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: Herm who wrote (8295)	8/19/1998 11:21:00 PM
From: Deep IntheMoney	of 14162

If anybody is confused I apologize. I hope you don't mind but I consider this a healthy discussion. My position as I said applies to the last of the questions you answered(8284) and it specifically refers to "going long at the lower band" and the guy was asking for what to do if it sinks instead. Perhaps you misunderstood the guy's question by telling him to write the deep covered call at the low point(he just entered the position) and buy puts with the premium. That is an extremely safe position (too safe to make any money). You give up your upside to protect your downside when you haven't made a dime!! On top of that you spend the premium you got on the puts when you believe it will go up!! I'd say better put that money in a bank(also with rolling up). I completely agree with the writing of CC at peak. I completely aggree with the W.I.N system. All I am suggesting is an exit strategy when one makes a bad entry. This could be made a trailing stop loss and thereby apply at all times. Have this stop loss follow you around. When you enter low what is your safety net? Letme be specific, when you bought that ROSS position a year ago, what was your safety net until you wrote those calls and bought Puts at the peak ? Nothing but your confidence (which I admire :)). But the question posed is this - what if it were to tank before it ever got higher. What would stop you from having a stop loss at that 25% below low price if you were so confident about the upside? You see, Stop losses are for ACTS OF GODS. I am not an expert at all but I know all fundmanagers, traders have a system and a stop loss is an integral part of it. Its like a fire extinguisher. You have it for the remotest chance. God forbid I'll ever have to use stop loss again. But it cost nothing. Its free. Even when you ride the downtrend (W) there is a point where you predict will be bottom and put stop loss at 25% below that. There is only so far you can ride down (below the predicted) with profit before it starts cutting into the capital and incurring huge losses. As far as indicators go you are probably much more experienced on them than I am. However, I consider them statistical tools using past data (also individual interpretation). BBs for e.g. are mere moving standard deviation from the average. So are stochastics and oscillators like RSI. They all can indicate possible directions from past performance but can never predict the future. Aggreed they are right more times than wrong but news and events are completely out of their control and they come out every minute. If you write the CCs deep in the money when its at the bottom you give away the upside at a time when your indicators and all your cells say its going up(for a very small time premium than out of the money). You should be selling PUTS(W.I.N) not calls. You should be buying calls not selling yet(your own W.I.N). But have an emergency evacuation plan. Again, I don't mean to undermine anything except suggest an exit strategy. You have to know your emergency exit(small loss) when you enter. On top of that you have to know how high (profit exit) you want to go. You have to know which battles not to fight so you can fight another day. Caroline, I wish I knew which discount broker has option stops. Of course they must all have for stocks. Online brokers(deep discount broker) have that feature. On my Etrade there is option stop/ option stop-limit. I use Smith Barney a lot and one of the perks of having a full service broker is that he will dig me up from my grave if option hits my stop price. Him or his office will call, pages, digs etc. It does not cost a dime anywhere. And its good habit. He gives me huge discount on option trades and adds a lot of value. thanks, Deep

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