No. of Recommendations: 21
" "The Three Worst Investment Strategies Ever"
#2 Writing Puts: The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me. Selling puts for income is the worst strategy ever – you get a pittance every month, and take massive risk to do so. Added to that, the only way to effectively manage that risk is to spend some of that pittance on protection. Awesome."
It's not really very a helpful snip to quote.
The risk in options comes almost entirely from the fact that they allow leverage. There is no requirement to do so. Like a hammer, there are ways to use them that are smart, and ways that are dumb. It might like be a lottery ticket where your loss is limited to the cost of the ticket, or might be as boring as an uncallable multi-year bank loan. But it's not helpful to post piffle like that quote. For example, few people appreciate that writing a cash-backed put is demonstrably safer than buying the same stock with cash the same day.
I think the quote is probably referring to people who are writing puts without the cash backing, then thinking of the premiums as income. In effect, using an infinite amount of leverage. In my analogy it's like taking a perfectly innocent hammer and throwing it up in the air above your head with your eyes closed.
Consider the examples in the thread. You pocket a very nice cash return (in addition to whatever you're already earning on it), or you get to buy some Berkshire stock at around 1.35 times book instead of 1.6. Which of those outcomes is losing one's home?
For me, put writing is just a conditional way of buying a stock. You get paid quite nicely for the uncertainty, the two outcomes being making a nice return on your cash or buying a stock you like at better than the current market price. In the last 100000 put contracts I've written, I've averaged 11.02%/year, without counting any boost from leverage. It's not such a bad way to make a living.
Jim
