[quote=SK in CV][quote=flu]
Dumb question. If one thinks the stock is going to rise, why not just buy the stock? What advantage does this put spread have over just buying? Excuse the dumb question…
The only option trading I’ve ever done was to either write covered calls or buy put options as a hedge against company issued stock options or RSUs that were unvested and/or nearly vesting…and that was back a long time ago, when companies didn’t have so many policies about owning derivatives as an employee…So I’m curious how people are using these other strategies.[/quote]
Not a dumb question at all. In fact, it’s one that I’ve asked 100 times. As it happens, the woman sitting next to me has made a living trading futures and options for the last 5 or 6 years. And I’m following her lead. It has to do with use of capital….even though I’m sitting with a lot of cash, I have these derivative non-cash positions that are hopefully making me money. I’m not convinced it’s the right thing.
Diamonds (Dow ETF) is now paying about 2.754% I think. She convinced me that instead of buying a few hundred shares, I should sell a wide put spread and take in (at current volatility) about $100 a month. That’s $12/yr on a $175 stock that I haven’t actually bought. 6.66% is a pretty decent return. Now if I had actually bought it, or it gets put to me, i’d sell covered calls against it every month. I’d limit my upside but increase yield to upwards towards 10%.
As I said, I follow her. I ask her the same question at least once a month. And she’s way smarter than I am. So I listen. (And she doesn’t read here, so I don’t score any points by saying that.)[/quote]
Sorry, I’m not following the 10% yield using covered calls. Care to explain? I’m really slow about these things….
When you first mentioned $1/premium a share….I was wondering why are you doing this for a $1/share…But then you put it into a bigger context for me $12/year for a $175/share… I never thought about it this way.
Just curious, I think I know, but what are the worst case scenarios wrto downside risk, beyond what you already sort of highlighted with the example with T?
I guess, I’m just wondering that if you happen to be in a situation in which the stock prices falls below the put you wrote, but above the put you bought, chances are you have to buy the stock….What is your exit strategy at that point? Your own the stock, your put option you bought is out of money (although unexpired).. Now what?
Also, for a company like ATT that is playing close to a 5% dividend, does the ex-dividend date play any role into when you implement your strategy… Do you try to get the dividend, do you try to avoid the dividend buy doing your transactions after the ex-dividend date, or does it not matter?
I appreciate you sharing…I was just reminded there are a lot of smarter people out their in this world than me, lol….
