Q&A: The Share Price Is Falling, Why You Are Not Rolling Your Apple Put But Rather, Letting It Get Exercised?

I think this is a good question posted by one of my readers.

Firstly, rolling (close an existing contract and open a new contract subsequently) the AAPL PUT means I will lose the entire premium that I have collected last month. Not only that, I have to cough out extra money to buy the contract back.

Explanation:

My AAPL PUT contract earned me $1215 when I first sold the contract.

However, I will have to pay a premium of $2,980 to buy back the contract now as the share price of Apple has dropped more than $20 since I last sold the PUT contract.

This extra money can be compensated by the premium that I will collect from the new PUT contract that I will be selling after I close the current PUT contract. However, it also means that I may have zero or even negative returns for 2 months (the duration of 2 PUT contracts), with a capital of USD19k invested.

I think that in a free-falling market, selling OTM Covered CALL contracts is going to help me make more money than rolling PUTS. If the share price keeps falling, then the PUT contract will have to keep rolling and options sellers may face a long period with zero or negative returns.

However, if he turns from selling cash-secured PUT to covered CALL, he can keep earning more premium when the share price keeps falling. In a CALL contract, the seller will need to sell away his shares if the share price rises above the strike price, so if the share price keeps falling, then it drifts further from the strike price and the premium drops proportionally. The CALL option seller can then close the contract earlier when the premium has dropped significantly.

In terms of rolling options contracts, my strategy is to roll PUTS contracts only when the market is bullish and to roll CALL contracts when the market is bearish, and I have explained the rationale in these 2 linked articles:
Why I Choose To Roll My PUT Option Contract When Share Price Rises
How I Do Earn Even When The Stock Market Is Bearish?

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2 thoughts on “Q&A: The Share Price Is Falling, Why You Are Not Rolling Your Apple Put But Rather, Letting It Get Exercised?

  1. Both are actually right answers. There are many options when position get tested. Yours is to use short call to chase down the stock. And when call gets challenged, to roll up so as to avoid selling below costs. Both reduces delta which is the objective when price tank. However long stock is more capital inefficient but since yours is cash secured, there is no difference. Only for Margin account, will rolling be preferred.

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