I am  new  to investing in Puts so i am posting a very basic question. Morn* has a Fair Valu for AIG of $70+. Today it is selling for about $43. I can sell Jan 09  40 Puts for about $4.70. Isn't the worst that could happen is that I will have to buy AIG for $40 next Jan? If it's not that low I pocket the $4.70. Seems like a no-brainer.Am  I  missing something.?

   Any comments will be appreciated.

  Joe Z

Joe,

yes, you basically have it correct. Your broker would set aside the $4000 per 100 shares in a money market where you would still earn interest, but the money would be locked up until then. That would be a cash-secured put in a cash account.

I don't use margin much, but you can also do this if you have enough margin and securities to cover the possible cost of buying the shares if put to you.

You asked about the worst thing that could happen. The stock could go bankrupt, in which case you'd end up paying $40/share for a worthless security. So you need to have confidence in the underlying security, and you need to believe that the put strike price is a good place to buy it.

Steve

Steve thanks for the reply. You've described just as I thought it worked.  I understand the risk but if sticking to stocks like AIG AXP etc,, the risk is minimal. It seems to be an interesting way to significantly increase the return on cash holdings.

                          joe

Yes, Joe, you are right.

It is also a good way to buy stocks at price levels that you want. For instance, in your example, if AIG is put to you, your cost basis would be 40 - 4.7, or 35.30 (plus commissions). So you can get the stock put to you and still have the price hold above your cost.

I sometimes do this when I am waiting for a good stock to get beaten down, and then I hope I get it! Then I sell covered calls on it and repeat the process if the stock gets called away.

Good luck. 

Steve

Joe Z 

I hope Morn* takes into account the option premium's historical volatilty because if it doesn't you may be overpaying and that will have as much impart on your return as anything. and if you are only writing options(rather than as part of a credit spread)be very carefull. but of course I don't know how much "homework" you done here.

good luck 

Jim