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Why do so many people selling puts fail?

Maybe, you are one of the people who got excited and started selling put contracts against stocks or even dividend stocks and failed.

I was there too. I was selling as a hell. I was selling puts a lot. And I failed too. Many times. I lost tons of money selling puts. Then the puts got in the money, I couldn’t roll them, got assigned, and I didn’t have money in my account to handle the assignment. I had to close the position at a loss.

Why do so many people fail?

The problem is in overdoing this type of trading. Many people sell too many puts beyond the ability of their accounts to handle it. If, for example, your account is a $5,000 net liquidation value and you sell put options worth $30,000 of net liquidation value (yes, it is possible with a margin account), then you are in trouble. And you are irresponsible and have no place in the stocks market.

Solution?

Sell only so many puts that if you get assigned, you can hold the position.

But, if you are impatient as I am, what can you do to ensure that you do not over-trade your account? Also, believe me, it is very easy to get overboard when in a margin account. I set aside the money I need for the assignment. In the past, I found this rule horrible and ridiculous. Why would I let free money sitting in an account doing nothing? I can invest them and make more money! Yes, you can. But then you are doomed over-trading your account.

In a margin account, I found it easier to set aside money in a margin account than in a cash account. In a cash account, the broker actually does it for you and if you have a small account, it will take years of savings for you to be able to start trading options due to extensive capital requirements. In a margin account, you only need 50% to set aside (of course, it fluctuates but we can discuss this in another post).

So, let’s say, you want to start selling put options against Coca-cola (KO) which trades for $49.56 a share. To buy (or be assigned) in a cash account, you would need $4,956.00 to cover the assignment. In a margin account, you would only need $2,478 cash to cover the assignment. Save that money aside and you can trade puts against KO without fear of being assigned and not having enough cash to cover that assignment. And, I found a way of saving that cash in my account and be comfortable with it.





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