I am wondering if you are short the stock and if you sell puts out of the money, what exactly happens in the scenario ? I am short 600 shares of GS stock and if I sell 6 contracts for a 65 strike price for January expiration, do I simply collect the premium and effectively close the trade if it ever gets to 65 ?
Thanks very much.
1) You could if you wanted to. However, you would be giving up the remaining extrinsic premium in the put options.
2) On a price drop from ~$77/share to $65/share, implied volatility levels would probably increase which would tend to firm-up the option, to your detriment.
3) I'll assume that you already know that a covered-put is the same as a short-call.