(11-30-2018, 10:22 PM)crimsonghost747 Wrote:(11-30-2018, 01:07 PM)Kerim Wrote: Yeah, but at the moment the put is sold, the stock was trading at, say, $31. When you sell the put, you're saying that you'd be comfortable buying at $30. So if you had instead not sold the put and just waited for your price, and bought outright at $30, you'd STILL ride the shares down from $30 to $28. In this case, you come out ahead for having sold the put, by the amount of the premium. Or am I not seeing it right?
In my opinion, these are the hard facts. Assuming "original" price of $31. Selling a put with a strike of $30. Stock being at $28 when you get assigned. No dividend payments during this time period. No trading fees or taxes.
Situation 1. You just decided to buy in at $31.
You spent $3100, it's now worth $2800. Loss of $300.
Situation 2. You waited until your comfy price of $30 and bought there.
You spent $3000, it's now worth $2800. Loss of $200.
Situation 3. You sold a put with a strike of $30 and got assigned.
You spent $3000, it's now worth $2800. You got the premium of say $50. Loss of $150.
Situation 4. You just decided to wait and do nothing.
You spend $0. You didn't buy anything. Profit/loss of $0.
If you have no plans to sell the underlying stock, then in all of the examples it would be an unrealized loss. Which is still a loss.
While situation 3 leads to a better outcome than situation 1 or 2, it's still a negative outcome. You have used more money than you have gained, so at the moment it most certainly is a loss. It might be a smaller loss than your original plan was but it's still a loss.
I can live with that. But at the end of the day we do not know what the market or individual stock will do in the next few weeks. All we can be sure of is what it cost today, and that we will pay a lower price next week or month with a put sale. And if we change our mind for whatever reason, there is a pretty good chance we can roll the put forward, and lower the entry basis somewhat.
IMO, the biggest risk in this strategy is failing to buy a stock that immediately goes on a big run. I'll cherry pick NVDA and AMD since we have the benefit of hindsight. I could have chased them for a year and only made a few thousand in put premiums (assume single contracts. Probably would have made 5 times that much just going long. Personally I won't chase a momo stock with this strategy. It's outside my risk tolerance for this point of my investing career.
I have sold a LOT of utilities and drug stock puts lately. My expire worthless percentage exceeds 90%, which of course wouldn't happen in a truly severe market. Let this run a few more months and I'll do the math vs going long and collecting my dividends instead of premiums. On a side note I often pick expiration dates that fall just before ex-div date so I am grabbing a dividend soon after being assigned should that occur. Not always possible of course. On another side note these are covered puts. The collateral is collecting 2.1% while I wait. I don't have to add much premium to that base to far exceed your typical dividend.
The most important cold hard fact to me is my portfolio value after a couple months of what I regard as a tough market. I have long positions in stocks and index mutual funds that are down well over 10% since OCT 1st. VERY few are up. My entire port is down less than 1% and this put strategy is much of the reason why. And this is after making a few errors I have discussed like DWDP and chasing oil stocks when my timing could not have been much worse.