Accepting Exposure   • 219
Looking at this diagram closely, you should be able to see several 
things:
1. The investor who is short this put certainly has a notable unrealized 
loss on his or her position. Y ou can tell this because the put the 
investor sold is now much more valuable than at the time of 
the original sale (more of the range of exposure is carved out by 
the BSM cone now). When you sell something at one price and the 
value of that thing goes up in the future, you suffer an opportunity 
loss on your original sale.
2. With the drop in price and the cut in fair value, the downside ex-
posure on this stock still looks overvalued.
3. If the company were to perform so that its share price eventually 
hit the new, reduced best-case valuation mark, the original short-
put position would generate a profit—albeit a smaller profit than 
the one originally envisioned.
At this point, there are a couple of choices open to the investor:
1. Convert the unrealized loss on the short-put position to a realized 
one by buying $50-strike puts to close the position (a.k.a. cover the 
position).
2. Leave the position open and manage it in the same way that the 
investor would manage a struggling stock position.
It is rarely a sound idea to close a short put immediately after the re-
lease of information that drives down the stock price (the first choice above, 
in other words). At these times, investors are generally panicked, and this 
panic will cause the price of the option you buy to cover to be more expen-
sive than justified. Waiting a few days or weeks for the fear to drain out of 
the option prices (i.e., for the BSM cone to narrow) and for the stock price 
to stabilize some will usually allow you to close the option position at a more 
favorable price. There is one exception to this rule: if your new valuation 
suggests a fair value at or below the present market price, it is better to close 
the position immediately and realize those losses. If you do not close the 
position, you are simply gambling (as opposed to investing) because you no 
longer have a better than even chance of making money on the investment.