America On-Line: will it survive ...? Message Board

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Technology Stocks : America On-Line: will it survive ...?

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To: yard_man who wrote (3124)	5/15/1997 10:45:00 PM
From: Stingray	of 13594

Hi Barry, you said that writing naked puts in a stock you want to buy is a "kind of a win-win situation". That's not exactly true, you win if the option expires unexcercised. If it gets excercised and at excercise time the stock price + option price is lower than the strike price you have lost out, because had you not written the put you could have bought the stock at that low price. I've toyed with the idea of writing naked puts but have not done so because it (a) it ties up your capital and (b) if you end up being forced to buy the stock you do so at a price which is higher than the market price, even if there is some piece of really bad news which would make you not want to buy the stock at all. A naked put gives you a high probability (> 50%) of a small gain but a small probability of a large loss and ties up your capital. If you decide to do this you should consider as many possible scenarios as you can, including the one where the stock falls below the strike price but ends up higher, and compare how you would end up if you write the put compared to whatever your default strategy would be.

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