[Selling Naked Puts on Armor Holdings (AH)/Sell to open Nov 40 Puts (AHWH)/Credit Limit for the day $1.90]
Dear Member,
After a good earnings report, the Armor Holdings (AH)is down about $2.45. As usual, the market tends to overreact. Meeting earnings expectations hardly seems a reason for a stock to plummet. Interestingly, AH currently has landed right about on the 40 day moving average.
I am placing an order to sell the Nov 40 Puts (AHWH) for a CREDIT limit of $1.90. A close below the 40 day moving average will be my exit. As long as the stock stays above 40 I just get to keep the $1.90 a share.
This position will be naked and is considered risky by brokers. The stock could be put to me anytime between now and the third Friday in November for $40 and I would have to buy it or take some other action. A trader must be approved to sell naked puts. One of my rules is that I wouldn't mind having the stock for $40 a share, and, in this case that is true for me. My net cost, though, if put to me would not be $40, but only $38.10 since the market is going to pay me $1.90 a share tomorrow if my order is filled.
Interestingly, the risk graph for selling naked puts is EXACTLY THE SAME as for writing covered calls.
DISCLOSURE: At the time of publication, I have no position in the referenced options or the underlying stock.
Sincerely,
Bill Kraft
CutLoss, Inc.
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