Joe,
You are right that it is very difficult to pick bottoms and tops, If we all could do it, we'd all be rich. Selling puts is a neutral to bullish strategy. If whatever evidence you have is suggesting the stock is going lower, you are better off waiting to enter rather than trying to guess where the bottom will be. My only point is that it does not make a lot of sense to be trying to pick a bottom long before the stock gets there. If, for example you were to write a 40 put on a declining $50 stock just because you think $40 will prove to be a good buy someday, and you want to collect a little premium if it doesn't get there, you would be better of seeing if the stock can indeed hold somewhere above 40 first. On the other hand, if conditions, fundamentals, whatever, suggest that the stock has finished its down leg and is more like to go up from 50, then you may want to make a conservative play selling the 40 or even the 45.
When you see a KO or G starting to lift off, you may very well want to move on it before it gets away because it looks like a bottom. I don't think the goal is to try to catch exact bottoms. Rather it is to do the best we can to let the stock find a bottom before jumping in, even if it's only a good one day reversal pattern. There should at least be something telling you "this stock probably will not go lower from here" rather than "I think it will only go another 2 or 3 or 5 points". We'll still be wrong a lot, but at least not settling for a small premium based on a lower target than where the stock is now.
Dan |
