John,
First to the slight argument. My aim with the put selling would be to replenish the Qcom contracts at 45, the price at which I sold them. If it fell to 40 and I were assigned the 45s, it would, at least so far as I can tell, be no different than if I waited for the price to drop to 45, then bought and watched the price drop further to 40. Except I have also pocketed at least one premium, perhaps more if it takes a while.
I could have been more explicit, but my statement you quoted was made in the context of comparing the cash backed short put to a comparable covered call. There is indeed some potential advantage to selling the puts compared to simply waiting to buy at 45. You collect some premium when you sell the 45 put that reduces your net cost to somewhat below 45. Therefore, selling the 45 put is potentially a better approach than a limit order placed at 45 (or waiting for that price), but it might not work out that way. If you sell the Nov45 put while the stock is at 50, and two weeks from now it hits 45, the put will be at a higher price than what you received. To make the buy at 45 you would have to lose money on the put, raising your net cost above 45. If the price goes back up, you would be better off had you just placed a limit buy order at 45; you would have your stock at 45 and enjoy whatever gain came on the subsequent rise. If the stock is below 45 at expiration, you are correct that you would have been better off selling the put. You cannot know which is better in advance, but unless you are getting a healthy premium for the put, odds are you are better off not selling it.
Most put writers try to capture a healthy premium when a stock falls to what they think is likely the bottom. They sell a strike near the money that is low enough so they think it is a good entry point, but they want to capture a large premium. Put premiums tend to be inflated when a stock tumbles, so that is the time to capture good premiums. OTM puts can of course be sold in anticipation of a stock decline to a target entry level, but that usually does not bring in a healthy premium. If you look at the numbers carefully, you will find that if you have to back the short put with cash you are just as well off buying the stock and selling an ITM call at the same strike as the put you might have sold.
As for the second question, after several back and forth e-mails with my broker today I learned they plan to implement an arrangement for cash secured selling of puts sometime before the end of the year. We'll see, though they are reasonably reliable. However, in the interim, he suggested I could sell shares short and then buy puts as an approximation of selling puts in the IRA rollover account.
I don't believe you can sell stock short in an IRA under any circumstance. To sell short you must borrow stock from the broker, and the broker cannot lend you assets in an IRA. Furthermore, short stock with long puts is not a substitute for short puts. As discussed above, the comparable thing is long stock and short calls. I'm guessing that when the broker talked about shorting stock in an IRA rollover account he might have been referring to an interim account you can have for 60 days before committing the funds from one retirement account to another. Be careful of the terminology, and be real careful you do not do illegal transactions in your IRA.
Dan |
