7 Lessons from Selling Puts on MooMoo

This is a shortened version of the original article on financialavocado.com

As a beginner options trader, I've made mistakes and learned many things along the way - here are my 7 important lessons. Consider this as an addendum to my Options Guide which lays down the basic concepts and step-by-step playbook to sell puts.

1. Start with Cheaper Conviction Stocks, then Level Up

It was not easy to find a quality stock that I want to own (Step 2) that was below $50. My shortlist included: SNAP, TWTR, PLTR. Ultimately I chose PLTR after analyzing that it is a rapidly growing company with good moats and a huge total addressable market.

PLTR options have worked well the past few months due to sideway volatility. The range of $21-$26 means I need to fork out max $2600 if the option is exercised, a palatable amount for me.

As I gained more confidence, I moved to U, AAPL and ABNB. These are all companies that have passed my investing framework and are long-term picks in my portfolio. This is the #1 principle to selling puts - do it on quality stocks you want to own.

2. Understand How IV Affects the Option

Implied Volatility (IV) is the expected volatility of a stock over the life of the option. It is directly influenced by supply and demand of the option and market expectation of the share price.

As demand for the option and market expectation of the share rise, IV rises, and the premiums (vice versa). Hence for our strategy of selling puts, it’s ideal to sell options on 1) stocks with generally higher IV and 2) when IV is higher.

For instance, PLTR has a higher IV of over 50%, while that of AAPL is around 25%. And like everything else, IV moves in cycles, so it’s more desirable to sell puts when IV is at the higher end.

3. Options are Rarely Exercised Before Expiry

These past 2 weeks have been brutal on tech stocks. When Unity dropped to $125 (my strike price), I initially thought it would be exercised. However, that didn’t happen. After reading up, I learned that options are rarely exercised before expiry due to the presence of extrinsic value.

Source: WallStreetMojo

Any option premium is made up of 2 parts: intrinsic value and extrinsic value.

A short recap: intrinsic value is the exercise value of the option (strike price — share price for puts) and extrinsic value is the time value, affected by IV.

When Unity’s share price dropped to the strike price (i.e. intrinsic value = 0), there is still extrinsic value due to the duration of the option (expiry date is Oct 22).

If an option buyer exercised the option now, he is throwing away significant extrinsic value. To profit, the option buyer tends to wait till option nears expiry, when time value has eroded and all that is left is the intrinsic value. Hence, most options are exercised on expiry date itself.

4. Buy to Close Option Instead of Holding Till Expiry

I held till expiry for the first few puts I sold on PLTR, as the share price never dropped below my strike price. I realized a more prudent way is to buy to close the options whenever premium has fallen decently.

This way, I reduce risk if the share price suddenly falls before expiry. The marginal return I get is not worth the extra risk I take on by passively waiting for the option to expire worthless, because anything can happen. This is assuming that I do not yet want to own 100 of the shares; if I do, then it doesn’t matter.

5. Understand Margin

I applied for MooMoo with a margin account, as I want to learn how to use leverage in the right way to amplify returns. In essence, margin allows me to borrow funds or stocks from the broker instead of paying in full. Here are some terms you need to know in MooMoo.

Disclaimer: Do NOT use margin if you don’t understand the risks fully. Margin can increase your purchasing power, but also potential for bigger losses!

• Net Liquidation Value (NLV) = sum of cash, market value of securities, funds in transit of all associated accounts

This is used as a reference for evaluating the risk level of the account.

• Initial Margin (IM) = amount of margin reserved for margin trading

When IM NLV, buying power will be used up and I can no longer open a new position.

• Maintenance Margin (MM) = minimum margin reserved to prevent a forced liquidation

This is an important number: if NLV drops below MM, there will be a margin call.

So far, I’ve been selling some puts on margin, which are technically naked puts. However, I make sure I have sufficient liquidity in my bank account to cover the puts. Hence this fulfils the requirement of a cash-secured put, yet I do not need to lock up my funds in the brokerage account.

6. Sell a Few but Not All on the Same Strike Price or Expiry Date

I sold 2 $125 puts on the same expiry date, one after the other, and realized belatedly that it was not wise. To have more flexibility with my exit strategies, I should have varied the strike price or the expiry date.

7. Clarification on Exit Strategies

I amended the Exit Strategies in my original Options Guide article based on new knowledge gained:

1. Stock price is above strike price: let it expire or buy to close at a low price; either way you collected premium on the first day
2. Stock price is below strike price: let it exercise, now you own 100 shares of a company like; you can continue with the wheel strategy if you’d like to
3. Stock price is below strike price but you don't want to own yet: buy back written put
4. Stock rises too much: buy back written put for around 10–20% of initial premium
5. In scenarios 3 and 4, one can continue to roll over: buy back and sell next month’s put

Concluding Thoughts

Lastly, remember to track your results. Full credits to the blogger TwoInvesting who created this neat spreadsheet — check out the link to his options tracker here.

I’m still a newbie at options trading, and would love to hear your thoughts or feedback on my understanding.

Disclaimer: Financial Avocado is a personal investing blog of a millennial. None of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or your personal life.