No. of Recommendations: 11
What do you guys think?
I looked at the same thing. They are probably pretty profitable at quite low risk. I might go a big further out, more Jan or June than Oct or Nov. If it's worth doing, you might as well make more bucks.
But a good way to think of a cash secured put is a way to [conditionally] purchase a stock that you think is not quite cheap enough. Or, a way to make money from a flattish stock price from a security that doesn't seem to have decent odds of a shortish term biggish upside. I think the puts on DG are quite attractive as put writing goes, but I don't think it fits the "not quite cheap enough" or "no likelihood of biggish upside" tests. For this one, I'd rather have all the upside. I have shares and calls.
In fact, I think the potential for a pretty big upside is big enough that a few out-of-the money calls might make interesting lottery tickets. Sure, the odds may favour you losing all that you put into it, but the upside might be quite nice. As an example, imagine being offered a security with 1/3 chance of losing everything, 1/3 chance of a moderate profit, and 1/3 chance of a really big profit. I might put a few pennies in that slot machine : )
A thought experiment trade: build a portfolio of one of each longish-dated calls at strike prices from (say) 120 to some higher number like 180.
Sell each one on the first day that its market value doubles, if it ever does so. Any remain positions, sell 2 months before expiry.
What is the likely distribution of IRRs?
Jim
