Well, gee, like, I mean that like dividends are FREE money, ya know ??? (vacant Valley Girl-like stare) (as long as you don't count the loss on the stock from going ex-div)
How does this strategy compare: buy 1000 shares of KO at 54.78. Sell 10 Jan2012 50 calls at 7.80. Your cash outlay and b/e excluding dividends is 46.98. There is $3.02 in time premium, so unless KO moves significantly higher, shares shouldn't be called and all the precious dividends will be collected for at least some time. You have given up any chance for capital gain for the $3 in option premium, but B/E is lower than the other strategy. If the shares are called away, you can rinse, wash, repeat.
Awesome to sell naked puts on a bear market Not just terrible R:R, but it's like going against the flow... Unless you have unlimited cash... then you can "always" be profitable by rolling your positions...
Everyone thinks their latest trade is a new insight... and it is... to them. comparing (using Friday close of 54.25): ........................................P/L................................................ ......CC + Short Put.......CC......Short Put.......50/55 put spread 40.........(2000)...........(1110)......(888)............(265) 45..........(1000)............(610).......(388)............(265) 50...............5................107.........112.............(265) 54.25........855...............317..........535..............162 55............1000..............389..........609...............235 60.............2000.............890.........1110..............235 --------------------------------------------------------------------- req:.........10000.............5110.......4890..............265 Y(60)..........20%...............17%.......22.7%...........89% Y (UNCH).....8.5%..............6.2%........11%...........61% Y(50)..............0%...............2%..........2.3%........(100%) tax treatment and dividend timing will make a difference.
Seems to me there are two different issues here. 1) Risk/reward ratio for any position is, to a certain degree, a matter of opinion (and/or "analysis"). 2) The original doubt aimed at the trade was, why synthetics instead of actual puts. I think the author explained himself pretty well. Your (and mine) trading horizon might be different, but for a certain class of investors, I can see why dividend tax + long term cap gains is a significant issue. Personally, I think there's room here to agree to disagree with the newsletter writer. I don't really think he's earned the various insulting/dismissive barbs aimed at the trade.
Well, the point is that if the buy-write has favorable tax implications over the naked puts he should have gone all in for the buy-write. Mixing a buy-write with an equivalent sale of puts is just weird. It's like he can't make up his mind.
This is actually a complex discussion about what is better. The buy-write or naked put selling. 1) Tax Implications of the two strategies. Which one will generate a lower tax on gains? Obviously, the buy-write will have more favorable long term tax advantages with the lower tax on dividends and long term capital gains 2) Margin Requirements of the two strategies. Which will generate a better return on capital? However, the naked put is a much higher return on capital since most brokers require 20-30% margin on naked puts. So, once you factor in the higher return on capital, the tax disadvantage may not be such a big deal Caveat: If this is done in an all cash account, then the buy-write is better. If this is done in an IRA, the total return should come out the same on both strategies