Do Naked Puts Trump Dividends For An Income Investor?

A few days ago Aristofanis Papadatos published an article here (Selling Puts Of High-Dividend Stocks For Maximum Yield) describing an income strategy using naked put options on high-quality, dividend stocks as an alternative to owning them outright. His approach is to sell deep in-the-money puts with one-year strike dates on the same high-quality, dividend-paying stocks a more conventional dividend-income investor might choose to own. The article generated a fair amount of discussion and piqued my interest enough to take a closer look.

Perhaps most importantly, the option strategy gives the investor money up front. Papadatos notes this in his article and points out that this allows some small leverage as the funds can be invested. A more complete analysis would have to account for the value of money for the year's time. Certainly this will offset a portion of the after-tax differences in returns. Countering this advantage for the naked put strategy is the fact that owning the stock affords the investor the opportunity to sell covered calls, arguably a more profitable and potentially lower risk strategy than receiving the income at the beginning of the cycle from the short puts.

Source: Seeking Alpha

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