I hope you find the information,
concepts, ideas and strategies on my site of value. If you would like to assist me with
the maintenance costs, and time spent keeping my site updated, I
have set up a Paypal account for those who would like to donate.
Thank you in advance. Remember, nothing on my site is financial
advice or recommendations. Investing is risky and losses can be
large. Trade at your own risk.
Read The Disclaimer
By using this site,
The full terms of
use can be read here.
Nothing presented is financial advice, trading advice or
recommendations. Everything presented is the author's ideas
only. The author accepts no liability for its use including
errors and omissions. You alone are solely responsible for your
own investing and trading. There are considerable risks involved
in implementing any investment strategies and losses can be
large. Trade at your own risk.
2011 / Opinion Article - Selling Stock Options
Why I Believe
Selling Puts Is Superior To Covered Calls
debate over whether selling puts or selling covered calls are
basically the same strategy has raged for years.
They are both selling stock option strategies. Go to any
financial forum and post a note about how you feel
as an investor that covered calls are better or
naked puts are better and you will stir up a debate.
Over 35 years ago when
options on many stocks were
just getting started I was introduced to selling
stock options such as naked put
selling as a means to lower my overall cost of entry
into a stock. However as the years have passed I
have developed various strategies that have shown to
me how flexible and truly exceptional naked puts are
in the arsenal of investing. Leaving aside tax implications involved in covered calls and naked
puts, I believe naked put selling is far superior to
covered calls and here are my 10 main reasons:
1) The obvious - I can buy into a stock at a
discount to the prevailing stock price. If I am
wrong and the stock moves higher, I am paid a
premium for my effort. All the while my capital sits
aside earning interest.
Covered call investing has two parts to the trade
and two commissions to be paid. First I have to tie
up my capital in the stock and then sell the call.
If the stock falls, I can try to get out of the
stock but normally this will result in a capital
loss and if I close my covered calls, I am back
paying two more commissions. With selling puts I sell
the put and keep my capital earning interest. I pay
one commission. Meanwhile as the expiry date
arrives, the premium evaporates on the put, and all
the while my capital still sits waiting. If the
stock should pullback and place my sold puts in the
money, I can buy back and roll out the puts either
further out in time for even more premium or roll it
down to follow the stock lower. When I roll lower,
often I can roll further out in time and still move
lower for a net credit rather than debit. Many times
I can follow the stock lower and still earn a
Naked Puts as my capital is not invested, my margin
amount is higher allowing me to write more naked
puts. In an uptrending market this can really add to
my profit. I can often write a lot more naked puts
than I can covered calls on the same stock as more
margin is available to me. An investor though has to
be careful and prudent as this can be a recipe for
disaster if an investor sells more puts that they
can actually handle.
Selling stock options such as covered calls with leaps is even worse as it
ties up my capital for an even longer period of
time. Selling Leap Naked Puts allows my capital to
be free for a longer period of time, earning
interest and being applied to other trades. I can
often time my trades so that I know how much capital
I will need when the leaps expire and this gives me
months to apply my capital to other naked put trades
until the leap put gets closer to expiry. Basically
I can almost double up on my capital. Therefore I
often sell a few leap puts on all my positions just
to garner more income and who knows, maybe I will
end up owning the stock at a greatly reduced price.
Selling Puts almost always allows me to
determine when I want to be assigned the shares. As
long as I monitor the naked put and roll it prior to
it expiring (Normally I roll about a 3 to 1 week before
depending on the price of the stock) I am almost
always able to avoid being assigned.
one bears repeating - selling covered calls takes
two commissions while naked puts takes just one.
might say, "wait, when I sell a covered call I can
sell above the stock price and earn the call premium
and should the stock move higher I also have an
additional capital gain." This is definitely true.
However often I check the 10 day simple moving
average against the 20 and 30 day exponential moving
average. If the 10 day is showing an uptrend, then I
sell a slightly ITM naked put and if the stock moves
up I reap the share price increase and I am still
holding the naked put. If the share price moves
above the naked put price by expiry then I have
captured all the put option premium AND had the put
expire worthless. How great is that! On my website I
show how I have used this strategy often. I call it
"Walk That Profit Home To Mama" and in an
uptrending market it can work wonders.
stocks that are in an uptrend, I can sell a string
of naked puts and capture premium all the way up and
still end up with my capital intact in an investment
account and enjoy the gains of the stock without
ever owning it.
I did this on the rise in XOM
in September 2010. While not as good as
actually owning the stock outright, it gives me
greater flexibility as I can sell naked put
contracts as the stock rises, close them for a
profit if the stock continues to rise and sell
contracts higher, following the rise in the stock.
When the uptrend begins to stall, I can close my
naked puts and be done with the stock, or I can look
the position over and decide to close and sell naked
puts further out in time in case the stock again
moves higher or if it moves lower, to capture more
premium on naked puts as the stock begins to fall
Finally my last example is using naked put income to
sell even more puts. How great a thing is that
- making money on other investors' money. Leap puts
are great for this strategy.
Take Coca Cola for example.
On Feb 4 2010 I looked at
Coca Cola and felt that I would be happy to own the stock at the
$55.00 strike. The stock was trading at 53.43. I
sold the Jan 2010 $55 naked put for $6.05. If
assigned at $55.00 my cost basis in the stock would
have been $48.95. On the other hand, if I was wrong
and the stock rose above $55.00, I was being paid
6.05 or 11% to wait. I sold the puts, earned the
capital, used that capital to sell more puts on
Kraft and meanwhile had no funds tied into either
Coca Cola or Kraft shares. So now I was using other
people's money to not only help pay for any possible
assignment on Coca Cola, but to sell naked puts on Kraft.
My Coke trade, which is still ongoing, can be seen
on my website, under the US Portfolio
flexibility of selling puts can not be
overstated. These are just 10 points. Over the years
I have developed many naked put selling strategies.
Everything from rescuing stock positions that had
large losses, to earning income from rapidly rising
stocks without ever owning the shares. When selling
stock options, naked puts
are my number one choice of investment vehicles in
my arsenal of tools. With them I fear no swings in
the market. In actuality I welcome them as every
rise in volatility just increases their premiums. I
believe every investors should study and paper trade
naked put strategies until they find those
strategies that assist them in earning capital and
protecting their assets.
You can tell that I am sold
on Naked Put selling and believe it is superior to covered
call writing. That being said, in Canada, Retirement
Accounts referred to as RRSP do not allow put selling, which is incredibly sad
and a big reason why I like to keep a large portion of my
investments outside my RRSP. In the United States this is
not the case as investors in the US are allowed to
sell cash secured naked puts.
(Basically the cash must be in their account to
cover the stock cost should it be assigned) If you have any additional
ideas, suggestions, comments, even arguments,
email me through this form.