<< When you sell put to buy stock at cheaper price, two things can happen:
a. the stock is a real winner, you probably won't get it. just keep the premium. if the stock is real strong, why not buy the stock outright (you can buy call s/t but the premium is expensive). >>
PAL, this is a somewhat limited view IMO.
Let me give you an example from a trade the Jill mentioned this morning.
JDSU, JDS Uniphase, is a VERY volatile stock, in an extremely popular market segment, optical networking. It has had a huge run recently, selling as high as around 240 recently, and has strong buys by a whole host of analysts.
As of a few moments ago, with JDSU trading around 203, the JDSU March 190 put was bid at 15 1/2. If I sell that put, and the stock is put to me, I will own 100 shares at a cost basis of $175. If not, I keep $1500. This is the idea of selling the volatility premium that edamo was so worked up about. (By the way, that 15 1/2 is ALL time premium).
Now, frankly, for me, I kinda like the idea of selling the put as opposed to buying the stock (or the call for those so inclined). I would really much rather own that volatile stock at 175 in 6 weeks than pay 203 now. And if not assigned, I am real happy pocketing my $1500. For those inclined to buy the stock or buy calls, if the stock runs to 300, I say, more power to them. Congrats.
Now, you may not like this strategy because you are afraid of a falling knife. But I think it is wrong to suggest that it is always wrong for others.
Sorry for the lengthy post on a fairly simple trading concept.
BP |
