<Mike do you have protection if after put is exercised and stock continues to fall? >
Rich. The simple answer is NO. However, if the stock is put to you, turn around and sell the covered call. Income from the covered call acts as insurance to the extent of what you received for the call. Additionally, the risk is no greater than sitting on a stock and doing nothing. For instance:
Short a 1 month put and receive $2 for a stock which sells for $60.
Your basis for the stock is now $58. By the end of the month the stock is $57,50. The stock is put to you and you own it at $60, Sell the next months' covered call at $2. Your basis for the stock is now $56. If the stock returns to $60, you have a $4 gain. (not as easy as it looks) The stock you do this on must have strong fundamentals and demonstrate an upward trend, i.e. Compaq. The premium received on tech stocks is richer than the DOW 30. However, the higher the premium, the greater the risk.
The above is only an example. In real life you have to monitor this daily in order to make a competent decision on your next move. Track this on paper before you do it.
Mike Gordon |
