Waiting for the big Kahuna Message Board

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Strategies & Market Trends : Waiting for the big Kahuna

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To: Sergio H who wrote (52125)	6/11/2001 12:20:56 AM
From: Joe Waynick	Read Replies (1) of 94695

Sergio, if you review McMillan, “Options as a Strategic Investment,” you’ll see why naked puts and covered calls are equivalent. In fact, McMillan says naked puts are SUPERIOR to covered calls because while the risk/reward ratio is the same, transaction costs for naked puts are lower since the writer doesn’t have to absorb commissions on two transactions. The risk for write naked puts is no greater than the risk of owning stock outright and selling a call. It is true that if you own the stock, it could appreciate in price. However, since you’ve written a call, you have the exact same upside potential limitation as one does writing a naked put on a stock that suddenly advances. In fact, the profit potential with naked puts is greater since put writing typically have a greater premium than call writing. We’re not comparing stock ownership vs. naked puts. We’re comparing naked puts vs. covered call writing. I hope this clarifies things somewhat. BTW, Mama Bear sent me a link to a broker that does allow options in their IRA accounts. Here’s the link: stockoptions.com

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