Message Font: Serif | Sans-Serif
No. of Recommendations: 0

I agree with everything Dave has said.

In particular, with regard to how far out to go Dave's point about time decay is spot on. The value of the option drops of exponentially as you approach expiry unless the stock has moved along way from the strike. On that basis you probably don't want to g more than 3months out (and I usually only go 1 or 2 months out)

Another related point is that you can also consider a bull put spread. With this you sell the put as you normally would -say a strike of $20 in this case. At the same time you purchase a put at a lower strike (say $17.5). This limits your total risk in the trade to the difference between the strikes minus the premium you collected. In this case $250 minus the collected premium

The advantages:
Your risk is limited as described above - if the stock, or more importantly the market as a whole, tanks you have locked in your maximum possible loss. Generally your broker will only require available funds representing the oral risk (as opposed to enough funds to buy 100 shares if only sell a put)

You collect a lower premium.
Higher commissions

I'm not necessarily recommending a spread for this trade - I use both strategies depending on the stock - it's just another technique to consider

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.