This was an academic example to show an option position can track a stock position (minus fixed costs like commissions).
The spread between the put write and call buy should be very small (.05). I find that the different option markets often differ by more than this, so you could likely even get a zero spread. If we assume .05 that would take another $500 away from your return. It is still made up by the opportunity to use the cash elsewhere. You do risk a bit not getting filled on both sides unless you have a good account to do this with (which I don't yet).
1) you will at best get 1-2% interest on your money (current money market rates).
OK. But if you have enough margin power, you can stick the cash into something that is stable and liquid so you can make 4-5% or more. You just pull the funds out when you get assigned.
2) You will also be required to post substantial collateral when you write a naked option. This is equal to the option premium + 25% of the strike price + The amount the option is in the money.
That is why I used a cash backed put as an example. The cash IS the collateral. It is more collateral than is even required. In fact you would need more collateral to purchase the shares outright on margin than you would to write the puts for the same number of shares.
3) It will be very hard in reality to find a stock that is trading a precisely the strike price at the time you wish to enter the trade. As a result, the intrinsic value premium on one side of the trade will be higher than the other and this will ruin your very thin economics.
Like I said, this was an academic example...hopefully it illustrates to Alan the power of options. Next time AMD is at a strike price (should be tomorrow!), I'll give a peek at the option prices to see how this would have worked out. If I used this strategy I would use it to get additional leverage without having to pay margin interest. I would leave the cash in an investment that I thought could more than make up for the spread and extra commissions paid for the option purchase.
HailMary
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