Using Naked puts to go long

[RGLD]

Ya know Cdaveman, the value between the bid / intrinsic is only .15 cents on your SPY example, but being more realistic, it's an index, if it moves past 243 (30%) I'll happy take my profit and let it expire.

You're Wrong! It is a stupid trade.

No offense, OP, but it shows a lack of understanding of the realities of option markets. Generally, not only is there less liquidity with ITM, but also as you go out in time.

Posters mention this because it is very important when trading - especially over the course of many trades. Without liquidity, you may as well give your money to charity.

You'd probably be better off buying the UL and selling the OTM call for an equivalent risk - whatever time frame or deep ITM put you are considering.

If you're gonna sell puts, look for liquidity in daily volume and open interest. It should easily be apparent where the liquidity is.

If you plan on hold on to it until it expires it's no big deal. Let's be more realistic, think of a stock like AAPL expiring in May with a strike price of 120 currently bid-ask 27.80 - 28.10. The spread is .30. Premiums are 1.34 - 1.64 respectively. I want to buy AAPL but I don't want to borrow from my broker and pay those margin fees and I want to collect that 1.34 premium. So I short the put. The only downside is I may not be able to get out at the price I want - I am fine with letting it expire ITM. And I am sure AAPL is pretty liquid. If this is a stupid trade, then the idea buying AAPL to begin with is a stupid trade - not the actual strategy. Ofcourse we look for liquidity, if a bid/ask is too wide it's best not to trade it.

Interestingly enough you can SHORT the underlying to lock in that $.134 Premium to make your own version of a naked Call. If AAPL goes above $121.34 by May you lose money. But this isn't Arbitage, you're creating your own version of a naked call.

 

[marcoPolo21]

Oh ok sorry - that is margin. I was talking about Margin Fees. For example if you go long the underlying at $50,000 (borrowed), your broker would charge you 7.25% that annually.

I do not think they charge much for selling options though I could be wrong.

.
isn't IB's margin rate around 1.5% ?

marc