i have enough on my plate right now. volatility index is high today (about 30%) so you can sell puts with no risk
here is an article about the risk of selling puts:
cnbc.com
TOOLS ANALYSIS
Apr 3 2000 6:00AM ET
More on Consider Your Options...
Consider Your Options:
Selling Puts: Risky or Conservative?
by James B. Bittman
Senior Instructor, Options Institute
Special to CNBC.com
(Consider Your Options appears on the first Monday of every
month. The series discusses basic strategies using listed call
and put options that target conservative investment objectives,
such as limiting risk or increasing income. For more information
on options education, call 1-800-OPTIONS, or visit the CBOE?s
Web site (www.cboe.com).
"Selling puts" is a strategy that is the subject of much controversy. It
strikes fear in the hearts of some investors and draws yawns from
others. Why is there such a range of reactions?
Let?s first look at how the strategy works and the risk and profit
potential. Second, scenarios in which investors and traders might
use the strategy will be presented. Third, the nature of risk will be
discussed, and an attempt will be made to explain when selling
puts might be viewed as "risky" or "conservative."
The seller of a put option is described as having a "short put
position," and the seller of an equity put assumes the obligation of
purchasing 100 shares of the underlying stock at the strike price. In
return for assuming this obligation, the put seller receives the
premium that is paid by the purchaser.
Before entering into this strategy, prior approval from a brokerage
firm must be received. Typically, only individuals who meet
minimum experience and net-worth requirements and who
maintain considerable account balances receive approval. Most
brokerage firms also require that selling puts be done in a margin
account and that a stated margin deposit be maintained. Although
cash or marginable securities may be used for the margin deposit,
the premium received is part of the total margin requirement, so
put sellers, effectively, don?t have use of the premium while a short
put position is open.
An example of a short put is: "sell one XYZ September 50 Put at 6
1/2." The initiator of this transaction assumes the obligation of
purchasing 100 shares of XYZ stock at 50 a share if an
assignment notice is received. In return, the premium of 6 « a
share, or $650 in this example, not including commissions, is
received.
Risk and Profit Potential
Graph 1 shows the profit and loss of this strategy at expiration. If
the price of XYZ stock closes at or above 50 on the third Friday in
September, then the 50 puts will expire worthless and the premium
received will be kept as income. If XYZ closes below 50 at
expiration, then the put will have value, and its owner will likely
exercise the right to sell XYZ stock at the strike price of 50. The put
seller will then be obligated to purchase 100 shares of XYZ stock.
Graph 1
Short 50 Put at 6«
Graph 1 shows that the profit potential is limited to the premium
received. Above a stock price of 50 at expiration, the line is flat at
a profit of 6 1/2 a share. Below 50, however, the risk is substantial.
Below the strike price, a short position is equivalent to a long stock
position from the break-even point which is the strike price, less
the premium received. In Graph 1, the break-even point is 43 «.
This is calculated by subtracting the premium received of 6 1/2
from the strike price of 50.
An Investment-Oriented Use of a Short Put
Consider Geoff, a conservative investor, who finds XYZ stock to be
an attractive investment, not at its current price of 50, but at 43 1/2.
Assume also that XYZ September 50 puts are trading at 6 1/2 and
that Geoff aren?t in any hurry to acquire XYZ stock.
If Geoff is forecasting that XYZ will trade in a range between 40
and 50 between now and September option expiration, then two of
Geoff?s alternatives are the following. First, he might place a limit
order to buy 100 shares of XYZ at 43 1/2. This is known as a
"good-till-cancelled" (GTC) order. Second, he might sell one
September 50 Put at 6 1/2. In both cases it is assumed that Geoff
deposits 43 « a share in cash in his brokerage account to pay for
the stock.
Let?s compare the two strategies. Remember that commissions
and taxes aren?t included in the comparison.
While the GTC order to buy stock at 43 1/2 is being represented,
Geoff is obligated to buy 100 shares at 43 1/2. At expiration, the
price of XYZ stock will either have stayed above 43 1/2, and Geoff
won?t have purchased any stock, or it will have traded below 43 «,
and he can expect to have bought 100 shares at 43 1/2. If the stock
stays above 43 1/2, then Geoff, in the case of the GTC order, will
have earned nothing except interest on funds in a money market
account.
If, however, Geoff sells a September 50 put at 6 1/2, the premium
is received. At expiration, if XYZ is above 50, no stock will be
purchased. Geoff, however, gets to keep the premium. If XYZ is
below 50 at expiration, Geoff is obligated to buy 100 shares at 50.
Since he received 6 1/2 when he sold the put, his net cost is 43 1/2
a share, not including commissions.
If the stock closes exactly at 50 at expiration, a short 50 put may be
assigned, or it could expire worthless. Assignment prior to
expiration is also a possibility that Geoff should consider. Either
way, however, the premium is retained.
A Trading-Oriented Use of a Short Put
Consider the case of Debra, a trader who is bullish on XYZ stock,
currently at 50, and who wants to profit from a predicted short-term
price rise. Debra might sell the XYZ September 50 put at 6 1/2,
with the hope of buying it back at a lower price if the price of XYZ
stock rises as predicted. The risk, of course, is that the price of
XYZ declines, the price of the put rises and a loss is incurred.
Since Debra has no interest in actually purchasing XYZ stock, she
may choose to deposit only the minimum required margin deposit.
It is likely that Debra?s thinking goes something like this: "If the
stock price declines, then I will simply repurchase the put, take my
loss and move on to the next trade."
The Risks
Although Geoff, the "investor," and Debra, the "trader," entered into
the same position -- they both sold an XYZ September 50 put at 6
« -- there are frequently different perceptions of the risk of what
each has done.
The investor is typically described as having sold a "cash-secured
put." This means that sufficient cash to purchase the stock has
been placed on deposit with the brokerage firm. If the put is
assigned, then paying for the stock is a simple matter: Just use the
funds on deposit. The maximum theoretical risk of a stock price
decline is the same as for any other stock holding purchased for
cash. The maximum risk is equal to the amount invested, and Geoff
should monitor the XYZ shares as he would any other stock
holding. The maximum percentage risk is 100 percent of the cash
invested in the stock.
Debra?s situation, however, is different. First, selling a put and
depositing only the minimum required amount is typically
described as selling a "naked put." This means that the margin
deposit isn?t sufficient to purchase the underlying stock.
Consequently, it is likely that a trader will receive a "margin call" if
the put is assigned. A margin call is a demand made by a
brokerage firm requiring an increase in account equity. If a client
fails to meet a margin call, then the firm will typically close out one
or more positions so that the account equity is high enough to meet
the margin requirement for the remaining positions.
While the maximum theoretical risk of a stock price decline is the
same in dollar terms for a "trader" as it is for an "investor," the
maximum percentage risk for a trader is greater than 100 percent
of the margin deposit. Consequently, it is possible that the seller of
a "naked put" could lose more than the initial margin deposit. And
this is where "selling puts" gets it reputation as a "high-risk
strategy."
As the comparison of the "investor" and the "trader" illustrate, it is
not the selling of puts alone that determines the percentage risk.
Rather, it is the size of the margin deposit. "Cash-secured short
puts" involve risk that in both dollar terms and percentage terms is
equal to purchasing stock at the break-even point. Selling "naked
puts," however, involves percentage risks that can greatly exceed
the risk of purchasing stock.
Selling an equity put creates an obligation to purchase the
underlying stock. A margin deposit and prior approval from a
brokerage firm are required. The profit potential is limited to the
premium received, but the risk is substantial. Below the break-even
point (strike price, minus premium received) the maximum dollar
risk of a short put position is equal to a long stock position.
The term "cash-secured put" is used to describe a short put
position that is backed with sufficient cash to purchase the
underlying stock. Selling cash-secured puts can be viewed as a
conservative, investment-oriented strategy when the forecast is for
sideways trading prices, when the goal is to purchase the
underlying stock and when there is no hurry to purchase it.
The term "naked put" describes a short put position that is backed
by a margin deposit, possibly the minimum requirement, that is
insufficient to purchase the underlying stock. Selling naked puts
involves risk that is greater than the margin deposit. It is a
trading-oriented strategy suitable only for experienced traders who
are capable of withstanding the associated risks.
In short, selling puts can be risky or conservative. It depends on
how you do it.
James B. Bittman is a senior instructor at the Options Institute,
the educational arm of the Chicago Board Options Exchange. He
is also the author of Options for the Stock Investor.
Options involve risks and aren?t suitable for everyone. Prior to
buying or selling an option, an investor must receive a copy of
Characteristics and Risks of Standardized Options, which may be
obtained from your broker or from the Chicago Board Options
Exchange at 400 S. LaSalle, Chicago, Ill., 60605. Investors
considering options should consult their tax adviser as to how
taxes may affect the outcome of contemplated options
transactions.
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