Selling Naked Question

tdeel · #1 24th February 2006, 11:41 PM

Hi Folks,
Thanks in advance for any help you may offer.
I am very new to the business, but like anything in my life, I've done a lot of research before opening any accounts.
One thing I haven't been able to find information on is specific reference to assignment of stock on a naked sell.

Example.

I'm looking at a stock which is trading at 17.20
17.50 put is at 2.00.
Expiration is 3 weeks from today.
Volume is decent on this stock and Open Interest and Volume are both in good ranges at this level on this particular option.
I am working with a broker who allows writing naked puts.

If I were to sell the in the money put for 2.00, how soon, if at all, could I expect to be assigned the stock at 17.50?

My thought is that if I were assigned at 17.50, actual cost to me with the 2.00 premium is 15.50. If I were assigned fairly quickly, I could possibly turn around and sell the stock or a call option on the stock for another small profit.

Does it make sense or am I an idiot?

Don't be afraid to call me an idiot if that's the case. I'm a person who likes to know where I stand.

Thanks for your candor.

tdeel

Agilent · #2 25th February 2006, 12:45 AM

tdeel
Not sure if yr example is real life , or theoretical

If real life, the premium you quote ( 2.. rupees?) appears high for a strike price of 17.5, if spot is 17.2

I mean, have u looked at the bid/offer spread . R U sure u got the correct 'side' of the quote ?

Lets say you were wrong ( for discussion sake) and the best buyer is at 1, then yr breakeven will be 16.5 ( 17.5 minus 1). Keep hoping the share is above this level until expiry. ( I get a funny feeling it will be below this in 3 weeks ... ha ha.. just kiddin')

How soon (if at all ) can u hope to be assigned ? I would say 3 weeks (for a European style option) and that only if the price remains below 17.5.

Does all this make sense?

AGILENT

tdeel · #3 25th February 2006, 03:28 AM

Agilent,

Thank you for your reply.

Sorry that I wasn't specific enough.
This is in USD. Is this not a good place to ask about American options or should I just be more specific in the future?

This is a real life example. American style option, US Dollar.
Symbol is VRX.
Current price is 17.12 USD.
Option price is now bid at 2.10 USD.

So, scenario would be:
-Sell naked 17.50 USD.
-Collect 210 USD/contract.
-Actual cost of stock is then 15.40 USD if assigned.
-If assigned at current price of 17.12, sell the stock for 17.12/share
assuming no further movement in the price.
-Collect in essence another 1.72 per share on sell.
-Total profit of 382 per contract minus commissions.

Again, how likely and how soon might I get assigned in an American option scenario?

Thanks again for your patience and instruction.

By the way, I am not considering actually making this trade at this time as I have not looked at the Technicals and Fundamentals.

Just trying to learn.

Thanks,
tdeel

vince · #4 25th February 2006, 07:14 AM

Tdeel,

Look at it this way. If you were to purchase this very put for 2, when the stock is at 17.2, your breakeven would be at 17.5-2=15.5 and I am not taking brokerage into account. Is there any way you would exercise the put before this. No right ? I would'nt expect assignment before 15.5 or even 15.

tdeel · #5 25th February 2006, 08:40 AM

Thanks Vince.

Makes sense.

I'm always leary if something makes sense with so little explanation. Thanks for instructing with such simplicity.

Good trading.

tdeel

vince · #6 25th February 2006, 10:20 AM

Most welcome Tdeel.

Trade well

Agilent · #7 25th February 2006, 11:40 PM

Quote:

Originally Posted by tdeel

Agilent,

Thank you for your reply.

Sorry that I wasn't specific enough.
This is in USD. Is this not a good place to ask about American options or should I just be more specific in the future?

This is a real life example. American style option, US Dollar.
Symbol is VRX.
Current price is 17.12 USD.
Option price is now bid at 2.10 USD.

So, scenario would be:
-Sell naked 17.50 USD.
-Collect 210 USD/contract.
-Actual cost of stock is then 15.40 USD if assigned.
-If assigned at current price of 17.12, sell the stock for 17.12/share
assuming no further movement in the price.
-Collect in essence another 1.72 per share on sell.
-Total profit of 382 per contract minus commissions.

Again, how likely and how soon might I get assigned in an American option scenario?

Thanks again for your patience and instruction.

By the way, I am not considering actually making this trade at this time as I have not looked at the Technicals and Fundamentals.

Just trying to learn.

Thanks,
tdeel

tdeal
Thanks for revealing the name of the share.Yes indeed the put is quite pricey . What's more : the bid offer spread is slim at just 10 cents, unlike my earlier guess. (I did some looking up).

So indeed, you can make around $2 per share as premium.

But hang on ... are u not double counting this in your profit computation.. I think yr profit will remain 1.72 and not 3.82 (or am I missing something?)

By the way , this scrip has the potential to fall $ 6 to 7 in 45 days (see chart) ... and its been in a downtrend since 2001 (obviously the business model /product stream looks weak) so IMHO, be a bit careful. (Maybe this explains in part why the puts look pricey and an 'attractive' sell)
AGILENT

Agilent · #8 26th February 2006, 12:03 AM

Ooops .. that was the wrong file (useful research report btw ... not how the analyst price targets have been progressively coming down over the past year)

Here's the correct chart ... see how it slumped from 26 to 18 in a couple of weeks in April/May 04 (of course ... need not recur, but then this scrip has a high beta, so IMHO : tread cautiously)

AGILENT

tdeel · #9 27th February 2006, 08:52 AM

Thank you for your help Agilent.

My initial thought, which now seems somewhat silly, was that I might be assigned pretty quickly which would then allow me to resell the stock at somewhere between 17 and 17.50 which would be 2.00 on the put and 1.50 to 2.00 on the sell of the stock since selling the put would have put my cost at 15.50.
Vince's explanation pointed out how unlikely it would be for me to be assigned before the stock dropped below the 15.50 or even 15.00 level.
As I said, I hadn't really looked at this stock in depth, just looking at it as an example to bring up my original question, which now seems extremely elementary. I've just never been assigned before and didn't know if it was always as simple as Vince's explanation.
Thanks for looking at the chart for me. You're right about the beta. It seems to have some resistance around 17. I might look more seriously at it after its international earnings report on the 28th.
As for now, I'm just trying to find some free education and I appreciate what you guys have shared with me.

Til Tuesday,

tdeel

Agilent · #10 27th February 2006, 01:03 PM

Quote:

Originally Posted by tdeel

Thank you for your help Agilent.

Thanks for looking at the chart for me. You're right about the beta. It seems to have some resistance around 17. I might look more seriously at it after its international earnings report on the 28th.
As for now, I'm just trying to find some free education and I appreciate what you guys have shared with me.

Til Tuesday,

tdeel

Hi tdeel

Surely you mean (long term) support , not resistance. The share has been in a downtrend for quiite some years now.

If 17 is broken, it could slip a couple of bucks. Maybe that explains why the puts are so pricey.

AGILENT

By the way, was I right abt your double counting the $2.1 , in your profit computation ? (see my post of 25 Feb) ..Eager to know

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