John,
In fact, I think my risk is different. It's the risk of not acquiring the shares. While I'm new to this, let me recount where I see the risk. If I sell, for instance, Nov puts at 45, when the share price is 50, and the price descends to 46, I will not be able to use the money set aside to buy the 45s to pick up the 46s
That is right John. By selling the cash backed put you have tied up $4500 per contract that you cannot use for other purposes. Even if the stock dropped to 40 or 35 you would not be able to buy it unless you used other money, or took the loss to buy back the put. The strike price of $45, less the put premium you received, establishes the cost basis for your shares in the event you have them put to you. In this respect, it is the same as if you bought the shares and sold Nov 45 calls, establishing your net cost of ownership. In either case, if the stock falls below the cost basis you have lost the opportunity to buy at a lower price because you already have your money committed to the position at a predetermined price.
About the only advantage to the cash backed short put is that you might avoid the transaction cost of buying (and perhaps later selling) the stock. That can be worthwhile, especially if you are inclined to stop out of the position if it goes against you. It's easier to just buy back the put than to unwind a covered call. It's also easier to monitor the position since all the value is tied up in the one instrument instead of two.
Dan |
