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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: Steve168 who wrote (979)4/16/2004 5:21:49 PM
From: Dan Duchardt  Read Replies (3) of 1064
 
Many people do what you suggest. The profit potential is equivalent to buying stock and selling covered calls, but since selling the put involves only one transaction you save a bit on commissions up front. Whether you get to keep those savings depends on how the position is terminated. If the option expires worthless, you don't have to pay anything more. If you are assigned and wind up buying the stock, then you pay commissions later.

You can buy the put back at a lower price anytime you want before expiration. If the stock runs up you can buy the put and look for a new entry, or sell one at a higher strike, or walk away with your gain. You do not have to buy the put back. You can wait for expiration to see what happens. Options that are .75 in the money are automatically exercised unless the owner explicitly declines to exercise. If the put is .75 in the money on expiration day, you will be assigned the stock and your broker will buy it at the $25 strike price. Your net cost will be $24 plus the cost of the two trades (short put plus long stock). If the put is worthless, you keep your $1 (less the short put fee). If the market value of the put is between zero and .75, you might or might not be assigned. It depends on how many people decide to take action to exercise their long puts at those prices, and if you are one of those randomly selected for assignment.
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