[RT] Managing covered call risk

[MikeSuesserott@xxxxxxxxxxx]

Steve,

two things. Suppose you own GE stock and want to stay with it for the rest
of your life, or at least for the long term, then selling covered GE calls
makes sense. Then these short calls will give you additional income on stock
you want to keep anyway.

Otherwise, it is not be advisable to use this strategy which will only make
your broker happy. It is madness to purchase stock just for the purpose of
selling calls against it, because you can get the very same risk/reward
position by simply selling naked puts only.

The unsuspecting public does not understand this. Even older option traders
who learned their trade when there were no puts in existence, don't
understand this sometimes. They willingly fork over capital and additional
commissions because there is an abiding misunderstanding that covered calls
are supposedly better protected than naked puts. Well, they aren't. The risk
is the same, because if the stock in the covered calls positions goes south,
it loses point for point as much as the naked put does.

Second, as to your question about managing that risk, this depends on your
pain threshold. IMO, you should place stops in both cases.

If you sold naked puts, place a (mental or conditional) buy stop on the
puts.
If you are in a CC position, place a sell stop on the stock and a
conditional buy stop on the calls.

Don't think you can really protect your capital by selling more calls. Many
people have found out about this the painful way, not only in 1987 and 1989,
but also last year.

Regards,

Michael Suesserott


> -----Ursprungliche Nachricht-----
> Von: schnakeus [mailto:schnake1@xxxxxxxxxxxx]
> Gesendet: Wednesday, March 13, 2002 20:30
> An: realtraders@xxxxxxxxxxxxxxx
> Betreff: [RT] Managing covered call risk
>
>
> Some of you were talking about covered calls awhile back. How do most
> of you handle downside risk in the stock price? You own 100 shares of
> XYZ at $30. Say you sell a 32 strike a month out for $3. The stock
> stays the same or goes up. You keep the premium because of
> deterioration or because it gets called. If it goes down to $27
> your'e even, in theory, although call retains some value til exp. Of
> course if it tanks, you lose. What do some of you do to manage the
> trade? Sell a lower strike call? Have a GTC stop-sell on the stock,
> then buy to close? Any other methodology?
> Opinions and ideas, Please and thanks.
>
> Steve
>
>
>
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