Here’s an option strategy to consider if you’re bullish

Editor’s reminder: The following article is
intended for educational purposes only. Consult your broker for more information about risks of this strategy.

Do naked put sales make

First of all, I’m far from an advocate of the idea, but depending on your market
outlook and risk tolerance, it may have some merit now. But it only makes sense

1) you’re of a mind to go bullish here, and

2) you’re comfortable with the risk/reward aspects of put selling.

So let’s say you’re bullish, or at least of a mind to buy this dip for a trade.
If it’s truly for a trade, and not for an “investment”, then you likely have a
point target, or net gain on the trade in mind. So instead of buying some stock,
why not sell some October puts? The combo of a weak market and increased
volatility has served to pump up the prices. October expiration has only 2 weeks
to go; any premium you collect, particularly for an out-of-the money put, will
evaporate real quickly in any sort of market upturn. So if time the trade
correctly, you will probably “earn” the premium soon after.

Another advantage in the strategy is that it ties up far less capital than an
actual stock purchase, thanks to arcane margin rules. In fact, a naked put sale
ties up far less capital than a covered write, and they’re the same exact thing.

The flipside of course is that you MUST understand the implications of what you
are doing, namely you will have to take delivery of the stock at the strike
price of the put you sold, should the situation arise. The words “Option
premium” have become synonymous with “income” in the last year thanks to the
overabundance of funds dedicated to this strategy, but it’s not.

So I offer zero judgment as to the wisdom and timing of selling puts right here,
right now. But someone said to me “I haven’t been this bullish since March of
2000, and I have to get in here.” I like the idea of naked selling puts as an
alternative to a naked stock purchase, or even an ostensibly “safe” bullish
trade like a LEAP purchase.

Adam Warner

Adam Warner is a proprietary trader
for Addormar Co., Inc., specializing in option and derivative strategies. Prior
to Addormar, he was an Equity Options Market Maker on the floor of the American
Stock Exchange from 1988-2001.