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Strategies & Market Trends : Value Investing
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To: 249443 who wrote (14354)4/20/2002 11:17:48 AM
From: MCsweet  Read Replies (1) of 78525
 
I've started taking a similar strategy. Don't recommend it for most people. It is selling naked out-of-the-money puts on stocks I wouldn't mind owning.

If you check the vol quotes, you'll notice that out-of-the-money puts have higher implied vols than out-of-the-money calls. This means the premiums on puts are richer than on calls.

This doesn't make sense to me from a statistical perspective as on-average stocks go up at more than risk free rate (used in Black-Scholes valuation), hence a naked call option should be undervalued versus a naked put option. It does make sense to me from an insurance perspective: Buying puts is like buying insurance for your portfolio, so you have to pay the insurance premium.

With all that in mind, I prefer to sell out-of-the-money puts. I sell them for a stock I wouldn't mind owning at the strike price.

Another nice thing about selling out-of-the-money puts is I can use a limit order and don't have track the order from second to second, as the value of the out-of-the-money puts is less sensitive to moves in the stock price then say an at-the-money option. Of course, it is best to diversify and take smaller positions on these things, as being short any naked option could cause a lot of pain.

MC
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