Covered Calls and the Madness of Crowds
Amy sez:
"Message #137472 from Amy J at Jun 16, 2001 2:28 AM
"Hi Elmer, RE: "XScale is a different animal which promises much higher performance. "
..
"How are you doing on cov calls? I'm amazed as to how powerful cc's are for a downturn. I never would have imagined them to be this powerful. 48% increase in shares since last year. But overall portfolio valuation is in the tank. Stock market downturns are temporary, right?"
I'm not Elmer, but here's the scoop:
-- Selling covered calls, or just calls in general, is of course a good speculation in a down or flat market
-- However, if the stock goes up, in a covered call the stock is taken away at the strike price. Sell a CC on Intel at $30 and watch it get taken away for $30 when Intel is trading at $45 and it won't seem like such a good deal, will it?
-- And sell a naked call and face the above situation and learn the truth of "He who sells what izzon hizon, buys it back or goes to prison."
-- The ultimate truth is that the sale of puts or calls, the buying of puts or calls, covered or naked, is never more than a fractional gain on a portfolio, on average. Unless one knows, or thinks one knows. which way the prices are moving, in which case all things are possible.
Sure, some people bet right (and a roughly equal number of others bet wrong, as they were the other side of the bet!) and tell tales of how much money they made by writing covered calls, or by buying naked puts.
But look closely at the underlying math, and the conserved quanties. If ambitious, take a gander at Black-Scholes, then ponder the fate of Longterm Capital Management.
--Tim May |
