How To Write Covered Calls - An Ongoing Real Case Study! Message Board

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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!

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To: Carl H. Gotsch who wrote (5732)	11/1/1997 4:55:00 PM
From: Herm	Read Replies (3) of 14162

Carl, Our discussion of adding naked PUT writing to our CCing makes sense if you are willing to add more shares of stocks to your holdings that you will eventually write CCs on anyway. Of course, that assumes that you like the stock and are long. What is the advantage of being a PUT writer rather than a stock trader? As the the buyer of a stock, you must invest a great deal of money to take a position in order to benefit in bull markets. You have generally are at the most risk since you are only able to time your purchase and selling points. Otherwise, you are at the mercy of the MMs and the market. We know that CCing can reduce your downside risk and increase your profits by collecting premies and lowering your net cost basis. But, just imagine if you can pick up more stock cheaper than your net cost basis. Just imagine collecting premies as the stock continues to move up! That is exactly what writing PUTs would provide. As a writer of a PUT, you do not have to put up any money when you sell short, although you must maintain enough money in your account to cover the margin requirements, which are very different from those required for stock traders. With naked PUTs payment cannot be less than the premium of the option plus 5 to 20% of the value of the underlying security. So, if a stock is just about to reach the bottom you can turn around a quickly write a naked at the money PUT for some big premies and when the stock reverses and starts heading up in price that PUT will erode quickly! So, you can cover or let it waste away! If the stock is PUT to you and you have to buy it, then it should be put to you at a discount compared to your net cost basis (NUT). Thus, you averaged down your holdings and can write CCs on that stock to make more profits. Again, getting the stock PUT to you is not bad if you have the money or margin and can make profits by CCing. In essence, what McMillan is saying is that if you only have to front 20% of the value and you stand to make the same profit as covered call writing then you have more leverage with naked PUTs. I recall a reader who was writing naked PUTs and trying very hard to be "put to" and he could not catch up with VVUS when it was raising. All those premies will lower your net cost basis when you do get caught. Just turn around and write CCs to make profits anyway! Writing naked PUTs to buy more stock is a VERY SMART approach!

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