Quote from newwurldmn:
he risks 1/3 of his money in a 25 29 putspread. he puts the other 2/3 in a treasury.
he makes 19% annualized if he expires out of the money. if stock goes to zero, he only loses 33% real loss. If stock goes to 25 (17% drop) he'll lose 33% real loss.
he makes more money than you, but he risks more money than you as well. but he can't lose everything on this trade just like it is extremely unlikely you will lose everything on yours.
His 2.72 yield is based on holding the stock for a year.
It's only a 3 month contract.
Why can't he lose everything he invested in the spread?
If the stock drops below his $25 strike, it's all gone.... unless he choses to buy the stock.
He may only lose 1/3 of what I would, but for me to lose the same 1/3 of my invested cash, the stock would need to drop closer to $20 vs $25 for him to lose a similar dollar amount.
In addition, he is investing in a treasury bond that has been dropping in value (15 points) over the past 7 months.
For the tiny yield he is earning, seems to me he is better off keeping the money in cash.
He only earns that 19% combined yield "IF" his treasury does not continue to drop in value.
If it does, he may actually lose money. (Again, down 15 points in 7 months).
The only real potential benefit I see to his spread vs my naked put is,.... if there is a sig % drop in stock value below our $29 strike.
For example, a loss of 31% of it's value, would drop the stock to $20.
But a loss of less than 30% is still manageable, via covered calls with potential stock recovery,.... as it is a company with no debt and plenty of cash.
Again, I am NOT against spreads.
I just think they should be used for volatile and/or high risk stocks.
That being, there should be a reason you may not want to potentially own the stock.
