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Hi Steve,
You are right about naked puts being the same as
covered calls except in two regards. In most (all?) IRA's selling naked
puts is not permitted. Secondly for small accounts with limited margin or
accounts not approved for margin selling naked puts or calls is not
permitted.
In these cases, IMHO, selling covered calls is much
better than buying puts or calls.
Good luck and good trading,
Ray Raffurty
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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: 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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