Using Naked puts to go long

R

RGLD

Can somebody please tell me the disadvantages of using Deep In The Money Puts for going long?

My Situation:

Stock is trading at $100. I naked sell a Put at strike price $200 Dec 2017.

Benefits:

Time Decay is on my side.

Your Broker will not charge you Margin Fees ( at least my broker tells me they don't charge fees for shorting)

If the stock gets "Put" to you, you will automatically collect the premium.

The Premium gives a cushion for error.

Your max Loss is less then just buying the underlying.

Disadvantages:

If the stock pays a dividend, you won't get it.

Could have Liquidity problems between Bid / Ask prices.

If the stock somehow manages to go above this very high strike price, the option will expire worthless thus capping your profit.


Please tell me if I am missing something. If selling deep in the money puts is really better then buying the underlying more people would be doing it. But I have heard ZERO. Nobody I know does this. So this must be a flawed strategy.
 
I'd think to measure the cost of holding verse the reward... You have to put money up ...the dividend you should still realize in some fashion as you are partly synthetically long...the dividend should be already represented in the price of the option... Obviously you have dividend risk if it changes... If vol is really high this might be better then buying the stock because your also short vol and you can hold...
 
You can use options to your advantage... But those blanket statements about selling puts as a safe thing are skewed... Your selling vol or your buying it... Your adding another positon if that is what you want its great... But you hear guys talk about stuff like. "The pros sell options" or put selling etcetera
 
cdcaveman said:
The deeper the wider... Slippages bid/ask
More...
If you calculate the true value of the option, sometimes the BID is actually lower then that value. That's getting in. If it's too wide getting out, I can always wait for it to expire in the money. I get to collect all the premium for my troubles. You can always hedge Vol Risk other ways. Wouldn't Vol effect your margin? Even if you hold the underlying, the day to day flux would push your marginal requirements anyway.

Most stocks I am trading do not pay dividends.
 
Last edited:
cdcaveman said:
Increase vol is going to increase your margin req if your short vol......the option basically goes up in value
More...

I guess that is a small disadvantage or advantage depending on Vol. If you don't go in over your head selling then the Vol risk is not a big deal. I only care about where it's going to expire.
 
> Stock is trading at $100. I naked sell a Put at strike price $200 Dec 2017.
> Benefits:
> Time Decay is on my side.

You're selling a 200 call if you think in rev-con terms, which will be worth ~0 unless the stock is ultravolatile (such a levered ETF) -- hence no 'time decay.' Typically the 200 strike put on a 100 price stock will be something like 99 bid at 101.
 
ok why not use a real example.. with spy... take a 300 strike dec 16 ditm put.. trading around 114 right now... basically 112.50 by 116 is the spread... the spread is wider then any representation of vola... if you sold it.. you would be lucky to get much premium over intrinsic.. if you did it wouldn't be worth considering given the actual delta risk... so i digress.. maybe only thing to consider is margin req might be lower then 100 shares..
 
You must log in or register to reply here.
Back
Top