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I've been studying the Canadian Securities Course for personal interest and have recently been reading about Options. My idea is about writing puts on good dividend paying stocks.
Let's take for example BMO current close at $34.25
1. Write 1 Oct 36 Put contract (premium at $5.75)
2. Collect the $575 premium
If stock is above $36 at expiration, the put will expire worthless and you keep your premium.
If stock is below strike price, the put will be exercised and you are required to buy the share at the strike price of $36 (minus the premium).
So if you focused your puts on solid dividend paying stocks you can earn money on premiums and even if the stock price decreases you still end up with a decent stock.
Of course, the fundamentals of the company could change in the interim and drive the price down deservedly and you're still on the hook at the higher price. But if the fundamentals stay as they are you still get a decent stock with a reasonable growth/yield to it.
After writing this out it seems that is what you would call a naked put, but you would still want to have the cash or equity on hand if/when the put is exercised.
I haven't actually played with options. Just thinking out loud and interested to see what others think about option strategies.
cheers
Let's take for example BMO current close at $34.25
1. Write 1 Oct 36 Put contract (premium at $5.75)
2. Collect the $575 premium
If stock is above $36 at expiration, the put will expire worthless and you keep your premium.
If stock is below strike price, the put will be exercised and you are required to buy the share at the strike price of $36 (minus the premium).
So if you focused your puts on solid dividend paying stocks you can earn money on premiums and even if the stock price decreases you still end up with a decent stock.
Of course, the fundamentals of the company could change in the interim and drive the price down deservedly and you're still on the hook at the higher price. But if the fundamentals stay as they are you still get a decent stock with a reasonable growth/yield to it.
After writing this out it seems that is what you would call a naked put, but you would still want to have the cash or equity on hand if/when the put is exercised.
I haven't actually played with options. Just thinking out loud and interested to see what others think about option strategies.
cheers