7 Essential Lessons from Selling Puts on MooMoo — Financial Avocado

8 min readOct 6, 2021

Back in February, I wrote about selling cash secured puts but didn’t really practice until changing my brokerage to MooMoo (power of procrastination and a good platform lol). Here are 7 important lessons I’ve gained from my hands-on experience. Consider this as an addendum to my Beginner Options Guide which lays down the basic concepts and my 8 basic steps to sell puts.

Start with Cheaper Quality Stocks, then Level Up
Understand How IV Affects the Option
Options are Rarely Exercised Before Expiry
Buy to Close Option Instead of Holding Till Expiry
Understand Margin
Sell a Few but Not All on the Same Strike Price or Expiry Date
Clarification on Exit Strategies

1. Start with Cheaper Quality Stocks, then Level Up

It was hard 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 I concluded from analysis it is a rapidly growing company with decent moats and a huge TAM (total addressable market). It’s not my favourite, due to customer concentration and opaque use cases, so I am happy to be paid with premiums to buy the shares at a lower desired price.

PLTR has worked well the past few months due to the sideways volatility. I’ve made $290 of realized profits since July and $280 in unrealized profits.

The current price range of $21-$26 means I need to fork out max $2600 if the option is exercised. This is a palatable amount for me, so I can trade comfortably without worries.

However, its low price implies a small premium. As I gained more confidence, I started selling 2 puts (or 2 contracts) later on to gain more profits.

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 options, and the market expectation of the share price.

As demand for the option and market expectation of the share price rise, IV rises too, and hence 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 and U typically have 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 of the charts. As seen below, this week starting in October has seen a spike in IV due to recent market drop… and is an opportune window for option sellers in my opinion.

3. Options are Rarely Exercised Before Expiry

These past 2 weeks have been brutal on high-growth tech stocks due to increasing bond yields. All my open options have increased dramatically in prices as share prices fell below the strike prices.

When U dropped to $125 (my strike price), I initially thought it would be exercised. However, that didn’t happen. After reading up more, I learned that options are rarely exercised before expiry due to the presence of extrinsic value .

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

A quick recap: intrinsic value is the exercise value of the option (strike price — share price for puts) while extrinsic value is the time value, affected by implied volatility.

Although Unity’s share price dropped to the strike price (i.e. intrinsic value = 0), there is still extrinsic value due to the time duration of the option (my expiry date is Oct 22nd). If an option buyer exercised the option now, he is throwing away significant extrinsic value for nothing.

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 only on expiry date itself. In less frequent cases, it may also happen when the option is so deep-in-the-money (share price much lower than strike price) that the intrinsic value is so much more significant than the extrinsic value he is forgoing.

4. Buy to Close Option Instead of Holding Till Expiry

I held till expiry for the first few puts I sold on PLTR, as it was a mild bull market and the share price never dropped below my strike price. However, I realized a more prudent way is to buy to close the options whenever the price falls to a low price, instead of waiting till expiry.

This way, I reduce my risk if the share price suddenly falls on or right before expiration date. 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.

Therefore, I now put a limit buy order on the same put option, right after I sell it. This is assuming that I do not yet want to own 100 of the shares; if I do, then it doesn’t matter.

For example, if I sold a PLTR put option for $1.14, I’ll set a limit buy order for $0.2. This will give me an annualized return of 40%. If I held to expiry i.e. buy at $0, the return is 48%, but I am willing to accept the lower return for lower risk.

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. Margin is the portion of purchase price that must be deposited in the account.

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

Let’s use the MooMoo trade preview to explain some terms:

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 my account. As I am selling a put, I do not own any equity so my NLV does not change post-trade.

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

As seen in the screenshot, I can trade over 95% of my account on margin. 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. MooMoo as the broker will ask me to deposit x amount of funds, part of the account will be liquidated without notice.

Max Buying Power (BP) = amount available to buy stocks with the highest leverage ratio

Max Withdrawal (W/D) = max amount that can be withdrawn from securities account, including partial margin and unsettled funds

So far, I’ve been selling some puts on margin, which are technically naked puts on MooMoo. 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, which works fine for me.

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’s not a wise decision. 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:

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

I shall elaborate in a separate article on the second part of the wheel strategy, or selling covered calls on the 100 shares you now own. I’m not too keen on this tactic because it goes against my fundamental principle when I sell puts: buying quality companies that I like and believe will go up in price. Selling covered calls limits my upside, so I’m not sure how this fits into my method… but I will give it a try.

Concluding Thoughts

Lastly, this is not a lesson but a reminder to track and monitor your results. Full credits to the blogger TwoInvesting who created the spreadsheet you see in my screenshot — 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. Happy trading 🙂

Disclaimer: Financial Avocado is a personal investing blog of a millennial who is passionate about personal financial education. By using this Site, you specifically agree that 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.

Originally published at https://financialavocado.com on October 6, 2021.