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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Uncle Frank who wrote (2690)10/14/2001 9:12:25 PM
From: Dan Duchardt  Read Replies (1) of 5205
 
uf,

What you say makes sense, and there is no substitute for being comfortable with whatever strategy you choose to employ, but I think there needs to be a distinction between your commitment to ownership of a particular stock and the comparison of these strategies. As you say, you have decided to hold certain stocks for the long term, so every time you sell a call you are risking the possibility of being obligated to sell a stock you want to hold at a discount to the market. You can of course avoid losing the stock, but at the expense of taking a loss on the calls.

A put seller may be just as committed as you are to wanting to own certain stocks, but is willing to take a comparable risk to the CC that she might lose the opportunity to purchase that stock by trying to obtain it at a discount to the market price. An ITM put can be sold for a nice premium with the assumption that the stock will eventually be assigned and ownership achieved at a net cost below the current market value. If the stock runs too far, the put will expire worthless. At that point the stock could be purchased at market price with the net effect being the same as taking a loss on the short call in a CC strategy. An ITM put can be sold with the assumption that a desirable stock is too pricey at the moment, but would be worth owning at a lower price. This is "mathematically" no different than selling an ITM call on a stock you want to own but you think it is currently over-valued, so you are willing to risk losing it for the sake of a fat premium.

There is really no escaping the numerical equivalence of the two strategies, but that certainly does not argue in favor of trading in one strategy for the other, especially for stocks you already own. If you ever decide to let yourself get called out and are contemplating a purchase of these stocks you really want to own you might consider the short put a viable approach to re-entry. Then again, you might be perfectly happy to just keep doing what you have been doing all along.

Dan
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