Analyzing Married Puts with PowerOptions’ Position Analysis Tool

Analysis of a Married Put Position:

Here at Power Options and Radio Active Trading we provide tools to help investors find, analyze, and manage their investments. We do not make recommendations or give advice on how and when to trade individual stocks or options. So a question like, “What should I do next”, is rather awkward. We do not want to give advice, but will work with the self-directed investor to find the information they need to analyze their position and make there own decisions.

I recently spoke to an investor about a position he had in LITE @ $47.90 +1.30. He wanted my advice on what to do with the married put position.

In this case, the conversation proceeded down the following path:

LITE stock price chart. We have to understand why the stock popped up as part of our position analysis.

  1. The position was in his Power Options portfolio as a marred put, which enabled both of us to look at the Big Charts graph (available under “more/info”, Charts) for LITE, which had a recent large stock price rise.
  2. I asked why the stock price jumped up in the last few days. He did not know, but suspected that it was a favorable earnings announcement. I suggested he click the blue “more/info” button in the portfolio to get some information about the price movement.
  3. We clicked Edit More Info, Company Info/News, News, to the left of each portfolio entry.  This brought up a number of recent articles and announcements about LITE. After reading several of the most recent news announcements, it was clear that earning and sales were unfavorable. The stock rise was not earnings related, but due to LITEs’ 3-D sensing technology that was rumored to be in Apple’s forthcoming iPhone 8. One of the Brokers commented that LITE stock is “a call option on 3D sensing”. That kind of news propelled the stock despite the below consensus revenue announcement.

The “WHY” on the stock movement was quickly answered. Now we needed to assess the present position’s profitability status. I suggested that we click the blue “more/info” button again and go to Position Actions, Position Analysis. The Analysis page showed us a profit/loss curve and what the present liquidation value would be and the value at expiration. The position analysis made clear the position was already bulletproof and could not lose because of previous covered call writes. A great situation to be in before the earnings announcement. If the stock had declined because of the disappointing earnings the position was guaranteed a 3% profit. However, with this rise in stock price the position now had a 15% profit if liquidated and 11% profit at this price at expiration (46 days) of the put option. The lower profit at expiration was due to the decay of the remaining put insurance time value which would be worthless at expiration.

The alternatives based on this position analysis were for the investor to:

  1. Liquidate now for a 15% profit after 4 months in the position
  2. Hold for more price appreciation, but if the price remained constant the profit would drop to 11%. And if the stock declined a 3% profit was guaranteed
  3. Write a $50 OTM call, which would guarantee 15%+ if the stock remained constant at $47.90 or went higher.

The final decision was left to the investor. What would you have done?

About Ernie Zerenner

Ernie is a self-directed investor after having retired from the Hewlett Packard Company. He has been a stock and options investor for over 40 years and currently trades for his own account. He is an owner of both RadioActive Trading and PowerOptions and uses the tools he developed on both sites to find, analyze, and manage his trades. Most of his trading activity uses the principles of the Blueprint to hedge his investments for safety.