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Strategies & Market Trends : Wings-FPT
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To: Didi who started this subject6/19/2001 12:57:30 PM
From: Didi   of 124
 
Covered Writing & Put Selling...

CBOE:
...Covered Calls: cboe.com
...Cash Secured Puts: cboe.com
..."Options Essential Concepts & Trading Strategies"
shopping.yahoo.com

Selected Margin Requirement:
#reply-14840923

Selected Options Pros on SI:
...Ed, my mentor: Member 7314840
...Ken: Member 4384570
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...Dave: Member 4360766

========================================================================

Selected highlights.

From "Options Essential Concepts & Trading Strategies", CBOE, p. 99-104.

>>>MOTIVATION TO SELL PUTS:

Regardless of his motives for selling puts, it is imperative that the put seller NOT be bearish.

Put selling can be compared to the activity of insurance underwriting.

One goal of an investor who chooses to sell puts might be to act as an underwriter and collect option premiums.
He makes money if the underlying is above the break-even point at expiration; however, he must be ready to accept substantial loss if the underlying declines far below the strike price.

Another goal could be to acquire stock.
A short put position can result in assignment, requiring the purchase of the underlying security at the strike price.

Assignment of a short put always results in the purchase of stock at a NET PRICE that is the break-even point.

Put selling becomes SPECULATIVE when the investor sells puts that represent MORE shares than he is willing to own.

He can do this because there is only an initial margin requirement for each short put (For margin purposes, a short put is considered uncovered regardless of the amount of capital supporting the activity.)
This investor has the possibility of a bigger loss than he is prepared to accept. That is speculation.

Compare the expiration profit/loss diagrams of covered call selling and put selling.
They have the EXACT SAME SHAPE.

If covered call selling is the equivalent strategy, it should have the same characteristic as put selling:

1. The covered call seller is willing to forgo any additional profits from the stock on movements beyond the strike price. So is the put seller.

2. The put seller underwrites the risk of the stock through expiration.
In covered call selling, in exchange for the premium of the call option, the investor maintains the risk of the underlying.

3. The break-even point of both strategies is lower than the current price of the underlying.<<
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