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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: Jeffry K. Smith who wrote (5687)	3/29/2000 1:01:00 PM
From: KFE	Read Replies (2) \| Respond to of 8096

Jeffry, I have seen this strategy: "the naked put will give you a higher rate of return and can be boosted if written against T-Bills in the account" mentioned in a number of places, but not where it was ever described well enough for me to understand it. I don't know which part of the question you are interested in so I will try to address both parts. Naked puts vs. covered calls and using T-Bills. Naked puts will yield a higher return than covered calls because less collateral is needed to cover an equivalent position and the collateral deposited can generate additional income. A covered call write will require 50% investment in the underlying if done on margin and 100% if not margined and if done on margin you will pay interest on the debit balance. An ATM naked put will require 20% collateral deposit which will also be generating additional income if deposit is cash or income producing security. Example: $100 stock. Call and put 100 strike both selling for $10. Stock is above $100 at expiration. CC: buy 1,000 shares of stock and write 10 calls. No margin:$100,000 invested & receive $10,000 in premiums for a 10% return. Margined: $50,000 invested & $10,000 in premiums for a 20%- interest paid return. Naked Put: deposit $20,000 in T-Bills and sell 10 puts. $20,000 invested & receive $10,000 in premiums plus the interest on the T-Bills for a 50%+ interest received return. Alternately, $100,000 in T-Bills could be deposited and 50 puts sold. In full disclosure any downward movement of the underlying will require additional collateral for maintenance margin and any losses will be a greater percentage loss for the naked puts. Leverage works both ways but you shouldn't be doing either strategy unless you can generate consistent profits. Why use T-Bills: If you use cash instead as collateral your broker may deduct the margin requirement from any cash balance you have earning credit interest. Hope this helps. Regards, Ken