Everyone have a great day.

With all due respect, i think you misunderstood what MikeR was saying.

His ‘writing put’ strategy is not against the stocks you hold. What he means is that:

Long stock@30 Short Call@35 = Short put@35 Cash

You are doing the LHS of this equation (put-call parity) and he is suggesting the RHS. They are both exactly the same (assuming that the options are priced correctly) and have exactly identical Payoffs. There is no question of ‘double exposure’ in Mike’s strategy.

From my experience, your startegy is better because you collect the dividends from the stocks, which theoretically should be adjusted in options prices, but very often are not fully adjusted.

Another thing that can make a difference is what is happening with the stock currently. If the stock is tanking, its better to play Mike’s startegy because put options will be overpriced due to the fear (this is valid only for exchange traded puts). However, if the stock if rising, it might be better to play your strategy as the call options might be trading at a premium to their theoretical fair value.

Nish.

MikeR: I agree with your use of puts to a certain extent. Still, the major drawbacks I see are threefold:

1. The markets tend to overreact more swiftly and vehemently to bad news than push a stock up on good news. As such, a seemingly wonderful business can quickly become unwonderful – and a sale – if bad, hidden news hits.
2. A put strategy assumes that you are correct in your intrinsic value calculation and that nothing will go wrong. While I don’t want to be a pessimist, there are a lot of variables out of our control. Personally, I’d rather bet against making quick money in the short-term than bet that I am aboslutely right and that profits are right around the corner.
3. If your portfolio is fully invested and shares are put to you, you may now have to sell a wonderful business or begin paying margin interest to maintain your perhaps over-weighted position.

Here’s an example: A few years back, I had an investment in Patterson Dental (PDCO). Over the course of a year or so, my investment had doubled. Then, news hit that they were doing something shady with their stock options (or something, I don’t remember now). The business went from wonderful to “I’m not sure anymore” and the stock opened 10% lower the next day. It was downhill for the next year.

Had I sold puts on PDCO, I would have been stuck with shares in a company that I didn’t know how to analyze or that I didn’t want because I knew it was bad. Instead of easily liquidating my position and covering a call (for a small profit), I would have had to scramble to update my valuation with the new news and been double-invested (grossly over-weighted) in a company I didn’t know if I wanted.

My point is this: You can certainly make money selling puts. In my humble opinion, I think it is a better strategy to bet against radical growth in the short-term, but only hedge my bet in a way that allows me to reap satisfactory gains no matter what happens and that affords me the freedom to make quick decisions with the bulk of my investment in a particular company. No matter what position I hold, the options premiums will be small relative to the equity holding. As such, I’d rather have absolute freedom and immediate liquidity with 98% of my money than put myself at risk of being double invested if things go sour while I’m out for coffee.

My two cents anyways. Hope that helps!

A LEAPS (Long-Term Equity AnticiPation Security) is just an option with the exercise date many months out. So no difference between a LEAPS and an option so I suggest this book because it is well-written by the late Harrison Roth.

A LEAPS (Long-Term Equity AnticiPation Security) is just an option with the exercise date many months out. So no difference between a LEAPS and an option so I suggest this book because it is well-written by the late Harrison Roth.

I love this site and I have learned a great deal. But I have to present my thoughts on writing puts because it is identical to what you are talking about for selling covered calls. Writing covered-calls = writing puts. (There is a put-call parity, whatever play you can do with a call there is an identical play with a put.)

In your example you bought the stock at $30 and wrote the $35-strike calls for $0.50. Two things can happen.

1. The stock closes above $35 and you make $5.50 per share,

2. The stock closes below $35, you pocket $0.50 per share and you have 100 shares at a basis of $30 per share.

Now instead let%u2019s write the $35-strike puts and collect about $5.50. Again two things can happen.

1. The stock closes above $35 and you make $5.50 per share.

2. The stock closes below $35 you own 100 shares at a basis of $35 but you made $5.50 per share.

Same net result in both cases.

Mike

What books do you recommend for options trading? I’m at lost with all these jargons. It looks very attractive in terms of the gains and low risk.

Thanks,

peter

I really like your posts, What you wrote in this post is very informative. Selling calls against your position is basically covered call writing, which is a great way to generate some income on non-dividend paying stocks. But i never heard of selling puts against a position. But writing naked puts is a valid scenario. So if i want to buy a position (based on your model which you described beautifully in previous posts) then instead of buying the stock out-write i can write a put option and this way if the stock drops in price i will be assigned the stock (which i don’t mind holding anyway). If it does not drop then i can keep the premium and so generate some income.

Thanks again for your great posts, keep them coming

- Anand