Sr K,
I think you are missing the major point behind my post: if you consider simultaneously buying a stock and selling a call, vs. selling a naked put, the positions are equivalent. McMillan (Options As A Strategic Investment) devotes a significant number of pages in his book establishing this proposition mathematically. In point of fact, the price of puts and calls are interrelated because puts and calls can be converted into one another (this technique is demonstrated in McMillan's book).
While many investors use the approach you discussed (buying and selling "mispriced" options), still others use options as a vehicle to buy stocks at a lower price (again, this strategy is discussed by McMillan). The problem with the approach you outlined is that you assume that an expanding or contracting implied volatility implies a mispriced option. I would argue that it implies or greater or lesser uncertainty about the underlying issue. That implies that mispricing of options occurs only in relationship to one another (e.g., significant differences between the IV of at the money puts and calls).
Finally, selling puts does not use margin in the sense of creating margin debt; it does, however, decrease the amount of margin available to you. Suppose that you have no cash in your account and wish to establish a position in XYZ. Buying the stock and selling the call creates margin debt to the extent of the price of XYZ minus the premium received. Selling the naked put creates no margin debt (in fact it reduces margin debt to the extent of the premium received), but it does reduce margin available to you (the calculations vary depending on the brokerage account).
TTFN,
CTC |
