TP - selling covered calls does not protect you from a drop in the price of the underlying - it is a way to make money on an equity, usually when you believe the underlying will not rise above the strike price.
If you believe the stock will drop, you could buy protective puts. There are a number of ways to do that, depending on your time horizon and budget. If you think the stock will decline for a while but eventually come back, you can buy slightly out of the money puts a ways out - maybe even LEAP puts. For example, you could have bought Jan 2002 120 LEAP puts on SUNW a ways back at a pretty low premium. Those puts will increase in value at about the same rate as the stock declines, so it works like an insurance policy - if the stock goes down, you make money on the puts, if it goes up, you make money on the stock. Your risk is the cost of the puts. I usually sell back a protective position if either the stock goes up near or past the strike, or if I think I can call a bottom.
Near term puts have the same effect, and are a lot less expensive. They also move more closely with the stock price, as the "time value" is not as much of a factor. But they also "go away" more quickly, so you either have to close the position or put the stock in a shorter time frame.
A more aggressive play, assuming you believe in the underlying stock long term, is to buy protective puts, sell when you think the stock is at the bottom, and buy calls. That allows you to make money on both the fall and the rise. I made out very well with that strategy on both DELL and TYC this year, less successfully with INTC since it didn't go back up <GG>!
But in any event, buying the puts insures you against the drop in the stock price, so you are at least preserving a profit without selling the stock. |
