Is selling naked puts a smart way to go long a stock?
Would that allow me to go long the stock and also reduce my cost basis or am I not thinking this through correctly?
Answers
190 points
HoughtonAndAtkeson answered 2 years ago …
Believe it or not, selling naked puts is actually a little bit safer than simply buying a stock. We've used the strategy for success in our Big Money Options service, but the caveat being you must be cleared for a margin account through your brokerage, which is fairly easy to do.
Our colleague, Chris Rowe, wrote an article that sums it up well, which you can find here: http://www.optionszone.com/learn-more/chris-rowe/increase-your-odds-of-suc cess-with-naked-puts.html
475 points
spider348 answered 2 years ago …
The premium you get for selling the puts reduces your exposure a little. But as you know selling puts could obligate you to buy the stock in a declining market. I don't see an improving market at this time - so even if you are selling puts for a 1-3 month sideways or higher point, can you survive the potential drawdown until then without a margin call ?...don't margin your puts. Also, you better like the long term fundamentals of the underlying company because you might end up owning it. Otherwise you would buy back your puts at a loss or if you have things timed well make a profit. This can be a great way to capitalize from minimal up/down or sideways action, but not the same as owning a stock (you will not receive dividends, benefit from a strong rally, voting rights, etc) and of course you have the elements of time and volatility as part of the equation. Also, consider setting your strike at or near a major support level. It will require additional education, account monitoring, and capitalization (for margin), and possibly other qualifying requirements from your brokerage.
If you are bullish, why not a married put scenario ? You get stock ownership and protection.
991 points
rvilmur answered 2 years ago …
I think that selling naked puts on stocks that you would like to own but are uncertain as to where they will go in the short term can be a good strategy. The big caveat is that you are creating a margin event in your account so you need to have the actual cash to purchase at the strike price available or a lot of margin capability so that you don't get a margin call in a severe market downturn. If you are lucky, you can keep selling the current month every month and really lower your cost basis if you are eventually assigned. If the stock moves up too much, find another candidate that you would like to own at a discount.
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546 points
warren answered 2 years ago …
Yes as long as you are comfortable with the strike price you choose. It's a great strategy to emplot now in some selct stocks, mainly some resource silver and gold stocks. Unfortunately many peoepl do not understand how this works, too bad because it is a GREAT strategy sometimes.
Warren,
www.preciousmetalstockreview.com
113 points
zinfool answered 2 years ago …
I sell naked puts. It does two things for me; it gives me cash flow, and if my timing is right, it gives me the ability to buy stocks I like and have thouroughly veted at lower prices than I could on the open market. The main caveat is the timing, the strike price, and my risk tolerance. I look for a bottoming of
price action (not a market bottom), a price that generates good cash flow, and determine risk of the stock going lower and triggering being put the stock, and having to come up with cash to cover the difference of strike price to put price. You will be mark to market while your account has a risk factor. you must have a level 3 trading clearance as well as a margin account. There are net worth requirements too. Great time periods are few and far between, we just had a good one.
