James,
Writing naked puts can be an excellent, conservatively bullish move. With XYLN at 13ish now, you can sell the Nov. 12 1/2 puts for about 1 3/4. Worst case, that is like buying the stock at 10 3/4 (i.e., 12 1/2 strike price at which it will be assigned to you if the stock price falls below the strike minus the 1 3/4 commission that you took in). That is not bad: You can effectively buy XYLN today for 10 3/4, even though it is now at 13. Heck, I tried to buy this morning at 11, but the MMs took that ort off of the table before the market opened.
I've been writing conservative puts (i.e., those that are not out of the money, such as, for example, the XYLN Nov. 20s) for a year now, and if you are careful (it can cause you to get way too overexposed on the bull side), it is a decent source of income.
Reasonings behind selecting a particular strike price: I like to pick a strike that is below the current strike price (conservative). I don't like to start out with a potential assignment. Month to pick: I like to pick the closest month. Better to multiply the premium you take in by 12 (12 months) than to do, say, 3 4-month picks.
Best,
Gary Korn |
