37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
O.,,ter 19: The Sale of a Put 295
|
||
writer receives the dividends on the underlying stock, but the naked put writer does
|
||
not. In certain cases, this may be a substantial amount, but it should also be pointed
|
||
out that the puts on a high-yielding stock will have more value and the naked put
|
||
writer will thus be taking in a higher premium initially. From strictly a rate of return
|
||
viewpoint, naked put writing is superior to covered call writing. Basically, there is a
|
||
different psychology involved in writing naked puts than that required for covered call
|
||
writing. The covered call write is a comfortable strategy for most investors, since it
|
||
involves common stock ownership. Writing naked options, however, is a more foreign
|
||
concept to the average investor, even if the strategies are equivalent. Therefore, it is
|
||
relatively unlikely that the same investor would be a participant in both strategies.
|
||
FOLLOW-UP ACTION
|
||
The naked put writer would take protective follow-up action if the underlying stock
|
||
drops in price. His simplest form of follow-up action is to close the position at a small
|
||
loss if the stock drops. Since in-the-money puts tend to lose time value premium rap
|
||
idly, he may find that his loss is often quite small if the stock goes against him. In the
|
||
example above, XYZ was at 50 with the put at 4. If the stock falls to 45, the writer
|
||
may be able to quite easily repurchase the put for 5½ or 6 points, thereby incurring
|
||
a fairly small loss.
|
||
In the covered call writing strategy, it was recommended that the strategist roll
|
||
down wherever possible. One reason for doing so, rather than closing the covered call
|
||
position, is that stock commissions are quite large and one cannot generally afford to
|
||
be moving in and out of stocks all the time. It is more advantageous to try to preserve
|
||
the stock position and roll the calls down. This commission disadvantage does not
|
||
exist with naked put writing. When one closes the naked put position, he merely buys
|
||
in the put. Therefore, rolling down is not as advantageous for the naked put writer.
|
||
For example, in the paragraph above, the put writer buys in the put for 5½ or 6
|
||
points. He could roll down by selling a put with striking price 45 at that time.
|
||
However, there may be better put writing situations in other stocks, and there should
|
||
be no reason for him to continue to preserve a position in XYZ stock
|
||
In fact, this same reasoning can be applied to any sort of rolling action for the
|
||
naked put writer. It is extremely advantageous for the covered call writer to roll for
|
||
ward; that is, to buy back the call when it has little or no time value premium remain
|
||
ing in it and sell a longer-term call at the same striking price. By doing so, he takes in
|
||
additional premium without having to disturb his stock position at all. However, the
|
||
naked put writer has little advantage in rolling forward. He can also take in addition
|
||
al premium, but when he closes the initial uncovered put, he should then evaluate |