PUT writing example
Bob, I look for a profit taking pullback on fundamentally sound stocks that I wouldn't mind owning if I'm assigned. Typically, a good stock will pullback $2 - $5, hesitate for a few days, then begin advancing again.
For example, over the weekend I noticed a $2 pullback on CSCO. My very favorite networking stock. It closed on Friday at 92.625, down from 94.625 on Thursday. So today I entered an order to sell 2 July 95 PUT's at $3.50, (yesterday's CLOSE - 1/8).
Normally, I would have sold the Aug 95 at $5.9375 (yesterday's CLOSE - 1/8), but I was anxious to try this Systematic Writing technique. Since July expiration is only 2 weeks away I changed my parameters this one time.
Anyway, the sale actually went off at $3.625, so $725 goes into my account. Now as CBOE wrote, if the stock goes up, I keep the premium for a 11.85% return in two weeks. Not bad. If it goes down, I'll be assigned the stock and I'll write a straddle on the Aug 95 options. If it goes up, my stock will be assigned on the CALL's for at least a 35% - 40% 45 day return. If it goes down again, I'll be assigned on the PUT's and double my position. I'll then write the Sep 95 covered CALL's against the stock for a tremendous return.
If it goes down again, or if at any time the stock pulls back 15% or more, I'll implement repair actions as described by McMillan and exit my position with a break even.
The thing I like about SW is you have a strategy no matter what the stock does. Of course, I would only do this with stocks on which I'm bullish. The fundamentals of the stock is what matters here. You've got to do your homework!
I hope this helps. |
