I trade US options - only because the market is bigger and with that brings liquidity, tighter spreads, and increased opportunities. That said this strategy can be employed with Australian options however the contract size is larger - 1000 shares versus 100 shares in the US.
Selling a Put Naked (oo err, tee hee)?
Put selling is designed to complement a trading portfolio because it offers two methods for generating profits: collecting premium by selling an Out-of-the-Money option and/or acquiring a stock at a reduced price.
So in my case I choose fundamentally strong companies that exhibit the potential for future growth. I then sell out of the money puts at a strike price that I believe is at a wholesale price i.e. at a price where I would be willing to accumulate the stock where I would then consider selling out of the money calls viz. covered call(that's a topic for another day).
Let's look at the example of AT&T
Given the strong fundamentals here is my technical analysis/observation:-
- price is at historical lows
- price has found some recent support at the 25 level with a second support level at 23.5
- price has bounced of the 25 at least 4 times confirming the support
- price has broke below 25 but found support at 23.5 and reconfirmed support at 25
- price has bounced to the 26.5 level at least 5 times - i.e. people have made at least 5%
Now with a traders hat on:-
- would I be willing to accumulate the stock at 23-24 level - yes.
- are the premiums at 24 strike worth the risk - yes.
- what is my break even - 24-0.28 = 23.7 (Dec 24 strike) and is this close to the secondary support level - yes (ideally it would be below this level)
I am currently holding short -10 T Dec 24 Puts at $0.28. In other words I have sold 10 December AT&T put options at a strike price of 24.00. I have sold the right but not the obligation to buy AT&T stock at $24.
What if? How could it play out?
- stock shoots up above current resistance - the put price will be worthless I can either buy it back to close the position early at a nominal price or i can wait until expiration (December 18) and collect the full premium of $280 (10 x 100 x $0.28).
- stock stays above 24 but within current trading range - wait until expiration (December 18) and collect the full premium of $280 (10 x 100 x $0.28) then write (sell) the next month out (January) put option.
- stock breaks below 24 - the option will be exercised at expiration and I will hold 1000 AT&T stock at a cost of $24. I can then sell call options against this stock and gain monthly premium (covered call)
Ideally price remains in current trading range and monthly puts are sold against this premise. More on how it plays out later.
