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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: adairm who wrote (1089)6/20/2001 1:37:08 AM
From: Mathemagician  Read Replies (1) of 5205
 
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.

How is that different from buying the stock at 20 on margin and writing an OTM call? The risk you describe has nothing to do with writing puts. It is the risk associated with owning stock on margin. The scenario you described cannot be avoided by not writing puts, but it can be avoided by not using margin.

dM
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