I, too, am confused by Roth's assessments. They are contradictory in significant places and IMHO incorrect in others. For example...
Here is his summary of LEAPS CC writing:
OUTLOOK: Mildly bullish
ADVANTAGES: Downside cushion; cost reduction; good return
DRAWBACKS: Limited upside
DEGREE OF RISK: Comparable to stock ownership
For put writing:
OUTLOOK: Bullish to very bullish
ADVANTAGES: Low capital needed
DRAWBACKS: Needs close monitoring
DEGREE OF RISK: Moderate
For combinations:
OUTLOOK: Very bullish
ADVANTAGES: Combines covered Call writing with Put writing; collect two premiums
DRAWBACKS: Complex; needs monitoring; Double Commitment
DEGREE OF RISK: More intense than stock
Roth goes on to say that "Unconvered equity Put writing is very similar to covered Call writing. They have the same risk/reward profile. But Put writing might be deemed a superior strategy. That is because the reward/payoff is greater."
Here, he explains (complete with examples) that put writing and CC writing have the same risk/reward profile, except that the reward associated with puts is higher. Yet, his summaries imply the opposite in every category.
Later, he discusses that straddles/combinations are effectively a combination of a CC and a written Put. These are each of moderate risk or less, yet when viewed together the risk somehow becomes "intense". For example, suppose we own 1 block of a stock in one account and have written a CC against it. Suppose now we write a put for the same underlying in another account. We now own two positions which "have the same risk/reward profile", yet the risk of one is "moderate", the other is "comparable to stock ownership", and the two together is "intense". I just don't get it. The only thing I can think of is that he is trying to protect an unsophisticated reader from overextending due to margin.
FWIW, I view Roth's book as an good basic introduction to the mechanics of some options strategies. His analysis, however, is unreliable and should be taken with a grain of salt.
dM |
