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Mike,
If you sold naked puts, and were interested in
owning the underlying stock, would you still use a stop order to buy back the
puts?
Thanks,
Chris
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
<A title=MikeSuesserott@xxxxxxxxxxx
href="mailto:MikeSuesserott@xxxxxxxxxxx";>MikeSuesserott@xxxxxxxxxxx
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Wednesday, March 13, 2002 3:01
PM
Subject: [RT] Managing covered call
risk
Steve,two things. Suppose you own GE stock and want to
stay with it for the restof your life, or at least for the long term, then
selling covered GE callsmakes sense. Then these short calls will give you
additional income on stockyou want to keep anyway.Otherwise, it is
not be advisable to use this strategy which will only makeyour broker
happy. It is madness to purchase stock just for the purpose ofselling
calls against it, because you can get the very same risk/rewardposition by
simply selling naked puts only.The unsuspecting public does not
understand this. Even older option traderswho learned their trade when
there were no puts in existence, don'tunderstand this sometimes. They
willingly fork over capital and additionalcommissions because there is an
abiding misunderstanding that covered callsare supposedly better protected
than naked puts. Well, they aren't. The riskis 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 yourpain threshold. IMO, you should
place stops in both cases.If you sold naked puts, place a (mental or
conditional) buy stop on theputs.If you are in a CC position, place a
sell stop on the stock and aconditional buy stop on the
calls.Don't think you can really protect your capital by selling more
calls. Manypeople 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: <A
href="mailto:realtraders@xxxxxxxxxxxxxxx";>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.>>
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