"You are making up an argument and refuting it. It's a waste of time to talk to you.
"
I agree. I don't know what the point of it is either.
As rmorse says lots of people do it and make a consistent profit at it. I rarely sell naked puts except when I want to obtain the stock. Again VIX rants at his own straw man for no apparent reason.
"I would view selling naked options as comparable to owning the equivalent stock"
BINGO. It IS equivalent.
In the example I gave of XLU you would earn 4% annualized. XLU pays 3.4% in dividends. So if you are interested in XLU as a stable, rel safe stock to collect dividends (there are such people) you are better off selling the 15% OTM naked put , collect your 4% (up front instead of over time) and have a 15% buffer on loss. i.e. owning XLU stock incurs capital loss from the word go if XLU would decline, while being short the 15% OTM put would only produce a loss from the decline if the decline exceeded 15%, and from then on the loss would exactly match the loss from owning the stock.
The corollary of this is that selling the put, like holding the covered call to which it is equivalent, removes you from the possibility of capital gain if the stock should advance.
It is obvious to me that there are people who might relish the choice of the short 15% OTM put position over buying the stock.
Would I do this??
No.
I don't relish this as a strategy for this stock because the yield, as I said, is too anemic.
rmorse points out that my calculation of yield is for a cash account and the yield would be greater if a margin account were used.
Of course this is true, and a margined account would boost the yield to, perhaps 12% or so which MIGHT be more acceptable to me than the 4% I showed. Still, I would like a little more than 12%.
One way to boost yields is to use spreads instead of naked short puts which ups your yield AND protects from catastrophic declines.
In my thread (Conservative Option Trades) I have about 4 years of real time trades many of which are selling pretty far OTM spreads. There are some naked short puts, but only as a means of obtaining a desirable stock at a price which suits me better than the current market price. Feel free to look at these trades and see how they did. HOWEVER please do not post on that thread as I use it for trading purposes.
e.g. I have been short the $40 put on WNR because I would like to own WNR as a stock...at $40. This desire comes from my analysis of WNR as a stock to own. (e.g. WNR has had a Zacks buy rating for some time).
So far WNR refuses to drop below $40 and I have been limited to collecting the 10% or so I am earning on the short put. That's OK with me and I will take WNR at $40 if market conditions so dictate. If not I will keep earning 10% while I wait. This, to me, is a better strategy than placing a GTC order for WNR at $40 which would tie up the money and yield nothing.
One of the big differences between me and the other posters on this board is I use what most posters here would consider VERY long time frames for my trades. Seldom less than 6 months. This puts me solidly in the realm of stock investor rather than option flipper.
Actually I think of it as selling insurance on other peoples stock holdings. I look at the stock's fundamentals, current projections for the stock and the market and decide if I am willing to insure the stock position for the premium available. Like any insurer I must take the risk of disaster into account. What I also do, mostly, is what many primary insurers do: They lay off the amount of risk they are unwilling to bear by buying re-insurance from a re-insurer like Lloyds.
Selling spreads is selling insurance and then laying off a percentage of the risk to a re-insurer.
If you manage it in those terms it is quite a viable business.
One might note that Warren Buffett made his fortune by wisely selling insurance.
http://www.investopedia.com/terms/r/reinsurer.asp
Berkshire Hathaway is largely an insurance company...although they have been buying up reality companies where I live for reasons I can't imagine. I guess one of Buffett's big problems is keeping all his money working profitably.
There have been several instances where Buffett has sold large dollar amounts of puts:
http://www.optionmonster.com/news/article.php?page=why_warren_buffett_uses_short_puts_41541.html
Another POV:
http://www.forbes.com/forbes/2012/0806/investing-crash-insurance-spdr-make-money-from-fear.html
"
I agree. I don't know what the point of it is either.
As rmorse says lots of people do it and make a consistent profit at it. I rarely sell naked puts except when I want to obtain the stock. Again VIX rants at his own straw man for no apparent reason.
"I would view selling naked options as comparable to owning the equivalent stock"
BINGO. It IS equivalent.
In the example I gave of XLU you would earn 4% annualized. XLU pays 3.4% in dividends. So if you are interested in XLU as a stable, rel safe stock to collect dividends (there are such people) you are better off selling the 15% OTM naked put , collect your 4% (up front instead of over time) and have a 15% buffer on loss. i.e. owning XLU stock incurs capital loss from the word go if XLU would decline, while being short the 15% OTM put would only produce a loss from the decline if the decline exceeded 15%, and from then on the loss would exactly match the loss from owning the stock.
The corollary of this is that selling the put, like holding the covered call to which it is equivalent, removes you from the possibility of capital gain if the stock should advance.
It is obvious to me that there are people who might relish the choice of the short 15% OTM put position over buying the stock.
Would I do this??
No.
I don't relish this as a strategy for this stock because the yield, as I said, is too anemic.
rmorse points out that my calculation of yield is for a cash account and the yield would be greater if a margin account were used.
Of course this is true, and a margined account would boost the yield to, perhaps 12% or so which MIGHT be more acceptable to me than the 4% I showed. Still, I would like a little more than 12%.
One way to boost yields is to use spreads instead of naked short puts which ups your yield AND protects from catastrophic declines.
In my thread (Conservative Option Trades) I have about 4 years of real time trades many of which are selling pretty far OTM spreads. There are some naked short puts, but only as a means of obtaining a desirable stock at a price which suits me better than the current market price. Feel free to look at these trades and see how they did. HOWEVER please do not post on that thread as I use it for trading purposes.
e.g. I have been short the $40 put on WNR because I would like to own WNR as a stock...at $40. This desire comes from my analysis of WNR as a stock to own. (e.g. WNR has had a Zacks buy rating for some time).
So far WNR refuses to drop below $40 and I have been limited to collecting the 10% or so I am earning on the short put. That's OK with me and I will take WNR at $40 if market conditions so dictate. If not I will keep earning 10% while I wait. This, to me, is a better strategy than placing a GTC order for WNR at $40 which would tie up the money and yield nothing.
One of the big differences between me and the other posters on this board is I use what most posters here would consider VERY long time frames for my trades. Seldom less than 6 months. This puts me solidly in the realm of stock investor rather than option flipper.
Actually I think of it as selling insurance on other peoples stock holdings. I look at the stock's fundamentals, current projections for the stock and the market and decide if I am willing to insure the stock position for the premium available. Like any insurer I must take the risk of disaster into account. What I also do, mostly, is what many primary insurers do: They lay off the amount of risk they are unwilling to bear by buying re-insurance from a re-insurer like Lloyds.
Selling spreads is selling insurance and then laying off a percentage of the risk to a re-insurer.
If you manage it in those terms it is quite a viable business.
One might note that Warren Buffett made his fortune by wisely selling insurance.
http://www.investopedia.com/terms/r/reinsurer.asp
Berkshire Hathaway is largely an insurance company...although they have been buying up reality companies where I live for reasons I can't imagine. I guess one of Buffett's big problems is keeping all his money working profitably.
There have been several instances where Buffett has sold large dollar amounts of puts:
http://www.optionmonster.com/news/article.php?page=why_warren_buffett_uses_short_puts_41541.html
Another POV:
http://www.forbes.com/forbes/2012/0806/investing-crash-insurance-spdr-make-money-from-fear.html
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