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Notice IBM stock gained $1.91 and closed at $106.06/share. If we
are bullish about the stock, in addition to buying the stock and long
call, we can sell short or naked put.
Let’s look at near-the-money option IBMTA. If we sell 1 contract of
IBMTA for $410/contract, we collect $410 credit in our account. As long
as IBM stays above $105 by August 21st, 2009, we don’t have to
buy the stock and $410 is ours to keep, a 3.9 % return (4.10/105 = 3.9%)
in a little bit less than 2 months from 6/25 to 8/21.
When we trade the naked put strategy, we must be willing to own the
stock and we must have enough capital to buy the stock just in case the
stock drops below the strike price and it is put to us. This is an
advanced option strategy and it is not recommended for beginner. Trading
naked put needs extensive knowledge about chart reading and full
understanding of support and resistance level.
Let’s briefly compare Long Call and Short Put strategy:
If we buy 1 contract of IBMHA, we pay $470/contract. This is the
most we can lose if the stock doesn’t go our way. However, if the stock
shoots up, our gain is unlimited. When we trade long call, we are
directional option buyer and time is against us. The stock has to move up
for us to make money. Our break even point in this trade is $109.70 ($105
+ $4.70)
If we sell 1 contract of IBMTA, we collect $410/contract. This is
the most we can earn if the stock stays above $105. Notice the stock is
currently traded at $106.06, so we have a higher probability for a profitable
trade. When we trade short or naked put, we are option seller and time is
on our side. The stock can move side way or up for us to make money. In
this case, it can move down a bit and as long as it stays above $105, we
are profitable. Our break even point in this trade is $100.90 ($105 -
$4.10). Notice the break even point for selling naked put is almost 9
points lower than the break even point for buying long call. The down
side of this strategy is if the stock takes a nose dive, our loss can be HUGE.
Dennis Phan 潘家墉
03 July 2009
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