I believe the "superiority" of short puts vs buy-write in comparison is based on the significantly reduced margin and capital requirements for the short puts. This would tend to make the %return numbers seem greater per dollar of capital or margin committed. But although I understand this I don't like the comparison, as it could lead people to short puts beyond their capacity to absorb assignment. If a person is lucky, they can "get away with it", but such an operation is not really worth the risk, in my opinion.
The risk you describe is the risk that the investor will use margin irresponsibly and is not a risk inherent in writing naked puts. Regardless, the advantage of puts is not due to reduced margin requirement at all. It is due to the reduced capital requirement, which leads to a more efficient use of your money. That is, all else being equal a larger amount of premium can be collected with greater diversification, given a fixed amount of cash -- even without the use of margin. As usual, margin simply provides leverage, allowing you to play with someone else's money (for a fee).
As was alluded to by Duf, and rather poorly paraphrased by me, these strategies are more suited to long-term investors than to traders. With buy-writes, you buy common now. With short puts, you buy it later.
Agreed. However, I'd like to make an addition: With buy/writes, you buy common now. With short puts, you buy it later and for less.
Given the choice, I still don't understand why anyone would buy/write when they can sell a put instead.
dM |
