Barron’s: Selling put options will be key theme in 2010
An article on Barron’s this past week argues that selling put options is likely to emerge as a key options market theme this year.
The article, Monetizing the Fear of Others, notes that – in addition to enabling investors to potentially buy stocks at below market prices – selling put options lets investors “leverage the residual fear” of another market decline as defensive investors continue to buy put options for protection:
Anyone who sells puts effectively takes advantage of the residual concern amongst many major stock investors that stock prices could decline if the sleeping hobgoblins of the economic recovery, including inflation, reassert themselves. This concern is prompting many investors to continually buy puts on stock indexes and individual shares.
This fear among major investors creates opportunities for nimble investors to sell out-of-the-money puts that expire in one to three months on stocks that they would like to own. – Barron’s, 01/04/10
It’s good to see the option strategy of selling puts receiving more attention, however I can’t help but note that increased investor interest in writing put options (and buying call options) is almost certainly a sign that the risks for blindly following such strategies are increasing. In fact, a much better time for selling puts was a year ago, when the market was down substantially and volatility and option premiums were dramatically higher.
Still, selling cash secured put options (where enough cash is available in the account to buy the shares of the underlying stock if the short puts are assigned) remains a great strategy, especially for more conservative income-oriented traders and investors. I prefer it to the much more popular – and technically equivalent – strategy of selling covered call options.
As I point out in this blog’s introduction, selling put options can be a win-win strategy – in effect it lets you get paid to place limit orders to buy stocks you want to own at lower prices. The Barron’s article gives an example of this using Apple (AAPL).
Bottom line: Investors who include put option writing (and other options strategies) in their repertoire of investing tools have added flexibility over traditional equity-only investors in finding ways to reduce risk and enhance return in any market environment.
