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Activision Blizzard, Inc. Message Board

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  • ratn0007 ratn0007 Nov 7, 2009 10:14 AM Flag

    Sold ITM Put options, what to do?

    Was there a specific advatage in selling cash-secured Puts vs. buying stock and seling ITM calls against the stock?

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    • The two are virtually equivalent, but there are very slight advantages to selling puts:

      * Puts tends to be slightly more expensive than calls everything else being equal
      * Selling covered calls requires two transactions (stock buy+call sell), costing more in commissions. When selling puts the put buyer pays the stock purchase commission
      * Keeping cash in the account allows you to use it for to buy short-term treasuries or earn account interest, earning a return on the cash that would be tied to stock
      * If the calls are ITM right off the bat you're more likely to need to roll over the contract, increasing commissions
      * If there were dividends you would get them if you sold covered calls - but that's not an issue with ATVI
      * If you the stock goes down and you're assigned in the case of the puts you'll get the stock at a slightly lower cost basis for tax purposes

      The differences are minimal

      • 1 Reply to dontworrybehuppy
      • ITM calls take two transactions and probably three if you get called out (1 option transaction, 1 stock purchase, 1 assignment). ITM puts are nice if stock rises above strike, you can earn the premium at expiration (its a hybrid of a stock and option as you get both intrinsic value and time value as the premium), however because it is a hybrid combo, its more likely to swing point for point if stock goes down (delta approaches 1). Short puts are a good way to enter a stock position as long as you don't go over your cash-secured position, which was my intention when ATVI was at $12.20 in case I thought I wouldn't mind owning it a breakeven of $11.85; if it rose higher than $12.50, it would have been better for me to own the stock if it rose higher than 12.85 at expiration.

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