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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Road Walker who wrote (2184)8/23/2001 12:02:04 AM
From: BDR  Read Replies (1) of 5205
 
<<I have a question about selling puts v. buy/writes, for anyone on the thread. A similar strategy, intended to collect premium. Obviously buy/writes require more cash than selling puts. But there are repair strategies with buy/write, if the underlying equity goes down, you can buy back the cheaper call and sell a lower strike. Assuming the stock doesn't go down more than ~5% a month, you can at least break even. If you sell puts, and the market goes against you, I can't visualize an effective repair strategy, other than assignment and then selling calls. Am I missing something?>>

The analogous repair strategy would be to roll down the short Puts. The difference is that with CCs you have a net credit and with short Puts you have a net debit. The effect is the same though because with rolling down with CCs you are taking a loss you don't see. You have a bigger paper loss on the long equity position than you have a gain on the roll down of calls. With short Puts you have a cash loss with the roll down. The net value of the entire position should end up being the same, though you may be able to convince yourself you are better off picking up some extra premiums when you roll down the calls. Psychologically it is easier but financially the two should be the same. I think.
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