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Strategies & Market Trends : Waiting for the big Kahuna
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To: edward miller who wrote (27351)9/11/1998 11:39:00 AM
From: yard_man  Read Replies (1) of 94695
 
Compare simply placing a limit order for a stock with selling a put at the same strike price. That is a valid comparison.

Limit order:

If it hits the low price you buy the stock.

Sell puts:

If it hits the low price and stays below through expiry you get the stock, but you also get the premie.

Your risk is reduced (in selling the put instead of a limit order) only by the premium you get (neglecting commissions). Otherwise the risk is the same.

Of course the other side is better -- no exercise may still get you the premium even though the price has dipped below, whereas with the limit order you would have the stock slightly above where you bought.
One has a profit locked (expired put); the other does not.
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