JS: “You write << Puts are generally not a good idea, whether buying or selling. If you win, the taxman takes a big slice. Whether you win or lose, there is a brokerage commission to pay. And if you lose . . . well, you lose. >> So why buy and sell stocks, since they also generate commissions, losses and taxes?‘
☞ With stocks, the commission can be a tiny fraction of the investment — $8 on $8,000, say, versus $8 on a $400 put. In the first instance, it’s a tenth of one percent, in the second, 2%. If the house takes 2% every time you play – or 4% if you sell the option rather than exercise it – it definitely mounts up. And many brokers charge a lot more than $8 to trade a $400 option. With stocks, time does not expire. You have longer to be right. And with stocks, you can keep your investment compounding largely or entirely untaxed for decades until you sell – and then be taxed at the significantly lighter long-term capital gains rate. With stocks, it’s not a zero-sum game as it is with options. Over the long run, everyone can win (although generally not everyone does), as the economy grows and pays out dividends. Options are bets; stocks are investments.
Jeff: ‘In discussing the writing of puts, you forgot to mention the lost upside opportunity. What happens if CSCO does NOT go below $20/share? What if it goes straight to 60? Then Pete K never gets his shares and Cisco, which he correctly notes is a well-positioned company, soars without him. Sure, he got to keep the after-tax, after-commission portion of his premium, but he lost the chance to make a huge long-term gain. If Pete likes the company and feels it’s selling at a good value now, just buy the stock.’
☞ Well put.