Not all. If it's a company that 1 know well and the fundamentals are very strong, I might go long, even if the stock is significantly above its low. For example, Microchip Technology is currently at $35, which is well below its high of $50, but also well above last year's low of $15. Even though it's well off its low, I'm still selling puts in the stock because their business is improving tremendously.
Selling puts represents a bullish position. The seller of a put receives a premium for the obligation to buy a stock at a price called the strike price during the life span of the option. This obligation is activated if the option is exercised by the buyer, which will happen if the stock price is below the strike price at the option expiration. For example, assume that a stock is trading at $13 and that a put option on the stock with a $10 strike price is trading at $1. If the stock is trading above $10 when the option expires, the seller will have a $1 profit per share (a $100 profit per option contract, which represents 100 shares). If the stock is trading below $10 at the option expiration, the option will presumably be exercised, and the seller of the option will be required to buy the stock at $ 10, no matter how low the stock is trading. Okumus, who typically sells puts with strike prices below the current market price (called out-of-the-money puts), will earn a profit equal to the option premium paid by the option buyer if the stock declines modestly, remains unchanged, or goes up. However, if the stock declines by a wide margin, he will be obligated to buy the stock at an above-market price (the strike price) at the time of the option expiration.
What motivates you to sell puts in a stock instead of just buying the stock?
Any stock that I sell a put on, I am happy if they put me the stock [exercise the put option, requiring Okumus to buy the stock at the strike price]. I don't sell a put on a stock unless I would be happy to own the stock at the strike price.
For example, I'm currently short some $10 puts on J. D. Edwards, which is trading near $13. I hope they put me the stock because I would love to own it at $ 10. If they do, I'll still have the premium, and if I buy the stock at $ 10, I know I will make money.
But most of the time when I sell puts, the market never declines enough for the option to be exercised. This, of course, is okay too because I still keep the premium as a profit.
In other words, selling put options is an alternative way for you to be buying stocks. If it doesn't go down to the strike price, you still earn the premium, and if does go down to the strike price, that's also fine because that's the price you would have bought the stock at anyway.
Exactly. By selling puts, I am getting paid by the market while I'm waiting for the stock to come down to my price. Also, for some stocks, it may only be possible to make money by selling puts as opposed to buying the stock.
For example, value stocks have been very much out of favor in recent years. There are stocks that are trading at only five to six times earnings. The earnings are growing, insiders are buying, and the stocks are just sitting there. At the same time, the S&P is going up like crazy. You can't make money by buying these stocks, but you can by selling the puts. If you sell put options, you don't have to be right about the stock going up; all you need in order to make money is for the stock not to go down by much.
Let's say that there is a stock trading at 35, and you decide you would like to be a buyer at 30. Why not always sell the 30 put and collect the premium, since if it went to 30, you would buy it anyway? This way, you would always make the premium as a profit, whether the stock went down to 30 or not.
Because you always have to consider your opportunity costs. If I sell puts, I need to put up margin against the position. Sometimes the premium I could collect for selling the put wouldn't justify tying up the money needed for the position. I could do better investing that money elsewhere.
Let's go back to when you arrived in the United States. You said earlier that you started researching the U.S. stock market when you first came here, which also approximately coincided with the beginning of college. How did you allocate your time between studying for college and studying the stock market?
On average I would say 35 percent school and 65 percent stock market, but the stock market percentage kept going up over time. By the beginning of my senior year, I was devoting 90 percent of my time to the stock market, and I quit school altogether.
Weren't you at all reluctant about quitting college a year before you were going to get
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You already recognize that rich individuals think differently than middle class or poor individuals in every aspect of life. But particularly when it comes to money. That's why they're rich. Their selections and decisions just by nature bring about riches.