36 lines
2.3 KiB
Plaintext
36 lines
2.3 KiB
Plaintext
Accepting Exposure • 215
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$5.50 does not come along very often, so you should take advantage of it
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when you see it.
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Of course, the absolute value of premium you will receive by writing
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(jargon that means selling an option) a short-term put is less than the ab-
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solute value of the premium you will receive by writing a long-term one.
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3
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As such, an investor must balance the effective buy price of the stock (the
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strike price of the option less the amount of premium to be received) in
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which he or she is investing in the short-put strategy with the percentage
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return he or she will receive if the put expires OTM.
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I will talk more about effective buy price in the next section, but keep
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in mind that we would like to generate the highest percentage return pos-
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sible and that this usually means choosing shorter-tenor options.
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Strike Price Selection
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In general, the best policy is to sell options at as close to the 50-delta [at-
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the-money (ATM)] mark as one can because that is where time value for
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any option is at its absolute maximum. Our expectation is that the option’s
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time value will be worthless at expiration, and if that is indeed the case,
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we will be selling time value at its maximum and “closing” our time value
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position at zero—its minimum. In this way, we are obeying (in reverse
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order) the old investing maxim “Buy low, sell high. ” Selling ATM puts
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means that our effective buy price will be the strike price at which we sold
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less the amount of the premium we received. It goes without saying that
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an intelligent investor would not agree to accept the downside exposure
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to a stock if he or she were not prepared to buy the stock at the effective
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buy price.
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Some people want to sell OTM puts, thereby making the effective buy
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price much lower than the present market price. This is an understandable
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impulse, but simply attempting to minimize the effective buy price means
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that you must ignore the other element of a successful short put strategy:
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maximizing the return generated. There are times when you might like to
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sell puts on a company but only at a lower strike price. Rather than accept-
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ing a lower return for accepting that risk, I find that the best strategy is
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simply to wait awhile until the markets make a hiccup and knock down the
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price of the stock to your desired strike price. |