Isn't there a way to sell put option premiums on a stock that one is willing to own in the long run? i.e. sell put options while the stock is overpriced until you are forced to own the underlying shares. Does this at all sound sensible? Could somebody provide some details on this technique if it is indeed valid?
If the idea is to own the stock then sell the put when you think the stock is UNDER valued....not overvalued. Look at the historical IV...and if the current volatility is very high then you will receive a higher premium than if the stock is OVER valued and current IV is lower than historical IV.
This method sounds sensible because it is. Just note that selling naked put options involves downside risk - but if you intend to buy the shares anyway, this this is a good method for owning the shares at your price. And if the put expires worthless and you fail to buy the shares you want - you get to keep the option premium as a nice consolation prize. So, if you want to buy a stock at $56 for example, sell a put with a strike price of 60 and collect $4 in premium. a) You may have to go out a few months to get that $4 premium b) You will not always be able to get as much premium as you want - but all that means is that it's the wrong time to be selling the put. Just as you would normally wait until the stock is near $56 to enter a bid with your broker, you can wait until a suitable option has a suitable premium. c) I wouldn't go out too many months just to get your price. I think 1-3 months is ideal for someone who wants to buy stock below the current market price. Mark http://blog.mdwoptions.com/options_for_rookies/
Exactly. For example, I own GE common and it's a core part of my retirement portfolio with a 20-30 year timeframe. I'd love to own more at a 'steal' at some point....but I'm also cautious in this market. Anyway, on Wed morning this week, because of its exposure to financial messes through its capital arm, GE's, that global diversified behemoth, had an IV in the mid-80s. GE? That's quite high, so I looked at the options to see if anything looked interesting for a trade during a period of higher premiums. GE common was at, I think, 24. I sold a load of Dec 12.50 puts -- grossly out of the money -- for 1.03 each because the premium was so darn high. Normally, those type of deep OTM puts on a slow-moving firm like GE would be much cheapter. Looked like a very good R/R for me, so I made the trade. I closed the trade for ~ 80% gain on Friday morning once GE shot up after the bailout news broke Thurs night. I won't complain ... and if GE for some reason had fallen to 12.50 by Dec expiration, I'd still be happy to get them at that price for a long-term holding. Would I have done this on a stock I wouldn't want to own? Probably not. And I probably could have sold a much higher strike on the puts, but again, in this market, the 12.50 strike was a rather comfortable risk-reward for me.
As long as the positions are cash covered. This is the oldest trick in the book, sell the put just below certain support level to make entry(or pocket the premium), then sell the call at above resistence once you are assigned the shares. You could significantly reduce your cost basis overtime if done correctly, the downside is it limits your profit potential to the upside if the underlying start to gap. But it usually is worth it, i do it all the time to my longer term holding stocks.
You should consider this ONLY IF: 1. You are fully prepared to own the stock at a lower price, even if the stock falls dramatically on bad news. 2. You are very conservative and always keep a close eye on your complete market exposure if all short puts in your account take a dive. Because it can, and will happen. Understand that short puts offer very limited upside, and unlimited downside. There are far better and less dangerous ways to make money.
The assumption was that puts would be sold as long as the stock is overvalued. However, a long term hold would always be the goal. I thought that selling calls was riskier in that selling puts had limited (not unlimited) downside risk. Also, isn't the risk in selling a put (with the intention to buy and hold) the same as buying the stock outright, since in any case the stock can go to zero?
absolutely right...in a high vol environment selling puts on stocks you want to own is a way of getting them at a discount and as Mark pointed out a very valid trade.
This is pretty much where writing-to-own falls apart. The only times you'd end up holding the shares are the times you probably don't want them anymore, i.e. when it turns out the company is a lot worse off than you thought.
True, but if an investor wants to accumulate shares, he/she probably would have placed a GTC buy order and owned them anyway. And NOT SOLD on a decline. Investors are not good at selling. Mark