$25,175 in IBM Stock vs. One $685 Put. Same Risk.

AI-generated source summary

The analysis focuses on comparing the strategy of buying 100 shares of IBM at $251.61 with selling one IBM put option with a strike price of $245 and a credit of $6.85 per share. The maximum loss for buying the stock outright is approximately $25,000, while selling the put limits the maximum loss to around $23,815, suggesting a slightly lower risk profile for the short put strategy. If the stock price stays above the $245 strike at expiration, the put seller keeps the $685 credit. If the stock price rises 20% annually, buying the stock yields a profit of $5,000 over a year, while selling 12 monthly puts at $680 each yields $8,160 in premiums, representing a 32.6% stock gain to match the premiums. However, a single loss on a short put can negate several months of gains. The net cost per share if assigned on the short put would be $238.15 ($245 strike - $6.85 credit). The analysis suggests that if one anticipates a significant rally in IBM, buying the stock might be more profitable, whereas a more modest rally or sideways movement would favor selling the put due to the premium collected and theta decay. The analysis highlights the capital efficiency of selling a put compared to buying stock, as it only requires margin rather than the full share price.

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