Selling Naked Puts on Dividend Stocks

Originally posted by ChippyDude ↑

You can do it yourself online if you understand how to read the Options pricing board.

You can also just ring up commsec or most brokers that would do it for you.

For example, If you have more than 30k trade size parcels and if you are trying to make 2% per month on each trade parcel of 30k.

Then this should be a type of investment you really should read up on.

For Instance, Today FMG is trading at about 4.79. But for a June 29th expiry naked put option with a strike price of $4-.

You could have sold Contracts today at 6 cents. Thats about 1.5% return for Month.

It means if FMG is trading at $4.00 or below on June 29th you must buy FMG at $4-00

But if FMG is still above $4-00 then you keep the 6 cents.

So lets say you sold 100 Contracts @ 6 cents (1 Contract = 100 stock)

100 Contracts or 10,000 x 6 cents = 600 bucks minus about $40 Brokerage.

If you are Comfortable making $560 Bucks off $40,000 then read up on Naked Puts.

You leave your 40 grand in the Trading account for the month and pocket $560 per month off FMG stock.

There are many other Stocks that allow you to sell options on.

Buying options is for Pros and Mugs, Selling Opions is for Pros and Mugs too, But if you are carefull you should be Ok.

By selling naked Puts out of the Money on solid stocks you are operating like your own hedge fund .

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ChippyDude, it's a good analysis of this type of trade from which you can make good money. I like that you are posting a trading idea but I have a problem with you calling this a fixed income contract. It implies that it's low risk and easy clippings.

So just to highlight the risks for people who might act on your suggestion:

1) As you also emphasise, I want to reinforce that this trade is cash covered. The cash has to be available and sitting in an account. It's is high risk to really do a naked put (without cash). The impulse however for a regular trader of this strategy may be to drift into a position where a single pool of cash covers a few trades in different stocks on the assumption that they won't all get triggered at once. It has to be a disciplined approach, with actual cash backing in full for every trade or its not low risk.

2) You are still taking a trading view on the stock. You might be happy to buy FMG at $3.90, but if it falls to $2.50 and doesnt recover for a long period or never, your income strategy will have taken a hit. There is an assumption that you can always be happy buying the stock and holding to get your money back with dividends along the way. But that nevertheless needs careful consideration in each case. Buy and hold has issues. Particularly in the current toppy markets. If we enter a bear phase, this income strategy wont be looking too smart. You have to take into account that if you do this strategy regulary over a lengthy period, then you are going to take some trading hits along the way and that should be accounted for in projected returns.

3) Hedge funds trading naked puts periodically blow up. Google LTCM or Victor Neiderhoffer

Hence the strategy should be approached with due regard to inherent risks, not treated like a fixed income contract, whatever someone might theorise about that.