Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Search the Community

Showing results for tags 'stock strategy'.



More search options

  • Search By Tags

    Type tags separated by commas.
  • Search By Author

Content Type


Forums

  • Welcome to Traders Laboratory
    • Beginners Forum
    • General Trading
    • Traders Log
    • General Discussion
    • Announcements and Support
  • The Markets
    • Market News & Analysis
    • E-mini Futures
    • Forex
    • Futures
    • Stocks
    • Options
    • Spread Betting & CFDs
  • Technical Topics
    • Technical Analysis
    • Automated Trading
    • Coding Forum
    • Swing Trading and Position Trading
    • Market Profile
    • The Wyckoff Forum
    • Volume Spread Analysis
    • The Candlestick Corner
    • Market Internals
    • Day Trading and Scalping
    • Risk & Money Management
    • Trading Psychology
  • Trading Resources
    • Trading Indicators
    • Brokers and Data Feeds
    • Trading Products and Services
    • Tools of the Trade
    • The Marketplace
    • Commercial Content
    • Listings and Reviews
    • Trading Dictionary
    • Trading Articles

Calendars

There are no results to display.


Find results in...

Find results that contain...


Date Created

  • Start

    End


Last Updated

  • Start

    End


Filter by number of...

Joined

  • Start

    End


Group


First Name


Last Name


Phone


City


Country


Gender


Occupation


Biography


Interests


LinkedIn


How did you find out about TradersLaboratory?


Vendor


Favorite Markets


Trading Years


Trading Platform


Broker

Found 1 result

  1. A frequently mentioned strategy for acquiring shares of a desirable stock is that of selling naked puts and waiting to have the stock assigned. Advocates of this strategy argue that this is a great way to buy a stock at a discount price. While there is some potential value to this strategy, it is unclear that this approach is always a sound way to acquire a stock. Let’s look at a case that was recently profiled in the financial press to investigate the pros and cons of acquiring stock by selling naked puts. Astex Pharmaceuticals Inc (ASTX) is a popular stock with a price that has been in a steep decline since the beginning of May. Recently the stock price appears to have bottomed out near $4.50 per share. On June 11, with ASTX stock trading at $4.60 per share, a single order to sell 5000 contracts of the Jul 4.5 puts was filled at $.32 per share. There was no evidence that this was part of a spread order that would have hedged the short puts. Ostensibly, this order was placed by a put seller (firm or individual) that has some potential interest in owning 500,000 shares of ASTX stock. Positive side of this strategy The arguments in favor of this trade point out that if the stock price is above $4.50 at the July expiration date, the short naked puts will expire worthless and the seller keeps the $.32 per share. On the other hand, if the stock price is below $4.50, the seller will be assigned the stock and thereby acquire 500000 shares at the discounted price $4.18 per share [4.50 - .32 = 4.18]. An important point about this stock acquisition strategy is that while the put seller does not need to have all of the cash available to purchase the stock prior to the options expiration date, there will still be a substantial margin requirement imposed as soon as the puts are sold. Negative side of this strategy To see the negative side of this strategy of selling naked puts, suppose that ASTX stock has bottomed out near $4.50 a share and rises to $5.00 or higher by the July options expiration date. The put seller may regret not having decided to buy 500000 shares of stock at $4.60 per share while simultaneously selling the Jul 5 calls for $.35 per share. That combination represents a discounted stock price of $4.25 per share [4.60 - .35 = 4.25], and if the stock price is above $5.0 at the July options expiration, the stock will be called away for a total profit of $.75 per share [.35 + (5.00 -4.60) = .75]. On the other hand, if the stock price begins to fall, it may be possible to roll the short Jul 5 calls down to the Jul 4.5 calls so as to receive a total of say $.45 from the two short call transactions, thereby reducing the cost basis of the ASTX stock down to $4.15 per share [4.60 - .45 = 4.15]. Conclusion The primary point of this discussion is if you are bullish on a stock that is near a bottom in price, you may be better off buying the stock than going through the acquisition process of selling naked puts. If you are correct in your assessment that the stock is ready to start moving up, you are likely to achieve a better return by simply buying the stock and selling out-of-the-money calls. Even if the stock continues to fall a bit lower, your cost basis for stock ownership may be about the same as that of the put selling strategy. ************************************ Dr. Olmstead can be found at http://www.olmsteadoptions.com, an on-line options trading site, centered around options education and trading strategies he’s developed. He is Professor of Applied Mathematics at Northwestern University, author of the popular and highly-praised options book, Options for the Beginner and Beyond (2006) and former chief strategist for The Options Professor on-line newsletter, distributed by Zacks.com and Forbes.com.
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.