Diversifying your puts and an important reality check for an emailer

Two answers to two subscriber questions:

I have APOL May 50 puts @ 4.45, down 54% now.  Is it better to double down on these or buy another strike of ITM May puts?
Thanks, love the service.

The short answer to your question (pun intended, get it? “Short” answer to a question about one of our shorts. My mom will like that one at least) is that yes, you probably should space out either the time or the strikes on your options as you layer into more of them. You could alternatively use maybe 1/3 or 1/2 of  of the capital you’re about to use to buy those APOL puts today to add to the existing strike & date position and use the rest of it to buy some higher or lower priced or some puts that expire out in August or so instead.  I explained before that using puts is extra risky because even as I’m quite confident that APOL’s funding via taxpayer money is about to dry up over the course of the next year or three, that doesn’t mean the stock will reflect that by May or even by August. So you might also consider just shorting some common APOL stock.

Second question I got that I want to share with you guys:

Hi Cody,

This is my first email to you. I have a few AAPL Jan 2014- 400 Calls in my portfolio. I can’t afford the stock itself as I was cheated out of the balk of my trading account by three dishonest brokers.
How would it look like writing calls on these leaps compared to writing calls on the stock itself. What’s the pros and cons if AAPL goes up and down.  What would be the result  if my leaps were called out.

If you can’t afford to put $500 in a single common stock position by buying just one share of Apple common, then quite frankly, I don’t think it’s a good be risking your money on AAPL Leaps (a “Leap”, for those of you who don’t know, is a long-dated option, usually dated out to expire more than a year into the future). And moreover, if you can’t afford to put $500 into a single common stock position then the same thing goes — I don’t think it’s a good idea for you to be risking that same few hundred dollars with complex option buying and writing and what not that you’re describing above. One of the most important lessons for any trader/investor comes from Warren Buffett who says, “If we can’t find things withing our circle of competence, we don’t expand the circle. We’ll wait.”

And one of the reasons I’ve had so many subscribers stick with me for ten years or more is that I’m willing to tell you guys when you *shouldn’t* trade and not to force things.  The same Apple Leap emailer finished with:

I am trying to work my way back to some trading income after my devastating experience with american brokers. Thanks.

I tell everybody that it’s a bad idea to try to trade for income. Everybody will have a big “draw down” at some point, which means that you’ll fall maybe 20, maybe 30% or more from your all-time highs in your stock account. And when that happens, that means you’re going to have to make 40 or 50% or more just to get back to where you were at the highs. Does that mean, if you were trading for income, that you went without any cash flow/income for those months that it took you to get back to your highs? Or does that mean you now keep taking money out even though you’re down and you’re playing with a fraction of the capital you were at the highs?

I do think we can continue to consistently blow away the broader markets and make a decent percentage on our capital base when we look at our portfolio over quarters and years. But there will always be months that will be tough when you’re cold as ice on your bets and if you’re having to force trades at those times because you need income, you’re probably going to end up losing even more.

Be careful is what I’m saying. And please consider not trading for income or risking money in options if you don’t think you have enough to invest in a one share of a company’s common stock.