luda002

@bchadwick. Thanks very much.

CFA4Techie

Well there's a management fee, of course. Then there's the possibility that you should be getting a 2% premium for that option if you sold it yourself and they're keeping the difference. Then there's also the possibility that the firm exercises your option when the price goes low, while selling the same option to someone else, thus pocketing whatever time value is left in the option and leaving you with an exercised put option as per the contract.

dyga

Well there's a management fee, of course. Then there's the possibility that you should be getting a 2% premium for that option if you sold it yourself and they're keeping the difference. Then there's also the possibility that the firm exercises your option when the price goes low, while selling the same option to someone else, thus pocketing whatever time value is left in the option and leaving you with an exercised put option as per the contract.

Windjammer

Thanks. This makes some sense. Where does the investment firm make it's money. Only from the fee?

Valores

So you are selling a 30-40% out of the money put and collecting 1% in premium as long as it isn't exercised.

The main risk is that the underlying stock goes to 0 or thereabouts and you have to fork over a ton of cash to buy it at the "predetermined price"

It's a strategy that has made lots of people money. Most of the time, the equity curves show nice steady gains for a long time and then suddenly drop off to zero or at least some massive drawdowns.

People stay in for a while, thinking, I'm just going to do it for a little bit and then get out, but the thought of free money is just too appetizing until the giant comes back from hunting and Jack has to run away in search of the beanstalk.