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Thursday, November 20, 2003 9:41:07 AM
Here is one example. Say you are going to buy a stock today for $11. Instead of doing that, write an in-the-money put on it (perhaps the next months $12 put - you'll probably get about $1.75 for them making the price to buy the stock around $10.25). You'll virtually be guaranteed the assignment, and you'll get to keep between $.50-$1.00 extra per share. You could then take that extra $.50-$1.00 you received in cash, and throw it into a risky out of the money call purchase. You have just purchased shares for the same amount you otherwise would have, and now you have a long shot gamble that may even pay off in spades. I use this one all the time. There are 2 risks here. If the stock goes up, you won't get assigned the shares, but the calls you purchaesed will probably pay off nicely, so you still 'win'. 2nd, if the stock goes down and you would have wanted to sell the shares had you done an outright purchase, you will have to buy back the put for a greater loss than you would have had just buying the stock. If you wait it out and get assigned, there would be no difference in potential loss. Basically you have to wait out the time value of the option you wrote.
If you combine put/call writing with stock purchases, you can easily do better than average. You can even use this strategy as a source of income after you make your fortune and want to keep it.
HailMary
HailMary
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