Selling Puts: How to Calculate Return When Selecting Strike Price/Date? And With Margin?

lindq said:
Among many issues with shorting puts, the main problem is that in theory it can appear to make sense if one wants to own the underlying and is ready, willing and able to accept it.

But theoretical gives way to reality when after writing the put the underlying, for reasons that can't be foreseen, crashes and burns, and you are left with an instrument in your account that you would have never bought given the present circumstances.

Thus, what you are doing in writing the option is assuming/hoping that circumstances at X date in the future are such that you'll be a happy puppy. And that very often is not the case when the shit hits the fan.
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How this is more risky than buying the stock? You are basically buying a stock at the discount, and the stock goes down, you always will do better than just buying the stock.

The main risk of the naked put is opportunity loss in case the stock rallies and you are missing those gains.
 
Kim Klaiman said:
How this is more risky than buying the stock? You are basically buying a stock at the discount, and the stock goes down, you always will do better than just buying the stock.

The main risk of the naked put is opportunity loss in case the stock rallies and you are missing those gains.
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The same risk for less reward? How is it not more risky?
 
It is not the same risk. You keep the credit from the sold put in any case. And you can select the strikes based on your outlook for the stock.

For example, if you sell AAPL June 180 put for $10, you are protected down to $170. So if AAPL goes to $160, you lose $10, compared to the stock holder who loses TWICE. The only case you are doing worse than the stock holder is if AAPL rallies above $190 by June expiration. But you still keep the $10 and make almost 30% return on margin in 3 months.
 
Kim, the problem is that people forget the leverage in options. If you cant afford to lose 10% on a position of 500 shares you should not be short 5 puts either. Yet because optically the amount looks tiny in comparison to 500 shares of stock - certainly for the Alphabet/Amazon/Booking.com type shares people will take such positions. Lindq cannot make a really cogent argument that its in any way more dangerous than being long stock with covered calls or indeed just long stock, yet people insist on repeating this falsehood over and over.
 
@TrustyJules This is definitely true. But if you go this direction, same can be said about being long stocks on margin.

Selling naked put options is (mistakenly) considered to be a 'very risky‘ proposition. Stockbrokers who spread that message are doing their customers a major disservice, because they are steering them away from a prudent strategy. The only dangerous part of options trading is the risk-insensitive trader who buys and sells options with little or no understanding of just what can go wrong.

So yes, naked put can be considered more risky because it can be abused more easily. We can definitely agree here. But the strategy itself is not more risky than covered calls or holding the stock.

As I mentioned many times, the problem is not the strategy. The problem is leverage. Strategies don't kill accounts. Leverage does.
 
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