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I sold puts on a meme stock and it fell 60%

Meme-stock puts pay huge premiums because the stock can move huge distances, both ways. When the crowd leaves, the stock can fall far below any strike that looked comfortable, and the premium for covered calls dries up too. Here's the trap in numbers and how to handle where you are.

Options guide · 9-minute read · Updated 2026-10-27

What's happening in your account right now

A stock everyone was talking about had run up fast. Its puts paid more than anything else you'd ever seen. You sold one, at a strike well below the price, and it felt like there was plenty of room.

Then the attention faded. The stock slid, then dropped, and now it sits far below your strike. You're assigned, or about to be, on shares that are worth a fraction of what you agreed to pay.

Plenty of careful people have been here. The numbers on these stocks look like a gift. Let's look at what they really were.

The IV trap, worked out (an illustration, not a trade idea)

A made-up stock, XYZ, traded at $10 for most of the year. Then it caught the crowd's attention and ran to $40 in a few weeks. Implied volatility went through the roof.

You sell a 30-day $30 put for $4.00. You collect $400 and set aside $3,000. The strike is 25% below the price. It feels far away.

Over the month the crowd moves on. XYZ falls 60%, to $16. You're assigned 100 shares at $30.

The $400 premium was real. It just bought a promise to pay $30 for a stock that had been worth $10 a few weeks earlier.

Why the covered calls don't rescue it

After assignment, the plan in the wheel strategy is to sell covered calls on the shares. Here's the catch.

Your cost after the premium is $26. With XYZ at $16, a $26 call is far away. And now that the crowd has gone, IV has fallen too. Option prices fall with it.

You took the risk when premiums were high. You're stuck in the repair phase when they're low. That's the meme-stock trap: the high IV that paid you is gone right when you'd need it.

What makes a meme stock different

Not every high-IV stock is a meme stock. These usually show several of these signs at once:

• The price has run far beyond the business. Sales and profits haven't changed much. The price has.
• The move came in weeks, not years.
• Very large daily swings, in both directions.
• Trading halts, when the exchange pauses the stock after a big move. You can't close anything while it's halted. See the stock got halted.
• Wide bid-ask spreads on the options, especially on the way down.
• Talk about the stock is louder than talk about the company.

The useful question: where did the stock trade before the crowd showed up? That's a realistic place it could go back to. In our example, $10.

Your choices now

You own 100 shares at $30, with a $26 cost. XYZ is at $16.

1. Sell the shares and take the loss. −$1,000, and $1,600 back to use elsewhere. This is often the cleanest choice when the price was driven by attention, not by the business. Use a limit order.
2. Hold with a plan. If you think the company is worth more than $16, hold and sell calls at or above $26 when they pay anything. Set a date to review. Don't hold "until it comes back" with no end.
3. Hold part, sell part. If you hold several hundred shares, sell down to a size you'd be willing to buy fresh today, and keep the rest on a written plan.

One move to avoid: selling another put lower because the premium still looks big. A $15 put paying $2.00 feels like a way to "average down." It's a second bet on the same crowd. If XYZ returns to $10, you'd lose on both.

The rule for next time

Before selling a put on any stock that has run up fast, answer three questions in writing:

1. Would I own this at the strike if the crowd left tomorrow? Not at today's price. At the strike, after the hype is gone.
2. Where did it trade before the run? Work out the loss if it goes back there. In our example: −$1,600 on one contract.
3. Can the account take that loss and still feel normal? If not, the trade is too big, or it's the wrong stock.

If you can't answer yes to the first question, skip it, however good the premium looks. Our stocks to avoid for the wheel page lists the warning signs, and I chased the highest premium on the list shows the same trap from a screener.

In Canada, the same rules apply in a TFSA or RRSP. Covered calls are widely allowed; cash-secured puts depend on the broker, and options permissions differ by broker. This is general information, not tax advice; a loss inside a registered account usually can't be claimed.

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