ABC is trading at $100.50 and trending upward. Instead of buying it via a stock trade I sell an in the money put for $100 (for $3), which automatically executes and my basis is $97.5. Six months from now I want to sell the stock at $110. I sell an in the money call (for $2) and automatically gain two extra points.
That works, but if it goes down your option is worthless.
It might behoove you to hedge against the loss. But at $100 and sell a put for $115. If it goes to $114 you keep everything. If it goes to $115 you pocket $15 a share and any dividends.
For this purpose, you might consider leveraging using margin rather than risk the amount of the option.
Yes, in that scenario you would do quite well, but if it drops to $90, you’re still down. That $5 in premium is decent, but you are also giving up potential upside vs just being long the stock if the stock keeps running up.
The guy who bought the option to put it to you at $100 won’t bother to do so with the price rising beyond $100.50. I don’t see any automatic execution happening. You pocket the $3, he has insurance against a reversal of the rising trend. He can unload the position on you for $100 if things do go south. Maybe I’m missing something.
First of all, at $100.50, your $100 put is 50 cents out of the money, not in the money. Second of all, your basis would be $97, assuming it closes on expiration below $100 and you get assigned. If you were right, and the stock keeps going up, you keep your $300 and if the stock goes up to $150, well, at least you got to keep your $300.