It has been suggested many times by both Bill and others on this site that writing puts on stocks of strong companies (such as Cara 100 companies) on days of weakness (like today) is a good way to either pocket a premium or lower your cost on the underlying stock.

INTC is often mentioned. But I'm unsure as to how far out I should set the expiry. Jun seems to be in turmoil, and Jul also has me confused. Something like January 07 would benefit from the coming of Vista, so owning the stock at say 17.50 - premium would be a good position heading into 2007. But is this really wise with the current recessionary worries? Are we expecting to see Intel dip into the 15s and lower?

Learning how to use PUT options to generate profit and lower buy-in costs seems to be of extreme importance, but difficult to time. Any thoughts?

Now Bill. There is no reason to gloat when you're half correct. You were afterall wrong about future fed hikes(I believe the fed chairman was rather clear about that today) and the metals rally. The odds are clearly against a rally in the metals with additional rate hikes and a slowing economy. In 100% agreement with your Dow 8800 target. Keep up the great work on your blog!

Raging

Interest rates were rising through the last gold bull market.

It will happen this time as well.

CNBC: Might the secret actually to do the exact opposite of what the channel's talking heads recommend?

Novalawyer,

I think you got it.

Just as they are usually wrong at explaining what is/has happened in the markets. When they are overly pushing in one direction (bullish/bearish) they are normally wrong.
Look for when they are reaching a little too hard to press their case, this is the best time to do the opposite. Some examples:
- Dow 12,000 parties.
- Higher interest rates are good for equities.
- Homebuilders are undervalued.
These are the Basic sell side scripts. They sound great but the premise is flawed.

Bill has been a great teacher for our understanding of what is being sold to us by the talking heads.
It is like poker you have to know how to read their tells.

Andy

Fazeli,

There are many ways to use options. If you are confident you would buy INTC for example at 17.5 then you would feel comfortable selling the 17.5 puts. If you believe the above then don't worry about the time, the price will reflect the amount of time to expiration. Also, due to recent upticks in volatility I would be fairly certain the front month puts although a smaller dollar amount will trade at a higher volatility than the back months, thus you would sell these.

Bill mentions he likes to trade this way. There are other ways to approach this. You could buy the stock and puts in a one to one ratio, this is essentially creating a synthetic call. You have limited risk and unlimited upside but you breakeven occurs at a higher value.

Another approach that many pit traders use is buy the stock and puts in a ratio staying "delta neutral". If the stock breaks you can buy more shares and if it rallies you can sell some. With this position "synthetic straddle or backspread" you are hoping successful stock scalping overcomes the loss of value due to decay.

One of the best books used by option traders I suggest you read is "Option pricing and Volatility " by Natenburg.

kc,

Thanks a lot for the comments. I'll grab that book and give it a read.

Used to be writing naked puts was for really experienced traders with a lot of capital -- not the "Little People".

Have things changed?

I don't deny it's a good strategy, but there are inherent risks involved. etc. & etc.

Natenberg is very good, as are both of Larry McMillan's books. I sold some calls today, and I really suspect I'm going to be shorting more calls and probably stocks as well pretty soon if the US markets keep falling apart as they are, especially if the Fed keeps raisng rates. I'm looking at the Nasdaq 100, and the brokerage stocks, since I think that's where the most bang for the buck is going to be.

Omphalos,

Writing cash secured puts has the exact same risk/reward graph as doing covered calls. The advantage is that it's one commission instead of two. Unless the stock pays a pretty decent dividend, writing puts is likely the better play unless for some reason the calls are trading with a higher implied volatility than the puts are.

Eye Doc,

You make some good points. The only advantage of having the buy-write (synthetic short put) versus the listed short puts is when you are trading NY stocks and you can't sell short on down ticks. This is the only time you would see the puts trade out of line with the calls outside of normal slippage.

Situations arise when 999,999 shows up on the offer and everyone and their grandmother is trying to buy puts. The puts might trade 1/2 over what they are worth relative to the calls and stock price. Problem is you cannot get short stock off until it is an uptick. If you have the long stock you blast (sell) the bid, sell the puts and buy the calls for a nice 1/2 arbitrage profit.

The pricing of the put reflects both the present stock price and dividends. There is no difference in expected return whether you sell the put or have the buy-write. Arbitrage keeps the whole thing in-line.

kc,

Thanks.

Fazeli,

I had the same question as you when Bill suggested selling calls on MSFT when the stock collapsed to $24 after the last earnings.

The RSI, MACD and other indicators suggested oversold conditions and good entry points and taking a partial position was a valid suggestion. However, I noted then that from my perspective, despite all these indications, since I was expecting an imminent down turn in the markets and holding a significant number of puts to profit from such an outcome, selling puts would be directly contradictory to my overall strategy.

If you are buying or selling, rather than timing the purchase, my suggested mode of operation would be to scale in. Buy (or sell) some now, more later. I leave enough fire power to enable myself to scale in two times after the initial transaction. However, if you, like me see the market undergoing a significant correction soon, have patience. Selling MSFT puts now would make you more money than before. However, if you do not strongly believe that a market down turn is imminent, I would sell puts now rather than be greedy.

I must admit, I am tempted to rake in the dollars from selling puts now. But, oversold can remain oversold for extended periods and indeed, become even more oversold.

As Bill indicates often, he can only suggest. It is eventually up to you to parse his and other inputs and make your own decision.