Analyzing Put Options: Strategic Cost Averaging for Option Sellers

Introduction

One of the most powerful aspects of selling cash-secured puts is the ability to strategically lower your cost basis through cost averaging. When you already hold shares and the underlying stock presents an attractive premium opportunity, selling additional puts can simultaneously generate income and improve your position quality.

But this strategy requires careful analysis. You need to evaluate premium quality, calculate your commitment level relative to existing positions, and determine whether the risk-reward profile justifies increasing your exposure. In this guide, we'll walk through the real-world decision-making process option sellers use when analyzing put opportunities for cost averaging.

Understanding the Cost Averaging Opportunity

When you already own shares of a stock and identify a compelling cash-secured put opportunity, you're looking at a dual-benefit scenario. First, you collect immediate premium income. Second, if assigned, you purchase additional shares at a lower strike price, which automatically reduces your overall cost basis.

The key question becomes: Is the premium substantial enough to justify the additional capital commitment?

Evaluating Premium Quality

In the example analyzed, the trader identified a put option offering $3 in premium with a $300 collateral requirement per contract. This represents a 1% return on capital for the trade duration, which is considered attractive for near-term options.

But here's where the analysis gets interesting: the trader noted "that would definitely pull my cost average down." This observation is critical because it means the strike price, minus the premium received, would be lower than the current cost basis. When assignment occurs, you're not just buying more shares—you're buying them at an effective price that improves your entire position.

Calculating Position Size and Commitment Level

The trader already held 200 shares, representing approximately $800 in capital at the current cost basis. Selling two put contracts at a $300 strike would commit an additional $600 in collateral (2 contracts × $300 strike × 100 shares).

This calculation is essential:

• Existing position: $800 in capital deployed
• New commitment: $600 in additional collateral
• Total position size if assigned: $1,400

The decision point becomes: "It'll put me over to $1,000 position size, but I think it'll be worth it." This is disciplined position sizing in action. The trader acknowledged the position would grow beyond a typical threshold but determined the premium quality and cost-averaging benefit justified the exception.

Playing Both Sides: The Complete Wheel Strategy

One of the most sophisticated elements of this analysis was the intention to "play both sides." With 200 shares held, the trader could simultaneously sell covered calls against existing shares and sell cash-secured puts to potentially acquire more shares.

This dual-income approach is the essence of the wheel strategy:

1. Covered calls: Generate income on shares you already own
2. Cash-secured puts: Collect premium while waiting to purchase more shares at a discount

By doing both, you create income regardless of which direction the stock moves. If the stock rises, your covered calls generate profit. If it falls, your puts generate income and allow you to acquire shares at lower prices with an improved cost basis.

Timing Considerations: The Thanksgiving Week Factor

Market timing plays a role in option selection. The trader noted "that's Thanksgiving week, too," which is significant for several reasons:

• Lower liquidity: Holiday weeks often see reduced trading volume
• Shorter trading week: Markets closed for Thanksgiving and early close on Friday
• Time decay acceleration: Options lose value rapidly when fewer trading days remain

For option sellers, short-term holiday-week options can offer attractive premium opportunities with accelerated time decay, though you must balance this against potentially wider bid-ask spreads due to lower liquidity.

The Analysis Framework: Questions to Ask Before Selling Puts

Based on this real-world example, here's the mental checklist successful option sellers use when evaluating put opportunities for cost averaging:

1. Premium Quality Assessment

• What percentage return does the premium represent relative to collateral?
• Is the premium substantial enough to make the trade worthwhile?
• How does this premium compare to other opportunities in your portfolio?

2. Cost Basis Impact

• If assigned, what will your new effective purchase price be (strike minus premium)?
• Will this assignment improve your overall cost basis?
• At what blended cost basis will you hold shares after assignment?

3. Position Sizing and Risk Management

• What percentage of your portfolio will this position represent if assigned?
• Are you comfortable with the additional capital commitment?
• Does this position size align with your risk management rules?

4. Strategic Opportunities

• Can you simultaneously sell covered calls on existing shares?
• Does the timing (expiration week, market conditions) favor this trade?
• Are you prepared to hold more shares if assigned?

How MyATMM Simplifies Put Analysis and Cost Basis Tracking

One of the challenges in executing this type of strategic analysis is tracking your actual cost basis accurately. When you're selling covered calls, collecting dividends, and selling cash-secured puts on the same ticker, calculating your true cost basis becomes complex.

MyATMM's cost basis tracking solves this problem by automatically calculating your effective cost basis as you execute trades. You can see immediately how selling a put will impact your cost basis if assigned, helping you make informed decisions about whether the premium justifies increasing your position size.

The platform tracks:

• Current cost basis across all shares held
• Premium collected from covered calls and cash-secured puts
• Proposed cost basis if your active put positions get assigned
• Portfolio-wide metrics so you understand total capital commitment

This real-time visibility means you can confidently evaluate whether selling additional puts improves your position or overextends your capital allocation. Track up to 3 tickers free forever with no credit card required.

The Mathematics of Cost Averaging Through Puts

Let's walk through a concrete example using the scenario discussed:

This 13% cost basis reduction is substantial. It means every covered call you sell going forward starts from a more advantageous position. You can sell calls at lower strikes and still realize profits because your entry price is now significantly better.

When Cost Averaging Makes Sense—and When It Doesn't

Cost averaging through cash-secured puts is a powerful strategy, but it's not always the right move. Here's when it makes sense and when to avoid it:

Cost Averaging Is Smart When:

• Premium is substantial: You're receiving meaningful income relative to the strike price
• You want to own more: You believe in the underlying stock and would be happy to increase your position
• Strike improves cost basis: The effective purchase price (strike minus premium) is better than your current basis
• Position size remains manageable: Adding shares won't overconcentrate your portfolio
• You have capital available: You have the cash to cover assignment without disrupting other strategies

Avoid Cost Averaging When:

• Chasing losses: Selling puts just to "average down" a losing position without conviction
• Position too large already: The ticker represents too much of your portfolio
• Premium is weak: You're not being adequately compensated for the risk
• Fundamental deterioration: The stock's business fundamentals have weakened
• Limited capital: Assignment would prevent you from taking advantage of better opportunities

Making the Decision: Discipline Over Emotion

The most important aspect of the analysis shown in the example is the disciplined thought process. The trader didn't just see a premium and jump in. Instead, they:

1. Calculated the exact capital commitment
2. Evaluated how it would impact cost basis
3. Assessed whether position size would grow beyond comfort levels
4. Determined the premium quality justified the additional exposure
5. Considered timing factors like the holiday week

This systematic approach separates successful option sellers from those who eventually blow up their accounts. Every trade should pass through this filter before execution.

Conclusion: Strategic Put Selling Requires More Than Premium Analysis

Analyzing put options for cost averaging is more than just looking at premium amounts. It requires understanding how the trade impacts your overall position, whether the capital commitment aligns with your risk tolerance, and whether you're genuinely improving your cost basis or just increasing exposure for the sake of income.

The best option sellers approach each trade with a clear framework: evaluate premium quality, calculate cost basis impact, assess position sizing, and determine strategic fit. When all factors align, selling puts to average down cost basis can be one of the most profitable strategies in your income-generation toolkit.

For traders executing multiple strategies across multiple positions, keeping track of these calculations manually becomes overwhelming. Purpose-built tools like MyATMM automate the math and give you instant visibility into how each trade impacts your portfolio, letting you focus on strategy instead of spreadsheet management.

Risk Disclaimer

Options trading involves risk and is not suitable for all investors. Selling cash-secured puts obligates you to purchase shares at the strike price if assigned, potentially requiring significant capital. Past performance does not guarantee future results. This content is for educational purposes only and should not be considered financial advice. Always consult with a qualified financial advisor before making investment decisions.