Sunday, November 06, 2005

How far out should you write Naked Puts? Opinions?

I'm looking for opinions on how far out you feel Naked Puts should be written?
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Personally, I write puts on "front month" options only. These are puts that expire next month. I never write puts that have a more distant expiration. I do this for three reasons:

1) The time value of options errodes more quickly as you approach expiration.
2) A one month holding period gives me a better stock price predictability window. This actually has to do with stock price predictability theory, which states that the further out you are trying to predict, the less confidence you will have in your prediction.
3) I do not write during months that companies release earnings. With a one month window, it's easy for me to pick stocks that are not releasing earnings. Two months would also be acceptable, but more than two months would be impossible.

Saturday, November 05, 2005

Naked Puts or Not---That is the question!

So, on which side of the fence are you? Do you believe in writing naked puts or not? If so, then why and if not, why? If you are a naked put trader, do you use this trading technique exclusively or in combination with other trading techniques?
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Well, as you might guess, I am a naked put writer. Actually, let me correct myself. I'm a long term stock owner with a penchant for writing front-month OTM naked puts.

I write puts for one reason: To generate cash.

Now, with that said, I never (I repeat never) write puts with the thought that if things go sour, I can always buy the stock. Many people suggest that you should only write puts on stocks that you are willing to own. My reasoning for not doing this is simple: I write "short term" puts to generate cash, not to own stock.

I feel that by giving myself the "escape route" of purchasing the stock on which I'm writing puts that I end up creating a self induced "conflict of interest". It gives me the "excuse" to go ahead and buy the stock if it tanks.

Now, I agree 100% with the fact that "put writing" can be used to purchase stock. All I'm saying is that I choose not to utilize them for this purpose. Instead, I trade them to generate short term cash on my existing portfolio.