Newbie question about put options
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Newbie question about put options
Posted by lsuhsc05 on 2/11 at 7:53 am
I was wondering if this is a poor strategy for investing.

I have $60k to invest and I want to buy 12 solid stocks which pay dividends. Would it be a good idea to sell puts on them until I have to buy when the put option is called in? When I actually have to buy the stock I'll hold until value increases at least 5% then sell and start over with the same stock or another quality stock. The goal will be to make money from selling puts until I have to buy and then collect dividends until time to sell and then start over.

The biggest risk I see is a total collapse of a company for which I'm selling puts. Another risk is a long bear market in which case I would just hold the stock. Some examples of stock I would like to sell puts on would be IBM, Abbott, Chevron, Exxon, Intel, Wal Mart, Aflac to name a few.

Is this a bad idea? What am I missing?


This post was edited on 2/11 at 7:55 am

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Posted by ThaBigFella on 2/11 at 8:26 am to lsuhsc05
Wouldn't recommend it for someone with $60k...bc if the market has a 20-30% drop you're going to lose your mind...buy 12 stocks put $5k in each and drop it


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Posted by GumboPot on 2/11 at 8:31 am to lsuhsc05
quote:

The biggest risk I see is a total collapse of a company for which I'm selling puts.


Well, that risk would exist if you owned the stock however you could bail on the stock quickly. With puts you could buy back your position with a stop order if the stock collapses and you decide you no longer want to own the underlying stock.

With that said and IMO, selling puts is a good long strategy if you like the underlying stock, are willing to hold on to it for awhile (my definition of awhile is 18 months) and want to capture the underlying stock at a discount. Of course the stock could shoot up and you'd miss out on the run up. In that case, oh well...take your small profits and move on to the next one.



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Posted by lsuhsc05 on 2/11 at 8:43 am to ThaBigFella
quote:

...buy 12 stocks put $5k in each and drop it


Couldn't the market still drop 20-30%? In that case I just paid full price for stock and lost. At least with a put I would get a lower price. These are all stocks I would like to own so I wouldn't mind having to buy them. Especially if they pay dividends.



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Posted by Mootsman on 2/12 at 3:15 pm to lsuhsc05
Much easier and less complicated to write covered calls off the stocks.


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Posted by lsuhsc05 on 2/12 at 6:47 pm to Mootsman
Why not sell puts each month until you have to buy the stock. Immediately upon aquiring the stock, sell a call option equal to +5% of put price. Hold stock and collect dividends until call option is active. If call option is triggered then start selling puts again on the stock or a diffirent quality stock if necessary.

I know large drops in stock prices would be a risk, but most S&P 500 companies will increase their dividends if their stock falls too far.
I would have to come up with an absolute sell price to avoid complete loss but I only want to do this with companies I really want to own. Philosophically speaking, I would buy stock in companies in which I wouldn't mind starting a long term career.


This post was edited on 2/12 at 6:49 pm

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Posted by OFWHAP on 2/13 at 12:42 am to lsuhsc05
The problem with your strategy is that you'll get eaten up in a volatile market, as you'll only be able to profit in a narrow price range (if I'm understanding your proposed trades correctly). And as for collecting dividends on the stocks you bought at inflated prices, if the calls you've written are in the money come ex-dividend date, the owners of those calls will exercise early and deprive you of your dividend income.


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Posted by lsuhsc05 on 2/13 at 8:41 am to OFWHAP
quote:

if the calls you've written are in the money come ex-dividend date, the owners of those calls will exercise early and deprive you of your dividend income.


That would be ok as I would set the call option for +5% of the put price, so I would have made 5% when they excercise their call. If the stock stays around(+/-) the put price, I'll go long and take in dividends until it gets to the 5% mark.

Volatility could be a problem but if the price drops too low then I'll just go long with the stock as these are stocks I would own regardless. I will have to have an exit strategy for individual stock situations such as what happened with kodak, GM, MCI, Enron etc. In that case I would just have to cut my losses and move on.



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