How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Night Writer who wrote (11335)	8/3/1999 11:18:00 PM
From: Greg Higgins	Read Replies (1) of 14162

Night Writer writes:I understand selling the puts at $45 if you want to buy the stock. I don't understand how the buyer hedges by selling the lower puts. He gets back what he needs most, capital. Buying the 45 puts requires an outlay of 20 * 2,000 * 100 = 4 million dollars. By selling the 40's he gets back 3 million. The act of buying the 45 strike puts is a hedge on the stock. Selling the 40 strike puts now puts the 45 strike buyer at risk. What's his risk? His risk is that someone will put the stock to him at 40. If they do, he puts at 45 immediately (he's covered). If the stock manages to rise to 40+, he'll still put at 45. It's only if the stock is above 45 that he doesn't put.

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