you need not be long the common to sell the put. you should however have the resources in your account to accept the stock if put to you. to sell a put you have to assume market direction with upward bias and the individual issue has good fundamentals and ability to appreciate.
assume sap today price $32. sell jan 01 35 put (symbol zspmg) for about $13. your theoretical risk is the stock put to you at $35 in jan 01 if it is trading below $35. in reality your cost is 35-13 or $22, so if the stock is between 22-35 on jan 01 you have a profit. the premium you receive will depreciate in value with time. for instance a feb 35 (sapng) is about$3....as you see someone is paying you a very high premium to sell you the stock in 01. the question you must ask is will sap ever trade above 35 and hold in the coming two years. if you believe so sell the put. what you can do if you believe it is a better than $35 stock is sell 3 x 01 35 puts, receive about $3900 in premiums and buy the underlying common...now you have a position to build on...you could sell one covered call 01 35(zspag) and recive about $1100. not a bad days work for no cash output...although you have locked in your gain 35-32=3+11=14....a $14per share gain if the stock is above 35 on your call, plus the balance of premium from your original 3 put contracts, think it through, select the correct underlying common with growth ability, and it works, i have been doing it for years with cpq,hwp,dell,msft,intc,sunw, and now sap...i believe in large cap techs! |
