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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Uncle Frank who wrote (438)5/7/2001 6:57:11 AM
From: Mathemagician  Read Replies (3) of 5205
 
But writing puts is a whole 'nother science, and I must admit that I don't understand that game very well.

Actually, it is very similar to CC writing, and I get the impression that you have at least a perfunctory understanding of CC writing. :) Here's the idea:

When you write a CC you decide at which price you would buy, then you actually buy, and finally sell the call to collect a premium.

With selling naked puts you decide at which price you would buy then sell the put to collect a premium, saving the actual buying until later.

If the stock goes up you end up with cash and no stock. If the stock goes down you end up with underwater stock and a premium.

In both cases you need a stock you want to hold even if it drops and a price at which you would be comfortable buying it. The difference is that writing puts requires much less capital up front and so you dramatically increase your ROI with an equivalent risk/reward profile. Sometimes it makes me wonder why we bother selling CCs at all.

M
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