Hi Gerry,
I've written a few puts and it has worked out for me?usually! I would love to always have your "problem" of the stock always taking off to the upside and your short put going worthless! Let me list how I see using naked puts.
Covered Call Substitute. It's been said that naked puts are equivalent to covered calls, but I disagree slightly with that. When you consider potentially follow-up action, the near-term attitude on the stock is different: You generally ought to be neutral/bearish for CCs, and neutral/bullish for naked puts. As long as you're are not too badly wrong, you'll be fine. Example: I own some SUNW, I'm long term bullish. Even though I've done it, I'm not totally comfortable with CCs because I want to stay long and avoid follow-up action. I've sold 2-3 month puts 5-10 pts OTM three times and always kept the premium. Even if I got assigned, wouldn't mind being longer. Of course no need to be currently holding stock for this "CC" strategy. Which brings me to...
Buying at Discount. If you are near-term neutral/long-term bullish on a stock and want to buy it, sell at/slightly-in the money puts and TRY for assignment. I've been cursing myself for not buying CTXS during its last trip down to 40s. But rather than a TOTAL capitulation and buying outright, I'm short Oct 55s now. Which brings me to...
Stock Substitute. If you want to buy right away, and deep, ITM long term puts are available. Consider selling them. The risk is slightly less than buying outright because you get to hold the premium while you wait for the stock to move up. I haven't actually tried this yet, but I think it would work best with good stocks that have been beaten down because strike prices much higher than the market price will be available and of course downside risk mitigated by the recently prevailing bearish mood. I guess there is a possibility of early assignment, but is that really an issue on LEAPs? I don't know. Possible candidate? COMS maybe? JAN01 40s $15.5? One could argue if COMS is a "good stock" but that's a discussion for another thread!
I've been thinking there's got to be flaw in the stock substitute idea, otherwise why wouldn't more people do it? Maybe the are... |
