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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 (9302)	12/28/1998 2:30:00 AM
From: FR1	Read Replies (2) of 14162

Hi Herm, Here is my experience: 1) I have heard how NASDAQ wants to tighten up the swings we are getting on some stocks, particularly Internet stocks. 2) I did not know how they were going to do this. In my account at Dreyfus I have some Internet stocks which, a week ago, were at about 50% margin. 3) The stocks have done nothing but go up since then. 4) I was surprised, then, on Saturday when I received a fairly hefty house margin call. 5) Dreyfus is not open so I called Fidelity. The broker there told me that the new regs are that Internet stocks will now have a 70% margin requirement and other stocks, like DELL & IBM, may be at 30 or 40%. It sounds like the margin requirements are now going to be pegged to the option premium. This could be a real mess when trying to figure what you can buy on margin. 6) I don't know if everyone is getting a notice at the same time but this will cause some selling. All accounts that are heavy in Internet stocks and below 70% liquid will have to sell to meet the margin unless they are weighted with DOW blue chips or something. How many accounts are in this category is impossible to tell but we should find out soon because the margin due date is Jan 5. 7) On the plus side for Internet stocks, Amazon splits 3-1 in a week and YHOO and others are ready to split with the January earnings reports. Also, Internet spikes in the past have been based on wishful thinking about the day we start really using the Internet for commerce. From the sounds of this Christmas season, serious Internet commerce may finally have started. We will know by Jan 12 (YHOO report). 8) Right now I think I will buy slightly out of the money PUTS (maybe 2 strike points out) to cover my positions and sell if I see more than one major down day. 9) I somehow think the first part of January will be all-positive as stocks split occur and earnings come out with big gains. After that will be the big test. 10) Have you noticed any build up in PUTs open interest? Very interesting that you should ask that because it seems remarkable that there is no stampede to the PUTS which you would expect if we knew we were headed to a major correction. On Dec 1st there was a major drop with both YHOO and AMZN going down 25 in a day but people just bought them right back up. Some people say that the public buying is what is keeping them up. I don't know but I know a lot of shorts got burned in December. Hey, if you are lucky enough to have a giant kahuna in an internet stock don't cough up new money for margin calls! Take your profits and run. Margin is a loan and many folks will not be able to make that margin call without heavy liquidation. You have a good point. Tell me what you think of this: I was planning to simply back my Internet stocks with out of the money puts. In fact, maybe buy a few more PUTS than I have stock. They are fairly cheap and they will stop any downside fall. If a big sell off starts (ie more than a one day sell off), sell the stock and PUT. I am not sure what to do after that. What do you think? Maybe a straddle? This is probably the only time I have seen a situation where a straddle might actually make money.

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