What Did You Buy Today?

[crimsonghost747]

NilesMike Wrote:Selling a put to buy a stock is always less risky than just buying the stock. If it expires ITM you bought the stock for strike price minus the premium you collected. Now you own the stock cheaper. XYZ stock today=$45.00, sell a 44 put for .62. Your breakeven is 43.38. Yes, you may get assigned at $42.00. Still better than if you purchased XYZ for 45.00

If the put expires OTM, you keep the premium and do it again.

Here is how the math works out, at least the way I see it. There might be a mistake in there somewhere so please do correct me if I'm wrong.
The goal is quite obvious: you want to enter the stock. 

You have option A. Buy XYZ at $45.00 and done, enjoy the growth and dividends for the rest of time.

Now despite the fact that you like the stock for the long term, you obviously see some short term weakness (either in the stock itself or the market in general) because you think that you can get in at a lower price. So you have these options.

Option B. Sell the put for 0.62
Option C. Wait and see

Option A is the most profitable if the stock is anywhere above $45.62 on the strike date. 
Option B is the most profitable if the stock is anywhere between $45.62 and $43.38 on the strike date.
Option C is the most profitable if the stock goes anywhere below $43.38 at any point between now and the strike date.

So it looks to me that you really have to have a very good sense of where the stock will be in the given time frame if you want to enter a position with a put. For the sake of keeping it simple I didn't take into account: dividend payments in option A, cash collateral interest in options B and C, taxes, trading commissions.

Now this doesn't mean that the put strategy won't be profitable, especially if you manage to sell a few of them and then get assigned somewhere close to $45 or below. But it does look like it is the best option only in the case of either flat or slightly declining share price.