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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: ValueGuy who wrote (5118)	3/29/2011 8:29:38 AM
From: alanrs	Read Replies (1) of 5205

Naked calls end up in a short position if they are exercised. Most people (from what I've observed) never get comfortable shorting. It took me many years to give that a try, but then I'm basically a chicken. All that aside, if you are comfortable with a short position, the logic remains the same. Since so much of investing pivots on how one emotionally handles a given situation I tend to focus on that. If you are right on the direction and timing (I think xyz is going to go up/down in the next time period), there's only the issue of how you deal with a winning position, do you close it taking the gain or let it run hoping for more but risking the bird in the hand. If you are willing to short stock xyz at a given price (and really mean that), then selling a naked call is nothing more than collecting a premium for that willingness. Or, if you are not willing to be short the stock and are only trading the option, are willing to take a loss on the option, are trading within your own risk tolerance with a reasonably good idea of when to take the loss, and have the emotional ability to close the position at a loss when the time comes (all surprisingly difficult things to do), then it is like trading anything else. Whatever I do, I always have "what's the absolute worse thing that can happen" as part of my thinking. And when I think about what I think IS going to happen there's always the addendum that I'm probably wrong attached. Sorry to be so long winded, my best advice is to only do things you are comfortable with. I think it makes a lot of sense to sell covered calls or "naked" (cash covered) puts for a while to get the feel of it starting out. Good to see a new face. ARS

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