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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: AnnaInVA who wrote (2675)10/13/2001 6:03:03 PM
From: Kayaker  Read Replies (2) of 5205
 
re your shorting the QCOM Jan 70 put. Does your broker "take out" $70k out of your margin "allowance" or the net of $ 42.90 ? And either way, this amount of money now sits "untapped", ie. can't play with it.

Anna, there is a cash or margin requirement. This is from a note I made some time ago. It varies by brokerage.

25% of the stock price plus amount collected on sale of put (premium), minus amount by which put is out of the money, OR 5% of the stock price, whichever is higher.

A little hard to follow before my first coffee. Note that it changes as the stock price changes. I don't pay much attention to it because I only short 'cash-backed' puts, i.e., I will keep 70k cash available (43k + the 27k premium). I call it a 62% (27/43) return if I keep them until Jan 03 and QCOM is 70 or above at expiration, though some folks calculate the return differently. Or, my net cost is $43/share if ever I am put the shares (at 70).

I wouldn't do a long term CC at this time. Short puts when the stock is low, short calls when the stock is high. I think the stock is low. If I short the puts here and the stock runs up, I can bail out with a nice profit since the puts drop as the stock goes up. If I buy shares and short calls and the stock runs up and I want out, I have to buy the calls back at a loss. I know they would go up less than the stock but still not a good situation. I always feel trapped by long term CCs in a rising market.

Scout for 'edamo' posts for more info on put shorting. He has posted many helpful notes and has much experience.
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