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Pastimes : The Other James Cramer Thread
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To: Don Pueblo who wrote ()7/15/1998 8:35:00 PM
From: Michael Elizabeth Chastain   of 35
 
What's one of your favorite Cramer columns?

One of mine is a column about writing covered calls.

A week or two ago I was cruising a web site with computer-generated options recommendations. They had tables for various greek letters showing options that had extreme high and low values for the letters.

One of the tables was "high theta" options, suggested for covered call writing. These are options with a huge volatility premium. The idea is that you buy the underlying, sell the covered call, and hope that the stock trades flat to mildly up.

The #1 high-theta option was an out-of-the-money AMZN call.

I just had to laugh. This was when AMZN was about 120 and had not crested to 140. I could tell this had to be a bad idea. But it was one of Cramer's old columns that really put the finger on it for me. In that column, he wrote about how he had written a lot of covered calls just before the October 1987 crash, when the Trading Goddess told him to liquidate. He couldn't sell his stock because with all the volatility, it was too risky to be naked short calls. And he didn't want to buy back the calls because all the volatility had pumped them up, making them very expensive. Basically, there was no safe way to close his position without taking an ugly loss up front. As he put it, he was like a "stationary army surrounded by a blitzkreig."

(What did Cramer actually do? He brought in both the common and the calls, at a loss. So he had a lot of cash on 19 October 1987).

I don't trade options anyways, and I certainly wouldn't have written a covered call on AMZN. So that Cramer column didn't have any effect on my net worth. But it had a good effect on my market insight!
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