"How Do I Repair A Losing Short Put?"

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"How Do I Repair A Losing Short Put?"

"My advisor sold to open a naked put. He abandoned my account the stock is plunging down is there any strategy to recover the loss?"
- Asked By Antonio on 21 Feb 2013

Answered by Mr. OppiE

Hi Antonio,

Naked put write is an options strategy with technically unlimited loss potential (losses accumulate as long as the underlying stock goes down. Of course the underlying stock could only go down to zero) but only a limited gain to be reaped. Due to the unlimited loss potential, it is extremely dangerous to use naked put writes without a fixed stop loss point in place and from the way you stated your question, it seems like your position was established without stop loss. That is truly an unacceptable mistake for a naked write strategy.

Now that your position is already losing money and you obviously wish to try to repair the position instead of taking a quick stop loss to prevent further damage, the best way is by Delta Neutral hedging with positive Gamma. This will create a position which will not only halt any further directional losses but also allow the overall position to start making a profit no matter which direction it moves into next. Yes, if you put your position to delta neutral and gamma positive, it will start to make a profit even if the stock should suddenly shoot upwards strongly. You will no longer depend on a certain directional move in order to make a profit.

The problem with applying a directional fix to a losing position such as this one is that the underlying stock might just turn around and start going the other way after applying the fix, resulting in a double loss. In fact, if you are so certain that the underlying stock is going to keep going down, there will be no need to fix this position at all. All you have to do is to quickly close it out (using the buy to close order) and then short as many of the underlying stock (or buy put options) as your entire inheritance and life saving allows you to. Yes, the problem is that such certainty does not exist and that is why in fixing a losing position, the most important thing is to make sure it doesn't result in a double loss. This is why delta neutral hedging is so useful and powerful in repairing losing positions.



In order to transform a naked put write into a delta neutral gamma positive position, all you have to do is to buy (buy to open) enough at the money or near the money put options in order to completely (or as completely as possible) offset the positive delta of your existing short put options.

Repairing Losing Short Put Options With Delta Neutral Hedging Assuming you wrote 5 contracts QQQ's March $69 put when QQQ was trading at $69, expecting QQQ to continue going upwards. However, instead of continuing upwards, QQQ dropped to $67, resulting in a loss on your short March $69 Put. You decided to apply a delta neutral gamma positive hedge. At this time, your 5 contracts of short March $69 Puts are trading at $2.21 with a total delta value of 347.90 and a total gamma value of -53.77. The March $67 Puts are trading at $0.94 with delta value of -0.4597 and gamma value of 0.1366. You buy 8 contracts of the March $67 puts resulting in the following position: 5 contracts of March $69 Puts = 347.90 delta , -53.77 gamma 8 contracts of March $67 Puts = -0.4597 x 800 = -367.76 delta, 0.1366 x 800 = 109.28 gamma Overall Delta = 347.90 - 367.76 = -19.86 (which is as close to delta neutral as this position can get) Overall Gamma = 109.28 - 53.77 = 55.51 Maximum profit if QQQ should start to rally from this point forward = $353 Maximum profit if QQQ should continue to drop = unlimited

However, take note at this point that you do require additional cash to purchase the additional put options. Also, this kind of options position transformation may also be too complex to calculate and execute for beginners to options trading. In fact, many beginners often get the order type wrong and end up in a worse position. As such, please seek the advise and help of an options professional if you wish to execute the above suggestion. If you find it hard or impossible to perform a delta neutral gamma positive hedging, then you might wish to simply cut loss quickly if you do not see the underlying stock coming back up in your favor before the put options expire. Take note also that in the money short options positions are highly susceptible for early assignment the closer it gets to expiration so there is a possibility that you might end up having to take stock of the underlying stock if you continue to hold the position.


In conclusion, delta neutral gamma positive hedging is perhaps the best way to repair any losing options positions but it can be extremely complex to calculate the exact hedging trade to take. On top of that, additional funds are required which might not be available to a losing account. As such, all options beginners are advised to seek professional help before executing such a complex hedging strategy.