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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: alanballow who wrote (4542)10/30/2006 2:02:40 PM
From: Uncle Frank  Read Replies (1) of 5205
 
>> Now slowly, for the dummies on the dummy thread, selling puts = buying calls, except you may be obliged to buy at the strike price...

Not at all.

Buying calls is a high leverage play... kind of like buying a Keno ticket. You only collect your winnings if the price of the underlying stock rises above the strike price plus the premium you paid to buy the call. You must be extremely bullish on a stock's prospects to be a call buyer.

Selling (writing) puts is an unleveraged play. It's like selling Keno tickets, not buying them. If you write an out of the money put and the underlying stock's valuation increases, stays flat, or goes down slightly, you still win (keep the premium). If the stock goes down significantly and you don't buy back the option before expiry, you will be assigned the stock at the strike price. That's why it's best to restrict put writing to stocks that you'd like to own. If the stock does get assigned, your net cost will be the strike price minus the premium you collected for writing the put.

I hope I didn't confuse the issue, but I wanted to strongly make the point that selling puts differs dramatically, in terms of expectations and risk profile, from buying calls.

duf
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