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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Thomas Tam who wrote (1420)	7/11/2001 11:14:50 AM
From: Dan Duchardt	of 5205

Thomas, Any other thoughts out there on naked call writing? I think Frank hates this. Looks like you were right about Frank <gg> Roth's warning is well founded, but as it says in the last quoted paragraph from uf's reply Writing uncovered Calls can lead to a disaster. If the stock rises above the strike and the Call is assigned, what results is a very different position: short stock, instead of long stock. And that is neither a familiar nor a comfortable position for most. If you are not comfortable shorting stock, then you should not be selling naked calls. The flip side of that is if you are comfortable shorting stock, selling naked calls instead gives you some protection against loss that you do not get with short stock. Whatever time premium you collect from the short sale offsets some loss if the stock goes up. Of course that protection comes at the expense of limited profit potential; you cannot make more than the premium you collect. An alternative to this strategy is a bear spread with either puts or calls, which further limits the profit potential but gives you a lot more protection. It might be worth looking into that before writing naked calls. Dan

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