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Technology Stocks : America On-Line: will it survive ...?
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To: Gary Korn who wrote (9060)3/26/1998 2:04:00 AM
From: Jason Cogan  Read Replies (1) of 13594
 
Gary:

I'm glad I could be so helpful. I agree with you that naked option writing is often a safer way to take a directional view. It's why I do it all the time, particularly on high volatility stocks, where the time is worth so much.

However, I caution you and everyone else about "Not seeing the risk."
Selling puts is not the same as buying stocks at a discount. Because if the stock of a company goes up, you don't own the stock. You only own it when everyone else doesn't want it, not the other way around.

Another way to look at selling calls and puts is this way: Traditionally, investors (both long and short) think of buying x amount of shares at a certain price. Say 1000 AOL at 66 (crazy I know.)

Selling 10 puts at 60 isn't like buying 1000 shares at 60. You're buying a little AOL at 60, but you don't know exactly how much. If the stock rallies, it's like owning less than a 1000 shares. How many less depends on exactly how high the stock goes. Worst case: You own all the shares precisely when you don't want to, when the stocks at 40. That's called negative convexity.

However, I agree that writing puts is a smart strategy over time, particularly stocks that people follow very comfortable with and don't believe a "big surprise" is coming. There are several stocks that I write puts on constantly, and continues to be a profitable strategy.

Hope this helps,

Jason
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