3 ms·
> Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait. This is not risk free:)
by chollida1 4y ago
> Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait.
This is not risk free:)
In your scenario you can either buy the stock at your entry price, call it $100
If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario.
You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put.
There is nothing risk free going on here:)
- mox1 4y agoHis point was if you are about to literally buy the stock, there is no downside to selling a put (upside is a different story of course). Especially Cash secured puts.
- chollida1 4y agoWell that's where you are wrong. There is potentially a huge amount of downside. The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry. And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put. Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.