RE: Using margin to buy stock, then write CCs
I personally think this play is very risky in bad times. If everything goes well, you get your 20% return. If the stock is not called, you reduce your cost basis. Great.
Now the stock goes down 10% and you get a margin call, what do you do? Unless you have some other funds or margin capacity, you will be forced to buy back the calls first, then sell the stock. You will probably lose money.
This type of trading is probably ok for someone of Voltaire's experience, but it is certainly not for newbies. I always use a 20% rule. If I put on my play and the stock immediately drops 20%, how badly will I be hurt? If I have to put up money for margin calls, it is not a safe play.
In today's market, maybe we should use a 30% rule.
Seldom Blue |
