Here's How to Handle Near-the-Money Puts Approaching Expiration Day

I get two options-related questions from multiple readers on a very regular basis. Here they are. Can they avoid being put if the underlying shares are in-the-money or near-the-money as an option approaches expiration day? Can they avoid dealing with a hard deadline while still maintaining their exposure to the stock? The answer to both queries is a resounding, Yes. I recently dealt with exactly that situation on Atmos Energy a very high-quality natural gas utility company, which I recommended here last January. At that time ATO looked great, at about $89 per share, down from a pre-COVID peak of $121.10 and a COVID-panic bottom of $77.92. Record results appeared on tap for 2021. My target price for year-end 2021 was focused on $110.88. Here is the original graphic from that Jan. 2021 article. I followed my own advice back then, picking up some shares, while also shorting some July 16, 2021 expiration date puts at $95 and $100 strike prices. The premiums last January brought in $10.50 for the $95 strike puts and $13.50 per share on the $100 strike puts. As of 1:48 p.m. on Monday, ATO was changing hands at $98.66. By definition the $100 puts were in-the-money and could potentially be exercised if ATO fails to rise back to at least $100 by July 16. The $95 puts remained unusable at present, but could possibly sink below that strike price, if negative market action or company specific price movements head south. There were 18-days to go before expiration, so action was required for traders willing to wait and see what happens until then. It's good to review where the forced purchase prices would be, if actually exercised. The $95 less the $10.50 put premium collected up front dropped my break-even price to just $84.50. $100 less the $13.50 premium collected reduced the break-even on that trade to only $85.60. Unless ATO dips to below those levels I'd be able to hold the shares, with embedded paper gains, or immediately liquidate to create actual realized profits. ATO's Monday price was still highly profitable on both option sales. I had other stocks, though, that were more appealing to me than ATO recently. As such I had rolled out my July 16, 2021 $100 puts to Jan. 21, 2022 $100 puts back on June 18, 2021. The four contracts I had sold for a combined $5,220 on Jan. 25 were bought back for just $1,236. That trade became a completed, taxable event, which generated a fine $3,984 net gain. A new short sale of four contracts of ATO's Jan. 21, 2022 $100 strike price puts was sold to open (STO) that day for $7.45 per share. Proceeds from those put sales totaled $2,980, which established what was an identical commitment to buy. The lone changed factor was a six-month extension of the original expiration date. I was thus able to book an almost $4,000 gain on the July $100 puts plus a new cash infusion of $2,980. That's how you can extend a deadline, while also getting paid to do so. How cool is that? On Monday, I decided to employ the same trading technique to my Jul. 16, 2021 expiration date $95 puts. Actual pricing from those two trades (buying to close and selling to open) are shown below. I paid 47 cents per share to close the near-term puts while receiving $4.21 per share for the newly sold Jan. 21, 2022 expiration date $95 puts. That process is called a credit spread. It gets that designation because my account was credited with the difference between the BTC cost of $94 ($0.47 x 200 shares) and the STO proceeds of $864 ($4.32 x 200 shares). The July $95 puts became a closed-out gain of $10.03 per share (STO for $10.50, BTC for $0.47) times the 200-share short put commitment. My realized gain totaled $2,006. The sale of the new Jan. 21, 2022 expiration date $95 puts kept my original exposure the same as before- to stand ready to buy 200 ATO, if exercised, for $95 per share. Extending that deadline by six-months brought in $770 more than it cost to close out the July $95 puts. If ATO remains above $95 next Jan. 21, I'll have a further gain of $862 to report ($432 x 200 shares). Combined profits on the closed-out July $100 puts plus the July $95 puts was $5,990 ($3,984 + $2,006). How much actual cash did I need to put up to make almost $6,000? Absolutely nothing. I used excess free buying power already available in my margin-type account to secure the puts which were never exercised. When was the last time you made about six grand on an investment without putting up any capital to do so? Conservative put writing can be quite conservative and highly profitable if done in a well thought out fashion. Don't let the ubiquitous critics of the technique keep you from trying it out. I've had great success with put selling over more than forty years of doing it.

Here's How to Handle Near-the-Money Puts Approaching Expiration Day

When was the last time you made about six grand on an investment without putting up any capital to do so?

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