Questions about put selling and buying, I am puzzled!!! Please help:
Supposed I sold 10 naked puts, exp Jan 2003, strike 75 and received 53,000 for the sale (current stock price 22)
Supposed, at the same time I bought 10 puts, expir. Jan 2003, strike 20, paying 5,000 for it
If on Jan 15, 2003 the price drops below $20 it will cost me (55,000 + 5,000) - 53,000 = $7,000 (total risk; worst case scenario)
If I put the 48,000 (53,000 - 5,000) income received initially for the put
selling in a 2-year CD,lets say, for 6% per year I will earn about 6,000 in interest thus ALMOST TOTALLY ERASING MY RISK OF THIS INVESTMENT (well, I could lose 7,000-6000=1,000). I am limited to a max 48,000 profit if the stock price exceeds $75 a share on Jan 15, 2003. Not bad, an investment almost without any risk???
What am I missing here? Maybe it is my tax liability? Do I need to pay taxes upfront from the net 48,000 received for the put transactions?
Thanks
Witold |
