Has anyone tried this option strategy?...

B

Breakout

I just learned about an interesting strategy and was wondering
if any of you guys do this. Here's how it works...

Say, you're watching ABC stock, and it's trading around $30.
And you're interested in buying if it pulls back to $25.

So, instead of placing an order to buy at $25, you sell $25 puts.
If the stock doesn't pullback to $25, you make money on the puts.

If it does pullback to under $25, then the buyers of the options
will exercise their put, and you will be long the stock at $25
like you wanted to be anyway. Plus, your purchase price is
reduced by the premium you received when you sold the options.

Sounded pretty good to me, but I wouldn't mind hearing from
someone who's tried this.
 
This method is used everyday.

Wade Cook, aka Piece of shit, advocated this method ... Thus take it with a grain of salt



Good strategy if AND only if volatility is high

One caveat: Payoff is pretty stable, unless you use leverage. Money is also tied up due to nakedness...
 
You've just described the strategy of "naked put selling". This is a strategy that can be done at different risk levels. What you're doing is selling "out-of-the-money" puts in hopes of buying a desirable stock at a lower price. So while you wait for the stock to possibly trade lower to the strike price, you get to keep the premium.

Good luck.
 
problem is -- if the stock goes to $10 -- you still have to buy it at $25 -- so you are immediately down $15 - premium that you took in.
 
Quote from traderjimbo:

problem is -- if the stock goes to $10 -- you still have to buy it at $25 -- so you are immediately down $15 - premium that you took in.
More...

Isn't there some sort of stop loss strategy I can use? Let's just
say I got $2 for the put. So, if the stock drops to $23, then I'm
breakeven. If it drops under $23, I can buy the puts back for a
small loss, right?
 
Quote from Breakout:



Isn't there some sort of stop loss strategy I can use? Let's just
say I got $2 for the put. So, if the stock drops to $23, then I'm
breakeven. If it drops under $23, I can buy the puts back for a
small loss, right?
More...

And what if the day you get filled they halt the stock and announce accounting fraud, poor earnings, etc etc.
 
Quote from Breakout:

Isn't there some sort of stop loss strategy I can use? Let's just say I got $2 for the put. So, if the stock drops to $23, then I'm breakeven. If it drops under $23, I can buy the puts back for a
small loss, right?
More...

What happens if the stock gap down 50% at open ?

One of my friends bought a hot technology stock in ealry 2000. One morning when he woke up, the stock was down 50%. He immediately got an margin call.


:( :( :(
:confused: :confused: :confused:
 
Yea, that reminds me of something I read about Mark Cook. Seems he sold a bunch of calls, then the stock halted trading
for awhile. When it started to trade again he was down
$500,000...ouch!
 
"If it drops under $23, I can buy the puts back for a
small loss, right? "
yes you could buy the puts back at any time. selling naked puts has the same or slightly less risk (because of the premium recieved ) as being long the stock as long as you dont sell any more than you have cash available to buy the stock at the strike price.
 
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