<Don't deal in generalizations, put down step by step like I did.>
O.K. step by step... although I don't know why I waste my time with someone with obviously only rudimentary knowledge of derivatives:
<Most people seem to think that the greatest thing that can happen when they write a Call is for the stock to sit there and not move until expiration. WRONG! WRONG! WRONG!>
So far you've just belittled people... O.K. if that's what your into.
<Now our counterparts are going to argue that by being Covered then we lose any opportunity to make any money past the premium we are paid on our calls, that is PURE BULLS---!>
More abuse.. but your right that you can make the premium PLUS profit in the stock up to the strike... but why don't you just say that... it's not "pure bulls"... it's a slight oversight perhaps??
<The best thing that can happen is for the stock to Skyrocket>,
Well this is just wrong. again... your maximum profit point is at or above the strike at expiration... you are indifferent to all those outcomes including the 'skyrocket', I don't know why you need me to repeat, and I don't know how anyone can be more concise than that. Therefore although those who you belittle are not exactly correct their 'concerns' are certainly valid especially in a non-continuous market.... ie. one with 'gaps' [see below].
Sure you make freak'n money on a 'buy write' if the stock 'Rockets' like you said.. but your sure as hell aren't as happy as the straight common holder by a long shot are you?
<Nothing bothers me more than to hear people on different threads tell people not to write Calls because any profit over and above their Call premium is locked out.>
I don't know why I'm going to bother, I think the baked potato I had for lunch was a bit moldy, and I'm not managing my time very effectively today. But I've learned a lot here on the 'Q' thread as well as the Gorilla thread... maybe this is time to give something back. Here's an advanced derivatives lesson:
'GAPS'-
ddichaz mentioned insurance... which of course is what an option contract is. Now the whole purpose behind purchasing insurance is in the case a negative 'event' happens... ie. a fire at your house. In the stock market this event is a 'gap' created by any number of things... we've all seen it. Hence many call 'puts' insurance... are you buying them in the case your stock moves down a bit every day giving you plenty of time to get out? No, you buy them in the case of a huge gap, or crash or other event where there is no continuous market... this was the mistake of 'portfolio insurance' where managers thought they could replicate options with 'dynamic hedging' on a day to day basis... until Oct. '87.
In fact, thinking that one can buy [to cover?] and sell either options or stock to tweak their risk profile on a continuous basis[stoploss orders come under this category] are as mistaken as the guy who says... I don't need fire insurance, I'm right around the corner from the firehouse! Sure that may help, but...
Now back to equities; option sellers are selling the gap [fire outcome], option buyers are buying it. So now the question is what price is the insurance? Is the buyer or seller getting a good price? Sorry, no time for that, I think I've contributed enough for one day.
I think it should be clear here who needs to 'see how it works' and who doesn't. All those people on the different threads who loath covered writing are most likely doing it for a reason... experience. They've probably [I'm guessing here, but the thread can use it's own experience] been getting their experiences in high tech stocks where 'events' and 'non-continuous market periods' are much more numerous than in index's or more mature companies.
Hope this has been useful to someone.
DAK
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