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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herm who wrote (5726)10/31/1997 8:32:00 AM
From: Douglas Webb  Read Replies (2) of 14162
 
I like the idea of writing puts at the bottom; I've considered doing it myself. You need to have some cash on hand, though. What are the typical margin requirements for naked put writing?

I've also been thinking about how to decide which calls to write. You always say to write at-the-money calls, which makes sense because you get the most time-value that way. But if our TA is working well and we have a good feel for the top, bottom, and cycle time, I think writing an in-the-money call near the bottom might be a better strategy. You get a larger premium, which locks in your gain so far. If the stock drops as predicted your call can erode to nothing near expiration. If it drops further you've got more protection than if you wrote the at-the-money call. And if it goes up instead of down you've at least locked in all your gains up to the point where you wrote the call.

This may work for writing the naked puts too. Instead of writing an at-the-money put, write an in-the-money put near where you think the top is going to be. This is riskier, though, since you may be forced to buy the stock at that price if it keeps going down. It may be better to write the put at the highest strike which is below your net; that way if you get assigned at least you lower your nut a bit.

Thoughts?

Doug.
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