More Put Ideas
Selling cash secured puts continues to prove to be a profitable though fairly conservative move in these markets. I've mentioned this idea several times (here and here) in the past few months as a way to get paid handsomely while waiting for lower prices on stocks that I'm interested in owning anyway.
Why are puts so expensive? I overheard a stock broker on the streets of New York this weekend talking on the phone about the merits of buying protective puts on stocks. Basically, if you own stocks, you buy puts in order to protect yourself from any downside movement. With prices fluctuating wildly and the markets collapsing, however, this form of protection has become increasingly expensive. As such, you want to sell high on these expensive puts and buy low(er) on the underlying stocks.
One additional point worth mentioning is that it's better to do this on highly traded stocks. The added benefit of liquidity is that it's easier to close out your position. The bid-ask spreads on the less liquid options makes it pretty expensive to buy and sell options.
I recently closed out my positions in both the GE $10 March '08 Put as well as the FCX $12.50 May '08 Put. Both stocks had appreciated considerably, so the puts I sold had grown cheaper. Rather than wait for the puts to expire worthless to collect the entire premium, I decided to buy the puts back to close out the positions early and lock in more than 70% of the premium. This resulted in about a 17% return on the cash I used to secure the FCX put, and about 11% return on the cash I used to secure the GE put. In both cases, the holding period was under 2 months.
With my cash no longer restricted, I'm looking for more opportunities to sell puts. As always, make sure to do this only on stocks or ETFs that you are interested in owning anyway. Depending on your risk tolerance, you can adjust the return you receive by selling puts with strikes that are way out of the money. You should be indifferent to whether or not the put is ultimately exercised, as both outcomes are desirable. Here are some at-the-money put ideas to get ~20% return on your cash on some popular securities along with their potential outcomes:
I think many people would be comfortable buying the S&P 500 at its current level of 850 and holding onto it for decades. If that's the case, then selling the put on SPY should be an even better move. I collect $1,450 today by setting aside $8,500 to potentially buy SPY in Dec 2009, which I would be willing to do today anyway. I get a 17% cash return or a 17% discount on the purchase price, just by waiting a year. The same holds true for Microsoft and Apple, both stocks that I would be quite willing to buy at current prices.
To take advantage of this, I'm going to get my IRA account approved for options trading. Since this is considered ordinary income, it's best to do this in a tax-advantaged account.
Why are puts so expensive? I overheard a stock broker on the streets of New York this weekend talking on the phone about the merits of buying protective puts on stocks. Basically, if you own stocks, you buy puts in order to protect yourself from any downside movement. With prices fluctuating wildly and the markets collapsing, however, this form of protection has become increasingly expensive. As such, you want to sell high on these expensive puts and buy low(er) on the underlying stocks.
One additional point worth mentioning is that it's better to do this on highly traded stocks. The added benefit of liquidity is that it's easier to close out your position. The bid-ask spreads on the less liquid options makes it pretty expensive to buy and sell options.
I recently closed out my positions in both the GE $10 March '08 Put as well as the FCX $12.50 May '08 Put. Both stocks had appreciated considerably, so the puts I sold had grown cheaper. Rather than wait for the puts to expire worthless to collect the entire premium, I decided to buy the puts back to close out the positions early and lock in more than 70% of the premium. This resulted in about a 17% return on the cash I used to secure the FCX put, and about 11% return on the cash I used to secure the GE put. In both cases, the holding period was under 2 months.
With my cash no longer restricted, I'm looking for more opportunities to sell puts. As always, make sure to do this only on stocks or ETFs that you are interested in owning anyway. Depending on your risk tolerance, you can adjust the return you receive by selling puts with strikes that are way out of the money. You should be indifferent to whether or not the put is ultimately exercised, as both outcomes are desirable. Here are some at-the-money put ideas to get ~20% return on your cash on some popular securities along with their potential outcomes:
- SPY $85 Dec '09 Put - $14.50 (17% cash return, or buy SPY at $70.50)
- MSFT $20 Jan '10 Put - $4.00 (20% cash return, or buy MSFT at $16.00)
- AAPL $80 Jan '10 Put - $16.70 (21% cash return, or buy AAPL at $63.30)
- FXI $25 Jan '10 Put - $6.30 (25% cash return, or buy FXI at $18.70)
- USO $30 Jan '10 Put - $6.50 (22% cash return, or buy USO at $23.50)
I think many people would be comfortable buying the S&P 500 at its current level of 850 and holding onto it for decades. If that's the case, then selling the put on SPY should be an even better move. I collect $1,450 today by setting aside $8,500 to potentially buy SPY in Dec 2009, which I would be willing to do today anyway. I get a 17% cash return or a 17% discount on the purchase price, just by waiting a year. The same holds true for Microsoft and Apple, both stocks that I would be quite willing to buy at current prices.
To take advantage of this, I'm going to get my IRA account approved for options trading. Since this is considered ordinary income, it's best to do this in a tax-advantaged account.
posted by Henry at
11:48 PM
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