Below
is Intel. Look at its 10 year chart. The stock has been in a
nice trading range for almost the entire 10 years. If I had
sold puts at $38.00 or even $35.00 I could generate
income all the way down to $20.00 over a period of time.
Being in Intel at $38.00 through naked put selling would not
concern me. I would roll out and down and stay ahead of
assignment by rolling months early and at the same time
watching the dividend amount to be sure my naked put
wouldn't be assigned due to the dividend. And I did mention
it pays a dividend correct? And that dividend has been
increasing year after year correct?
Recall that for me, selling naked puts is a long term
strategy. I am not jumping from stock to stock, chasing this
one up and then searching for the next great stock to try to
buy low and sell high. I have a clear goal and know what
stocks it will take to make that goal a reality. I also want
a stock that when it falls, it does not end up going from 90
to 15 over a period of years. I want a stock that might fall
from 25 to 15, like Intel has. It is much easier to recover
losing capital in a stock like Intel than a stock like
Lexmark.
LXK
Lexmark Puts,
Currently
the May $37 puts are selling for $1.70 Five contracts @
$1.70 = $850.
Stock
stays below $37, I get assigned 500 shares at $37 = $18,500
(true cost $18,500 - $850= $17,650) Stock goes past $37,
assignment never happens, keep $850
In a simple term I suppose yes. But I don't look at selling
naked puts as you have indicated above. It's a strategy that
requires goals and planning. Below are the strikes available
for MAY which expire in 24 days from the date of this
article. The stock today fell dramatically - down over 15%
which is really more like a bear market than a pull back.
It closed the day before above $38.00. Today (April 26)
Lexmark closed at 32.76, but got as low as 31.84. Below are
the puts from $33.00 down. I see no point in selling the
$37.00 naked put unless you think the stock is going to run
back up.
Before you sell the naked puts you mentioned, do you have
your goal and objectives in place? Have you asked yourself
if you want to own this company if you are assigned the
shares? Would you then sell covered calls to get exercised
out of the stock once assigned and then repeat the process?
You have to ask yourself, why are you selling naked puts on
this company. Are you just going for volatility? What is
your plan if the stock falls down to $25.00 in just a few
sessions? Where is support for the stock? How low has this
stock been before? How fast has it recovered before? Did you
look at Delta which can give you some idea as to what the
chance of assignment is? For example at the $31 strike Delta
is indicating a 27.2% chance of being assigned by May
options expiry.
Look
at the $31 strike. The stock collapsed today to 31.84 at one
point, and closed at 32.76. At the close the 31 strike was
.40 bid or 1.29%. Would you sell this strike and put your
capital at risk in a stock that just plummeted 15% for a
possible 1.29% gain when there are so many stocks available
that can provide the same return that have not seen this
type of collapse?
Below
are the 3 lowest available put options for JUNE 2011 options
expiry. Did you look at them to consider much larger
premiums and a time frame that might give the stock longer
to recover?
Overall what I am getting at, is that you need goals and
objectives. Once a plan is formulated and you are following
a stock for selling naked puts, you can take advantage of
pull backs. For example just a few sessions ago Intel sold
off and I loaded up on selling naked puts at the $19 strike.
Why would I do this? Because it is a stock I follow, it has
a very good trading range, I have been in it for years and
if assigned I would take the stock and sell calls and if
necessary average down because Intel meets my criteria. You
can see now that selling naked puts, to me is not just pick
a stock and sell a put. I'm investing, not "just" selling
puts.
Downsides:
Assigned
stock and price continues to fall?
But is this
what you wanted to happen? What about your plan? Did you
want the stock? Did you want it now? Did you think about a
plan to roll continuously until assigned to keep generating
more income until you end up being assigned the shares. How
much money do you want to earn before being assigned? Do you
never want the stock? If not then perhaps a different
strategy is in order? So is this really a downside? If I
sold the May 31.00 for .40 cents, then my true cost is
$30.60 on the stock, which is the lowest it has been in a
year. Is this a good entry point? Would I be happy here? If
that was my plan than there is no downside if assigned.
Upsides:
$850 ??
How about
$850.00 and a chance to do it all again, or the chance to
roll for more income, or what about split the position and
sell some put contracts this month and some put contracts
into JUNE? What about splitting up the entire trade over 3
months? Sell 2 puts for the closest month, 2 for June and 1
into October? How about selling each set of contracts at a
lower strike so for May you sell the $32, June the $31 and
October the $30? Now you are averaging yourself lower into
the stock and gathering more premium.
