Ok, let me put it this way. It makes no sense to write a put if you believe the price of the underlying security is going to go down (unless you like giving away money :-).
Writing a call in the same situation will net you the premium. Are you saying that there is no difference between a loss and a gain?
Marc,
1. You are correct that it makes no sense to write a put if you believe the price of the underlying security will go down (below the strike price). Writing a put is a bullish exercise.
2. Writing a covered call in the same (bearish) situation also makes no sense and for the same reason: If you are bearish, you should have sold the stock rather than have kept it.
3. However, if one is inclined to stay in the stock, writing a put is very much the same as buying (or keeping) the stock and writing a covered call: When you sell a put, you net premium. This is no different than when you sell a covered call.
4. When you write a covered call, and the underlying security goes down, you lose money vis-a-vis the security. When you write a naked put, and the underlying security goes down, you lose money vis-a-vis the security, as it will be assigned to you at the strike price. Again, the same result.
The advantage of the naked put is that, if the stock doesn't fall below the strike price (and with a conservative put you can have lots of points to work with before you fall to the strike price), you can use 30% of the equity that would have been required to buy the stock and write a covered call on it.
Gary Korn |
