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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: LemurHouse who wrote (3078)11/21/2001 8:50:35 PM
From: WTMHouston   of 5205
 
<<My question is, is there a third alternative when delivering the shares: I.E. could I have instructed my broker to establish a short position for me in AMAT, and to deliver the shares from the short position.>>

The problem with your intriguing and innovative strategy is . . . . I thought I had an easy way to explain it, but the more I think about it the more I think that my initial proposed explanation does not make sense because your strategy does make sense from an investing standpoint.

However, from a practical standpoint, it is likely that the brokerage said no just because they had never heard of it before and because they had no computer mechanism to account for it the way you wanted to structure it.

Your proposed strategy would likely play havoc with their internal cash distribution and margin calculations since there will be a negative cash value differential between the consideration received from the purchaser of your called out shares and the current market value. While this is really little more than marking the short to market, which they do regularly, I doubt that their system is set up to do it as a result of the form of transaction you proposed.

I suspect that to end up with your short against the box and to protect your tax position, you will have to make a market purchase of shares to deliver and then establish a separate short position to be in position to take advantage of the decline you predict. Of course, you end up with a lot of transactions to accomplish indirectly what could be done directly with what you proposed.

Just my thoughts.

Troy
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