Selling a put is an alternative to taking a long position in an underlying that you should consider and we explain the advantages and disadvantages here. Every type of account can employ this strategy.
There are times when a trader believes a lower priced stock is oversold and wants to go long. The trader may think that buying the stock is a good idea. We at tastylive are going to suggest selling a put over instead and explain why.
An example using the EEM (Emerging Markets ETF and down 19% on the year) was displayed. The example compared a short February $30 put position to long EEM stock at $31.50. The table included the buying power reduction (BPR), probability of profit (POP), credit received and breakeven.
A scenario of EEM closing unchanged at February expiration was displayed. The scenario compared the February EEM $30 short put to the long EEM stock position. The scenario showed the P/L, buying power reduction (BPR) and return on capital (ROC) on both.
A second scenario of EEM closing down $3.25 (1SD) at February expiration was displayed. The scenario compared the February EEM $30 short put to the long EEM stock position. The scenario showed the P/L, buying power reduction (BPR) and return on capital (ROC) on both. In this scenario if we still want to be long EEM we can take assignment of the put to become long a stock position. We now own the stock at a better cost basis (0.90 credit) than if we had bought the outright stock.
A third scenario of EEM closing up $3.25 (1SD) at February expiration was displayed. The scenario compared the February EEM $30 short put to the long EEM stock position. The scenario showed the P/L, buying power reduction (BPR) and return on capital (ROC) on both.
Watch this segment of “tasty BITES” with Tom Sosnoff and Tony Battista for the takeaways and the results of each scenario to see the benefits of establishing a long position by shorting a put rather than buying stock.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.