Jump to content

Question on Put Option


roughlyright
 Share

Recommended Posts

I have a question related to Naked Puts sold.

 

I have sold 30 put option contracts of January 2011 American Express Strike Price 7.5, at $2.50 when the price was under lot of pressure.  Right now the same Put Options are priced at $0.40.

 

I understand that if these were calls, I could have exercised in 2011 and own stock in its place. However, I sold naked puts. If the stock of American Express remains above say $10 in January 2011, can I still exercise my options and own stock instead?

 

I wish I actually bought calls as opposed to selling puts. My intents is to convert these 30 contracts into shares. Is this possible?

 

 

Link to comment
Share on other sites

You sold the right to sell.  You didn't buy the right to buy.  The only way you are going to end up with shares is if the price between now and then, or then, ends up $10 or below and someone decides to exercise their right to sell the shares to you at $10. 

 

I would buy them back and hope Axp goes back to $12.  Then buy calls.

 

 

Link to comment
Share on other sites

You wrote 30 put options and got payed for them by someone who thought AXP would go lower, or at least wanted to hedge their position.  Keep them until they expire and keep the 7500 before tax capital gain.  Buying them back now will leave you paying the capital gains tax in 2009.  People sell puts for one reason, and that is for income. 

 

People buy calls to get leverage on the upside.  I much prefer calls as the upside can be very lucrative and I dont want the income right now.  I have AXP $15 Leaps for 2011 that have now tripled. 

 

Use the 7500 to buy calls on something else that is dirt cheap now.  It is very unlikely that AXP will ever be as low as it was again unless something bizarre happens to the company specifically.  Their lendings are short tail and they have battened down the hatches now.     

Link to comment
Share on other sites

  • 2 weeks later...

People sell puts for one reason, and that is for income. 

 

This year I sold puts for a reason other than income.

 

In Feb/March I was selling far out of the money naked puts for 20% of notional (GE, AXP, MSFT, SHLD, WFC, etc...) to fund at-the-money FFH calls for 20% of notional.  Throughout this entire year I have been 100+% notional long FFH via calls.  By the time FFH dropped to $250, I was tired of being scared so I switched from a deep-in-the-money FFH long call strategy to an at-the-money FFH long call strategy.  The puts I wrote expire in 2010 while the calls I bought expire in 2011.

 

FFH is still down YTD by about 20%, but I'm now only down 3%.  This is because the premium in the puts I wrote are basically worthless now while the premium in the calls I bought have barely decayed at all.  Otherwise I'd be down 20%.

 

So anyway, yes, I wrote the puts to generate income but really I was running a strategy that would benefit from the 2010 expiry I sold vs the 2011 expiry I bought, coupled with a deep hedge against further decline (I sold puts at very low strikes).

 

Unfortunately, I didn't just buy the shares of the companies I wrote puts on -- but to do so would have exposed me to market risk I wasn't in the mood for.  So for whatever it's worth, I'm lucky that I'm not down 20% as I was the day I started to implement the strategy. 

 

Just pointing out that not everyone sells puts only for income.

 

 

Another reason somebody might write naked puts is for meeting a margin call.  You might have a concentrated position in FFH and your broker could flip out and raise the maintenance margin requirement on you.  Should that happen, write puts on something with a lower maintenance margin requirement and use the premium to buy puts on your FFH position.  That should meet your margin call.  In this situation, if you had a large capital gain on your FFH position you wouldn't want to sell it to buy calls as that would trigger a taxable event -- so the puts is the only answer I think.

 

 

 

 

 

 

 

Link to comment
Share on other sites

I have sold out of the money put(09 jul 7.50 few months ago and now 10 jan 7.50) on KHD. My goal is to lower my average price while waiting for a recovery.

 

I have taken this strategy from Buffet's book when he sold puts on Burlington Northern Santa Fe.

 

This can be considered low risk when in your mind you think that the underlying stock is a buy at the strike price of the option.

 

 

 

 

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...