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$25,175 in IBM Stock vs. One $685 Put. Same Risk.
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ticker lesson
Breakdown
0:01lesson
Buying stock vs selling put — capital efficiency
- Buy stock is default for investors
- Selling put more capital efficient
- Max loss on stock is purchase price
- Options decay via theta
- Stock has zero theta
2:29lesson
Theta decay in options vs stock
- Theta is money collected per day from time decay
- Options lose value as time passes
- Stock value doesn't decay
- Selling put has same max risk as buying stock
- Theta is $14.33 for IBM put
4:52lesson
Profit potential of selling naked puts
- Selling put can generate monthly profit
- Monthly profit $685 for IBM put
- Annual profit $8,100 if stock stays above strike
- Commissions less than profit
- Dividends are separate consideration
7:32lesson
Risk vs reward of buying stock vs selling put
- Max risk on stock is $25,175
- Max risk on put is $23,000
- Put has lower max risk
- Stock can double in price
- Likelihood of stock doubling is small
9:55lesson
Managing naked short puts and risk
- Assign on put if stock drops below strike
- Buy stock at strike price instead of current price
- Max risk is $7 cheaper than buying stock
- Can close put if no longer bullish
- No trade recommendation given
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