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Strategies & Market Trends : Roger's 1998 Short Picks
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To: JBINWC who wrote (17070)1/18/1999 10:32:00 AM
From: Don Westermeyer  Read Replies (2) of 18691
 
how is this strategy less risky? if the stock takes off higher, I'm dead, right?

No more dead than shorting the stock. In fact you will be ahead of the short sellers.

Example if AMZN is trading at $100 and goes to $150 in one month:

1. A short sellers sells 100 shares of stock, he is now out $5000.

2. On option player sells the 1 contract (100 shares) of the calls at the $100 strike price that expire in one month for $25 ($2500). That person will have lost $5000 (from stock) - $2500 (option premium) and will have lost only $2500.

The downside of selling short a call is that at most one can get is the premium. In summary, for the example above the most profit will be obtained by selling short the stock if the price will be lower than $75 in one month. Otherwise selling the call naked will get you them most money (or minimize the loss.

The real risk in using options is one is tempted to use too much leverage. The same $10000 investment can get a lot bigger position using options.

Brokers don't like to give most people the option to write a naked call unless you have a lot of $$$ in your account. Another more conservative way (than just shorting the stock) is to enter into a short position is to sell short the stock and then sell a 'Put'.
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