judith..."difficult for the stock to be called that you have held for a long time"
that is where the discipline comes in....when you are the writer, you have to understand that you are giving away upside potential beyond the strike plus the premium.
prior to setting the position you must acknowledge this fact, and be satisfied with the results.
the only problem i have with rolling a call forward in an undetermined trend market, is the psychology behind it, sometimes not thought out, but driven by potential opportunity loss, which equates to chasing a stock on a rally. discipline is in the belief that nothing goes up forever, and in recent markets usually not more then a few days.
my preference is to be in cash, use the cash as collateral and margin capacity and sell puts in issues that i would tend to go long on. it may not suit everybody, but it is a low maintenance method, that is less risk then going long...more a way to generate cash, then expecting capital gains in share price appreciation...
the key is to set the position when you are getting a good time factor and volatility addition to the premium...
e.g...i like atml, a benign, oft times sleepy semi maker, with good fundamentals, it tends to range trade, and recently has flat lined...take 100k, use it to back your purchase of 100 contracts of a jan 03 10 strike...do this on 4/12/01, the common at 10.75 and get a 3.30 premium, or 33k against your 100k for 20 months....or close to a 20% per annum return. today atml at 10.90, the contract is 2.40 x 2.60....if you close at 2.50, you have gained a .80 profit or 8k for four months against the 100k...in essence the underlying common moved .15 in four months, the put sale has returned .80....about a 24% per annum return...
decide what you want the options to do for you....don't let them do it to you....set your entry and exit points, be flexible, and adjust to market conditions if a trend develops...
remember you can resell the puts, same strike, farther out, always with somewhat of a net gain....
good luck,
ed a. |
