re. writing options, if you restrict yourself to the universe of very low RS stocks that are
* highly liquid,
* not small cap, and
* have options,
then you can write calls.
You don't want to trade options of any kind, ever, with small stocks. That's because the transaction costs will eat you alive.
The option strategy I would prefer is just to write naked calls. I would write a call that is about at the money (exercise price near the stock price). You pocket the premium, and if the stock doesn't go up before expiration, you get to keep it all on expiration day with no further trading. In comparison to shorting the stock, this method will provide you better results if the stock stays flat or goes down only a little, whereas shorting the stock will give you the best gain if the stock goes down a lot.
While people often say this is dangerous, it in fact has the same risk as shorting the stock (unlimited losses on the upside, with the same loss per share either way). The only way it can be more dangerous is if you expose yourself to more shares, which is possible to do, because with options your broker does not apply the same kind of rules for collateral as with stock. So it is wise to restrict yourself in this strategy with no more exposure than you would normally take with the stock itself.
If you want to reduce the risk, you can short a call that is near the money (strike price near the current stock price) and buy a call that is well out of the money (much higher than the current stock price. This puts a roof on your potential loss, but also reduces your gain significantly if the stock goes down, as you expect, so I would be less likely to do this. Anyway, this is a measure you could take with short equity, not just short calls. |
