In that case, the investor would be obligated to buy stock at the strike price. The worst that can happen is for the stock to become worthless. The maximum loss is limited but substantial. This investor would have to liquidate other assets quickly, or borrow cash, to be able to honor an assignment notice. In contrast, the naked put writer hopes that the put will keep losing value so the position won't be assigned and can be closed out early at a profit. The main difference is that the cash-secured put writer has set aside the funds for buying the stock in the event it is assigned and views assignment as a positive outcome. VariationsĪ cash-secured put is a variation on the naked put strategy. ![]() If the investor is intent on acquiring the stock and is less concerned about price, there are other strategy choices worth considering. The consolation would be pocketing the premium received for the put. Should the stock price remain above the strike during the life of the option, the investor will miss out on the stock purchase. ![]() However, the put assignment is not guaranteed. The strike price, less the premium received, represents a desirable purchase price. Unlike a naked put writer whose only goal is to collect premium income, a cash-secured put writer actually wants to acquire the underlying stock via assignment. This is primarily a stock acquisition strategy for a price-sensitive investor. In that case, the investor simply keeps the premium received for selling the put option. The investor must be prepared for the possibility that the put won't be assigned. If things go as hoped, it allows an investor to buy the stock at a price below its current market value. The cash-secured put involves writing a put option and simultaneously setting aside the cash to buy the stock if assigned. Looking for a short-term dip in stock price, followed by a longer-term appreciation. ![]() The choices then include repeating the short put strategy (possibly at a higher strike price), or closing out and buying the stock outright, or simply accepting that this winner 'got away.' Outlook Second, by waiting for a price dip, the investor risks missing out on a stock that keeps climbing upward. Strike price - premium received (substantial).Long $6,000 T-Bill (cash that covers potential put assignment).
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |