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Because you receive this $0.50 per share, your overall purchase price (should you be assigned) is lowered by $0.50 to $9.50.
Should
stock fall and you be forced to buy it, a great way to keep this cash flowing and at same time continue to reduce your risk is to simply turn around and start writing covered calls on it.
That being said, it's never a good idea in my opinion to write naked puts on a falling stock. Always look at a stock's chart for:
1) Moderate uptrends.
2) Sideways trends, especially 1-2 months AFTER a steep sell off.
If you go to: http://www.stockcharts.com and pull up QQQQ chart for first quarter of 2003, you'll find a great example of this second pattern.
During this time I began writing naked puts on QQQQ and then when I was eventually assigned I then wrote covered calls on QQQQ profitably for a number of months.
In sideways or rising markets, writing naked puts to potentially aquire stock (and be paid while you wait) and then writing covered calls on stock when and if you are exercised, may well be ultimate strategy for generating a cashflow income from markets.
Also, considering that a large majority of options are never exercised, much of time you may never even be required to buy stock.
When it comes to writing naked puts, you often get paid for a 'promise' that you don't end up having to keep. Now that's what I call leverage!
Happy option trading and investing!
James Thomas is a successful private option trader and has created http://www.option-trading tips.com as an informative, no-nonsense resource full of useful tips and information designed to help option traders and investors to become more profitable.
