by Travis Johnson, Stock Gumshoe | January 21, 2014 12:35 pm
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sorry it was Intel; I wish for your sake it had been RST. I keep trying with that one, but can’t get it called away. Soon maybe but meanwhile I make enough for a caramel latte every month.
I have covered calls on intel but at a higher strike price. I bought at $20 and even if they do get called like you it will be a healthy profit and I think they will pull back in the future anyways. I don’t do much options except covered calls I am comfortable losing the stock. can anyone explain how a put would cover losing the stock or do I not understand puts
If you Write a put (sell to open) you are getting $ now in exchange for the buyer being able to ‘put’ you the stock any time before expiration of the option. The buyer is taking insurance. You are selling it.
This strategy is used to attempt to buy at a cheaper price — and get paid if you don’t– but works best on stocks that are more volatile than Intel.
Today INTC closed at $24.90, the April $24 put is $0.65.
So you sell 1 Put, and if INTC is below $24 on April 19th you will be obligated to buy it with a cost basis of ($24.00 – $0.65 premium received = $23.35 per share) which is a discount of about 6% only 3 months in the future. ONE (1) contract (Put in this case) means 100 shares.
So on April 19th you either have $65 (less commission) or 100 shares of INTC with a cost basis of $2335 (less the original commission and no more)
If INTC is above $24 at that time you just keep the $0.65.
If INTC is, say, $14 at that time–well, you own (are forced to buy) it for $24 anyway–instant big loss.
You cannot sell Puts in an IRA. You need ‘upgraded’ options status in even taxable accounts (deep pockets). Nonetheless you can chase a high flyer like DDD to get paid e.g. 5% or 6% every 3 months to simply not buy the stock. Very profitable is this until DDD crashes sayeth the Yoda. I have so far been paid about 40% to NOT buy DDD.
It’s not likely to happen on INTC, but the buyer has the right to Put you the shares anytime before April 19th as well. This doesn’t happen in the efficient INTC market but does happen on some stocks. The people who do this are engaging in ‘arbitrage’ — and they will make pennies but they will make them in a day and do something else tomorrow.
Paul: Some brokers (e.g. Tradeking, others probably too) do allow selling puts in an IRA as long as they are fully cash secured. Using your INTC example, if i sell 1 put at $24 I need to have at least $2400 cash in the account in case the put gets exercised.
I haven’t actually tried that yet, I’m kinda new to options, just getting started. But as far as I know, as long as no margin is involved, it’s generally ok to do a specific option strategy inside an IRA.