218  •   The Intelligent Option Investor
investment will be expiring just about the time another short-put invest-
ment is becoming attractive, so you can use the margin that has until re-
cently been used to support the first position to support the new one.
Obviously, this strategy only works when markets are generally trend-
ing upward or at least sideways over the investment horizon of your short 
puts. If the market is falling, short-put positions expire ITM, so you are left 
with a position in the underlying stocks. For an option trader (i.e., a short-
term speculator), being put a stock is a nightmare because he or she has 
no concept of the underlying value of the firm. However, for an intelligent 
option investor, being put a stock simply means the opportunity to receive 
a dividend and enjoy capital appreciation in a strong stock with very little 
downside valuation risk.
The biggest problem arises when an investor sells a put and then re-
vises down his or her lowest-case valuation scenario at a later time. For in-
stance, the preceding diagram shows a worst-case scenario of $55 per share. 
What if new material information became known to you that changed your 
lower valuation range to $45 per share just as the market price for the stock 
dropped, as in the following diagram?
Advanced Building Corp. (ABC)
80
70
60
50 EBP = $47.50
Overvaluation of
downside exposure
40
30
20
5/18/2012 5/20/2013 249 499 749 999
Date/Day Count
Stock Price
RED