37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
19: The Sale of a Put 299
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YING STOCK BELOW ITS MARKET PRICE
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addition to viewing naked put writing as a strategy unto itself, as was the case in
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previous discussion, some investors who actually want to acquire stock will often
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te naked puts as well.
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bmple: XYZ is a $60 stock and an investor feels it would be a good buy at 55. He
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places an open buy order with a limit of 55. Three months later, XYZ has drifted
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down to 57 but no lower. It then turns and rises heavily, but the buy limit was never
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reached, and the investor misses out on the advance.
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This hypothetical investor could have used a naked put to his advantage.
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Suppose that when XYZ was originally at 60, this investor wrote a naked three-month
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put for 5 points instead of placing an open buy limit order. Then, if XYZ is anywhere
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below 60 at expiration, he will have stock put to him at 60. That is, he will have to buy
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stock at 60. However, since he received 5 points for the put sale, his net cost for the
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stock is 55. Thus, even ifXYZ is at 57 at expiration and has never been any lower, the
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investor can still buy XYZ for a net cost of 55.
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Of course, if XYZ rose right away and was above 60 at expiration, the put would
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not be assigned and the investor would not own XYZ. However, he would still have
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made $500 from selling the put, which is now worthless. The put writer thus assumes
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a more active role in his investments by acting rather than waiting. He receives at
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least some compensation for his efforts, even though he did not get to buy the stock.
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If, instead of rising, XYZ fell considerably, say to 40 by expiration, the investor
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would be forced to purchase stock at a net cost of 55, thereby giving himself an
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immediate paper loss. He was, however, going to buy stock at 55 in any case, so the
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put writer and the investor using a buy limit have the same result in this case. Critics
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may point out that any buy order for common stock may be canceled if one's opinion
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changes about purchasing the stock. The put writer, of course, may do the same thing
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by closing out his obligation through a closing purchase of the put.
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This technique is useful to many types of investors who are oriented toward
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eventually owning the stock. Large portfolio managers as well as individual investors
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may find the sale of puts useful for this purpose. It is a method of attempting to accu
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mulate a stock position at prices lower than today's market price. If the stock rises
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and the stock is not bought, the investor will at least have received the put premium
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as compensation for his efforts.
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SOME CAUTION IS REQUIRED
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Despite the seemingly benign nature of naked put writing, it can be a highly dan
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gerous strategy for two reasons: (1) Large losses are possible if the underlying stock |