and liquid options for options traders who sell covered calls and CSPs for options premium income and buy the stocks for their dividends and relative dividend safety.

Having been assigned CSPs, options traders can:

1. Sell the stock now or hope for a price bounce that in a few days or weeks or months will let them sell at a small profit. Some may figure that they got the stocks at a nice discount and hold on for the long term.

2. Sell out of the money (OTM) covered calls until the net debit (purchase price minus cumulative collected dividends and options premiums) allows them to take profits on the net debit by selling the stock or having the calls assigned. See my QCOM trades below.

3. Sell OTM covered calls that, if called, will give a smaller loss than selling now will. This assumes that the investor thinks that the stock will bounce and that Friday’s market bounce will continue next week in the face of the Federal Reserve Board’s rate hikes in a couple of weeks and uncertainty about new earnings reports.

4. Sell more cash secured puts on the assigned stocks or other stocks and ETFs in the hope of averaging down on the purchase price while collecting dividends and covered calls options premiums.

My Trades

On Friday two of my puts trades (RSG, SO) were assigned and two calls trades (QCOM and AFL) were assigned. CPB and LMT puts were assigned on Thursday. Expired puts puts included DGX, VRTX and QCOm. Thus, of the 24 puts trades on 22 stocks and ETFs that I made since Dec. 27 and have expired in January, four (16.7%) closed below their strike prices and were assigned or would have been if I had not bought them back before expiration in this bear market.

Six more puts trades will expire in the next three weeks, not including the new trades I’ll do. In 2021’s bull market, about 10% of my CSP trades were assigned. If you don’t want to have puts assigned, trading CSPs is safer in bull markets than in bear markets.

In the Money Calls

Two of my ITM covered calls trades closed at profitable prices.

A 10-day ITM covered calls trade on Aflac (AFL) involved buying the stock on 12.30.22 for $71.94 and selling AFL 1.20.23 $69 strike calls for $3.08 per share. AFL closed Friday at $71.95 and was called. I made $0.25 per share on the trade for an annualized return on risk of about 12.7%. To get the ARoR, I would have to do the same kind of trade every 10 days for 12 months.

The Qualcomm ITM trade is more interesting and complex and my big win of the week. I’m out of the stock with a profit after collecting options premiums and dividends.

On 8.24.22, I bought QCOM for $139.13 a share, or $13,913 per 100-share options contract. I sold QCOM 9.9.22 $133 strike covered calls for $7.95. On 9.9.22, QCOM closed at a price above the $133 strike price but below my purchase price. It wasn’t called.

Instead of selling QCOM at a loss, I sold QCOM 9.23.22 $137 covered calls with my net debit at $131.18.

The 1.20.23 QCOM trade was the eighth covered calls trade on the stock since August and the one that got called. I’m out of the stock with a profit on the final net debit of $121.46.

As a result, I’ve worked myself out of a hole. I’ve collected dividends and options premiums income, and I have a tax loss on the stock that will offset most of the dividend and premiums income.

This is how investors can work their ways out of losses on stocks by selling covered calls on them until the stocks are called at a profit on the net debit, if they ever are. What I did was sell covered calls at low deltas and out of the money probabilities that the would not be called until the net debit on the final trade was less than the last covered calls strike price of $122. I also sold some puts to reduce the net debit a bit.

At times, QCOM was way below my net debit. On 11.11.22 QCOM hit a low of $101.93. Things didn’t look so good. Fortunately, I could sell calls at OTM strikes and low deltas that were unlikely to have the stock called at a net debit loss. It takes patience and some work to get this wheel trade done. Last year I had stocks that fell so far that I wound up taking tax losses on them rather than spend years working myself out of the losses they represented.

My Vertex Pharmaceuticals (VRTX) 1.20.23 expiration $310 and $330 strike covered calls expired worthless. I’ll roll them forward after the company reports earnings and provides new guidance on Jan. 25.

I bought back my Kinder Morgan (KMI) 1.20.22 covered calls for the price I sold them at and will sell covered calls again after the company goes ex-dividend on Jan. 30. I don’t want to give up the dividends. KMI was stronger than I thought it was. It ended up closing below the calls strike, but I bought back the calls early to avoid assignment. I chickened out and gave up my options profit.

DOW 1.20.23 $55 calls also were called. DOW 1.20.23 $47 puts were bought back at a profit Thursday before expiration so that I wouldn’t wind up with a wash sale in the eyes of the IRS. I’m considering replacing DOW with another dividend stock, Lyondell Basell Industries (LYB), AT&T (T) or Verizon (VZ) depending on market conditions. If I do that I’ll sell puts on the stock to get a discount and some premiums income.

My Puts Trades

These CSP trades closed below their puts strikes Campbell Soup (CPB) (-7%), Lockheed Martin (LMT) (-3.6%), Merck (MRK (-0.1%), Republic Services (RSG) (-1.5%) and Southern Co. (SO) (-2.7%). I was able to buy back my Johnson & Johnson (JNJ) 1.20.23 $70 strike puts at a profit before they could be assigned. I’m done with JNJ for awhile after profitably selling covered calls and puts on it for several months.

On Thursday when I was sure that RSG would be put to me, I sold RSG 2.17.23 $125 strike covered calls for $2 a share (20% ARoR). If the stock rallies enough, I will get out of the stock at breakeven plus $2. If it declines, I’ll keep the $2 and sell another round of RSG covered calls and collect its 1.58% annual dividend. The next ex-dividend will be about 1.30.23. Remember, these are income trades.

Also on Thursday when it was clear that with LMT’s price at about $440 and my strike at $460 its puts would be assigned Friday. I sold LMT 1.27.23 (6 days) $4 covered calls for $2.65 (26.3% ARoR). I’ve been through this routine with LMT before. It took about a year to dig out of that hole at a profit.

These puts trades let me buy the stocks at discounts from the prices they were at when I sold the puts: CPB (2.6% discount where I risked assignment to get an 18% ARoR), LMT (6%), MRK (3.5%), RSG (4.6%) and SO (4%). I could have averted these assignments by taking lower yields and selling puts with lower strikes and deltas.

Questions: How did your puts and calls trades do last week? What are your takeaways from this way too long blog? It took me too long to write this blog, but writing it helps me think about my trades. I’ll try to keep things shorter for awhile.

LINKs:

Home Page. See previous dozens of articles on other trades, stocks and watch lists. If you read several of these articles, you’ll learn how my strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.

Follow @realDonJohnson on twitter.com.

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Beware. Like all investing, trading stocks and options is risky. I’m an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. It is not advice. The data presented looked accurate at publication time except for intra-day fluctuations, but I can’t guarantee the accuracy. Traders should do their due diligence. I reserve the right to trade any of the listed stocks and options at any time. I receive no compensation for producing this content nor for any links.