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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: Dan Duchardt who started this subject8/10/2001 10:23:18 PM
From: Dan Duchardt  Read Replies (1) of 1064
 
A question that pertains to a short put

Message 16197120

But (imho) isn't there an assumption that the stock we choose should be a good quality stock that if it did drop significantly in price, we would be glad to own it? This is my perspective as a ltb&h investor.

In my case, I want to hold my stock, because some day I hope it will go up again. In the mean while I want to write calls or do whatever to produce some additional income.

Nothing at all wrong with that point of view, but if I were to characterize it, I think I'd have to say it is "very bullish". You are betting that if the stock were to go into an extended decline that takes it below the put strike price less the premium you received by expiration day, you are very confident that is a temporary condition that will be reversed, so confident that you would even be willing to pay a premium for the stock and buy it at a price that might be well above the current market value. In the near term, if the stock falls in price you will be losing value at a rate that accelerates toward dollar for dollar with the stock. You can stop out of the position with somewhat less loss than an outright stock buyer, but the hope of time decay of the premium, or the bullish thinking you described above might encourage you to stay in longer and ultimately lose more. A moderately bullish person might buy the stock, or put in a limit order at a lower price, and sell at a small loss if it goes the wrong way.

Dan
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