Just theory or workable action plan?

IMHO, this is viable if no bad news with one of the positions occurs. Should Bad news occur, you will likely attempt to be calm and hold to your guns, and be willing to be PUT the stock at the contracted price.
Last year, I wrote OCT PUTs on LNCO at the $28 strike, with the IV around 20%, with LNCO trading around $29 as I desired to increase the size of my position in LNCO. Things began to occur causing the stock price to drop and the IV to soar above 80%, making it painful to buy back those PUT options, which were now huge. (Today LNCO is trading around $3)

I have done this with other stocks and not been burned, but one bad apple can destroy the whole lot. Typically trying to earn 10-50 cents, but stand to loose 10-50 dollars may not be worthwhile. Your mileage may vary.
 
stepandfetchit said:
but one bad apple can destroy the whole lot.
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The first question is: how is risk/reward?
If you know that, the answer might be very clear what you should do or not do.
Risk dollars to win dimes, or even less?

The fact that one apple can destroy the whole lot is a very clear answer I think.
 
Selling puts on stocks you'd like to own is a good strategy, but only if you're good at picking those stocks in the first place; In other words, it augments your stock selection strategy, but it's not a stand alone strategy or substitute for good picks. The same is true for covered calls.
 
You should only sell puts because you think the pits are over valued (the stock won't go down) not because they are on stocks you would like to own. If it's a stock you would like to own you presumably think it will go up. Why would you cap your upside if you think a stock will go up? And if you think a stock won't go up that much why would you want to own it?
 
newwurldmn said:
You should only sell puts because you think the pits are over valued (the stock won't go down) not because they are on stocks you would like to own. If it's a stock you would like to own you presumably think it will go up. Why would you cap your upside if you think a stock will go up? And if you think a stock won't go up that much why would you want to own it?
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It's the stocks that you don't think will go up that much that are precisely the ones you wouldn't want to risk having put to you.
The strategy doesn't cap your returns; instead, it allows you to by stocks that you'd like to own at a discount if they dip; and even if they don't dip, you are still compensated with the premium. Unless you have market timing superpowers, I would think this strategy would give better returns than straight buys and sells.
 
markuzick said:
It's the stocks that you don't think will go up that much that are precisely the ones you wouldn't want to risk having put to you.
The strategy doesn't cap your returns; instead, it allows you to by stocks that you'd like to own at a discount if they dip; and even if they don't dip, you are still compensated with the premium. Unless you have market timing superpowers, I would think this strategy would give better returns than straight buys and sells.
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The problem is if your dream stock fall overnight due to whatever bad news ( accouting, SEC investigation and etc), you will be in deep trouble if you write Put against it. The likely case at that time is you don't want to own this stock anymore as your opinion/expectations to this stock have change, but you have no choice (except you want to buy back the expensive Put)

No free lunch in option world.
 
"The problem is if your dream stock fall overnight due to whatever bad news"

Well, of course the same is true of owning a stock. If a disaster occurs usually you will be put at a price below what you would have paid had you bought the stock at the same time you sold the put. So that's actually a plus.

If you contemplate owning a stock for 'income', i.e. for the dividends; you will usually do better if you sell a below market put and get a premium that exceeds the rate of return of the stock's dividend. You will, of course, not participate in any upside should the price of the stock advance.

e.g. whenever I've done the calculation for TLT, T, VZ and a number of others, I have always done better by selling puts or put spreads than I would do if I bought the stock outright.

Part of the reason for this is that puts are typically 'overpriced'...which is another discussion entirely.
 
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galvinlee888 said:
The problem is if your dream stock fall overnight due to whatever bad news ( accouting, SEC investigation and etc), you will be in deep trouble if you write Put against it. The likely case at that time is you don't want to own this stock anymore as your opinion/expectations to this stock have change, but you have no choice (except you want to buy back the expensive Put)

No free lunch in option world.
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That's not the problem of this strategy for buying the stocks you want to own at a discount; in fact this strategy helps to mitigate the loss you would have incurred had you directly purchased the stock.
This put selling strategy will not make poor or unlucky stock selection profitable, but it still should improve your performance, whether you're good or bad at picking stocks - in that sense, it is a free lunch.
 
markuzick said:
That's not the problem of this strategy.. in that sense, it is a free lunch.
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go for it.. since it is free lunch. Covered call also a free lunch, it provides you "consistent" monthly income.

Ask yourself why the institutional never use those strategy in "practical".
 
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