38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 25: LEAPS 399
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Treasury bill and earn interest over the two years that the put write is in place. Even
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if the T-bill were earning only 4% per year, that would increase the overall two-year
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return for the naked put sale by 8%, to 32.4%. This should make it obvious that naked
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put selling is rrwre strategically advantageous than covered call writing.
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Even so, one might rightfully wonder if LEAPS put selling is better than selling
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shorter-term equity puts. As was the case with covered call writing, the answer
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depends on what the investor is trying to accomplish. Short-term puts will not bring
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as much premium into the account, so when they expire, one will be forced to find
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another suitable put sale to replace it. On the other hand, the LEAPS put sale brings
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in a larger premium and one does not have to find a replacement until the longer
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term LEAPS put expires. The negative aspect to selling the LEAPS puts is that time
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decay won't help much right away and, even if the stock moves higher (which is
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ostensibly good for the position), the put won't decline in price by a large amount,
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since the delta of the put is relatively small.
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One other factor might enter in the decision regarding whether to use short
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term puts or LEAPS puts. Some put writers are actually attempting to buy stock
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below the market price. That is, they would not mind being assigned on the put they
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sell, meaning that they would buy stock at a net cost of the striking price less the pre
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mium they received from the sale of the put. If they don't get assigned, they get to
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keep a profit equal to the premium they received when they first sold the put.
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Generally, a person would only sell puts in this manner on a stock that he had faith
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in, so that if he was assigned on the put, he would view that as a buying opportunity
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in the underlying stock. This strategy does not lend itself well to LEAPS. Since the
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LEAPS puts will carry a significant amount of time premium, there is little (if any)
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chance that the put writer will actually be assigned until the life of the put shortens
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substantially. This means that it is unlikely that the put writer will become a stock
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owner via assignment at any time in the near future. Consequently, if one is attempt
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ing to wTite puts in order to eventually buy the common stock when he is assigned,
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he would be better served to write shorter-term puts.
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UNCOVERED CALL SELLING
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There are very few differences between using LEAPS for naked call selling and using
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shorter-term calls, except for the ones that have been discussed already with regard
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to selling uncovered LEAPS: Time value decay occurs more slowly and, if the stock
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rallies and the naked calls have to be covered, the call writer will normally be paying
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more time premium than he is used to when he covers the call. Of course, the rea
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son that one is engaged in naked call writing might shed some more light on the use
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of LEAPS for that purpose. |