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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe)
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To: Dan Duchardt who wrote (2151)8/26/2001 11:53:56 PM
From: Joe Waynick  Read Replies (1) of 2241
 
Sure I can elaborate.

I must be very careful about the terminology I use. So please forgive me if I’ve confused you with terms. Your caution is justified. There is no such thing as a “naked” short put in an IRA. That would require margin and is a big no-no.

The proper terminology is “cash secured short put.” That means that you must have 100% of the exercisable price in your account to put on such a trade. For example, if you want to write one short put on Intel at a $30 strike, then you must have $3,000 in your account before the broker will allow the write.

Let’s look at the benefits. In fact, this is how I actually use short puts in my own IRA. If a stock you’re watching is selling for $40 and your research tells you that it is undervalued anywhere below $25, you can sell $20-$25 short puts on ½ the position size you want and collect a premium.

Now, you already plan to buy the stock at $25 or below anyway, you’re just waiting for the price to come to you. Why not collect a fee while you wait? What if the stock only dips to $27.50, then advances again? Then you’ve missed the boat and need to go hunting for another stock. By selling the put, you continually add $$ to your account each month whether the stock comes to you or not.

If it does dip to my price level, I buy ½ of the position I’m seeking and obtain the other half by being assigned. Sometimes, I’ll be assigned, sometimes not. Depending on if the stock stays below the strike on expiration day. If not, I write another put for the balance of the position I’m seeking and continue collecting premiums. Otherwise I get assigned and I have my full position at a lower cost basis than I would without the option premiums.

I only do this on stocks I really want to own. And then only at the price I really want. Otherwise, I don’t do it. I hope this helps.

Joe
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