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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: FaultLine who started this subject5/7/2001 1:17:16 PM
From: FaultLine  Read Replies (3) of 5205
 
I read Thomsett's book, Getting Started in Options yesterday except for Ch. 7 "Selling Puts" (speak of the devil),and Ch.8 "Combination Techniques.

As a relative beginner myself, reading Thomsett confirmed that I am heading in the right direction. Since I've already read a number of chapters from McMillian, going back to read Thomsett was like backfilling the creases between McMillians major ideas -- like the putting grout between the tiles. Thomsett's book expresses a useful mental framework for writing calls and includes a number of important cautions.

I have gotten so used to the various graphical representations in McMillian that I was surprised that Thomsett studiously avoided using even a single yield curve plot. I think the author made a decision to avoid inserting a possible offputting feature into this, a beginner's book.

I was amused to read his "pitfalls to avoid in your covered call writing" on pp. 158-159:

"1. Setting up the call write so that, if exercised, you end up losing money in the underlying stock.
This is possible if you sell calls with striking prices below your original basis in the stock....

2. Getting locked into positions that you cannot afford to close out.
If you become involved in too high a level of covered call writing, you will eventually find yourself in a position when you want to close out the call but you do not have the cash available to take advantage of the situation. You need to keep an adequate cash reserve so that you can act when the opportunity is there."

In the margin next to point 1, I wrote, "Been there..."
and next to point 2, I wrote, "done that."

But I did manage to escape and learned my lesson.

--dfl
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