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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dr. Id who wrote (1087)6/19/2001 6:36:13 PM
From: adairm  Read Replies (3) of 5205
 
<<selling 10 puts on the $14 stock can result in a 14k loss, as opposed to a 110k loss>>

True enough, but wouldn't the person who had the margin to sell 10 puts on a $110 stock sell 100 contracts on a $14 stock?

When I put on a position like this, I buy the number of shares (and sell the CC's) it takes to get round lots to meet the amount of dollars I want to put into the play.

Besides, what stock is selling for $110 right now? Has Berkshire Hathaway come down that far? <grin> Oh, yeah, maybe the Class B's...

Here's the risk with selling puts and getting assigned: Most people use their margin to secure the puts if excercised. Right? Let's say the stock is at 20, and they sell a 17.5 for a little premium. Maybe get a point. The stock goes down to 15, and the contract gets excercised. Now, assuming that you didn't go and spend your premium, you own stock worth 15 that you've paid 16.5 for. On margin. If it continues to fall, you just might start getting margin calls from your broker. And you might just be forced to sell some of your precious "cheap" shares for less that you think they're worth.

Next thing you know, your account has spiraled down to heartbreak levels, that margin draining your capital.

Adairm@howdoyouthinkIknowthis.exp
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