Naked Put Writing

A win-win game situation is when you win regardless of what happens. Let’s take an example to show how win-win put writing works.

If Pfizer is at 40 and you want to buy the stock if it falls to 35, rather than placing a limit order to buy the stock at 35, write a Jan 35 put at 2 ($200).

Now if Pfizer is at or below 35 at expiration or if you are assigned before then (not too likely), you will buy the stock at 35, just what you wanted, but you already have $200 in your pocket from writing the put. Therefore. you actually only paid $33 a share.

Altogether, we have a win-win situation where you get Pfizer at $33 a share, which is exactly what you wanted, or if Pfizer is not below 35, you get a consolation prize—the $200 you collected.

What if Pfizer drops to 30? Well, you were planning on buying the stock at 35 anyway. Here you are $200 richer.

Put writing is not appropriate when you want to buy a stock right away to take advantage of an immediate pending move. Put
writing is best when you are trying to buy stock or futures at lower prices.

Sometimes you can generate a lot of income trying to buy a stock. One of my targets for put writing is a stock that is a takeover. If a major corporation decides to buy a company, it must think that company has a good value and the takeover company’s
puts are usually overvalued because of arbitrage activities.

However, I only write puts on such stocks at strike prices at a point where they have long term support in the charts.

One good example of this strategy was when Monsanto was going to buy Delta Land and Pine (DLP). The takeover process took a long time and then fell through, but during that time I wrote a large number of different put positions and collected a lot of premiums.

When the deal fell apart, DLP gapped down to 17 and I got the stock at 20. A few months later I sold the stock for 28, an 8 point profit. Here was a true win-win
situation.

My friend Frank loves to write naked puts to buy stock, but he uses a different ploy than I do.

While I am writing shorter term puts to capture immediate income, he is writing longer term puts. These puts are way out-of-the-money on blue chip stocks that he loves. For Frank, put writing is a win-win game.

Either he gets the option premium, or he gets his favorite stocks at much lower prices.

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