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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 163.32+2.3%Nov 21 9:30 AM EST
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To: TShirtPrinter who wrote (41762)9/18/1999 11:37:00 AM
From: PAL  Read Replies (1) of 152472
 
Tony:

Both selling puts and buying calls are bullish strategies. The risk of selling puts is much much greater than buying calls since you may have to pay the entire strike price if assigned. Therefore, brokers have stringent rules for selling naked puts. The funny thing is that selling puts has a finite risk while shorting a stock has an unlimited risk, yet a broker will let you sell short before allowing you to sell naked puts.

In selling puts you have to pick a really dynamic company like QCOM. Let us take an example from Jan/190 options (at the money):

Call Jan190 AAOAR : 27
Put Jan190 AAOMR : 25

If you buy call: right away you are behind $ 27/sh. Thus the stock has to go to $ 217 before you break even. You will lose $ 27 if the stock stays at $ 190 upon expiration.

If you sell call, you collect $ 25, and the stock can drop to $ 165 before you starts to worry. You will lose $ 27 only if the stock drops to 138, but by then you can do a repair: buying back the option and roll into a later month for the same or greater premium. On paper you lost in the first transaction (tax writeoff) but positive on cashflow

Upside potential? Yes there is a limit. Let us just say QCOM goes to 300 come Jan/00. You triple your 27 investment getting $ 83 profit on buying calls, but only $ 25 in selling naked puts on zero investment (aside from margin requirement, so if a person is a purist, the opprtunity cost should be included).

If one wants to sell naked options, make sure that one really studies and make paper trades before plunging good earned money. While it can be profitable, the risk is significant.

Good Luck

Paul

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