Hi Carolyn,
In order to sell calls, you first have to own the stock outright. Unless your account allows you to sell naked calls, which I consider highly risky in the internet arena. By owning stocks, you must use your capital to buy the stocks or buy margin. The reason I don't like selling calls is that I limit my upside and tie up my money. Also, I will not get interest on that money.
Okay, let get an example, well use SDTI (Security Dynamics)
I buy 1000 shares at 16.75= $16,750.
I sell 10 calls March 17.5 for $.50 = $500 income
premium for 1 week option is 3%
call away at 17.5 total gain 7.4%
I can sell 10 puts March 15 for $.50 = $500 income
Thats all I get for premium, but I don't have to pay $16,750, but I will receive interest on this amount. If SDTI goes down to say $15.5.
I will have $500.
But for the calls you gain $500 bucks on the call, but you lost $1,250
from owning SDTI. Your net lost is $750, but by selling the put you are protected from a little down side.
hope this helps,
jimmy |
