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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: OX who wrote (11604)	9/25/1999 1:34:00 AM
From: Greg Higgins	Read Replies (3) \| Respond to of 14162

OX writes:I find it fascinating that you were assigned. The person exercising must've thot CPQ was going to gap up this morning, 'cause yesterdays closing bids sure don't reflect a high probability of assignment (BWDIK). I'm not sure if you're assuming I sold it recently, actually it was early August when I sold the put, say 6 weeks ago. I'm interested in your assessment of the Putter's state of mind, but I think you're ascribing call trader motives to a put buyer. I've been short very deep in the money puts before and they never last to expiration. I didn't have any particular price at which I expected to have the assignment take place. When I first sold the put I figured I'd be OK as long as CPQ moved slowly but steadily upward (which it didn't), but I knew the position was risky. Since my premium + margin was more than 50% of the stock price, however, I wasn't overly concerned. I've been as deep as 20+ pts ITM (on calls) but still had miniscule time value left, and luckily was not assigned (was hoping not to be in this case). As McMillian explains reasonably well, calls almost always have some time value left with several months to expiration, while nothing loses times value faster than an ITM put. (Example, the 2002 CPQ 75 Put is showing negative time value.) More than the mathematics, however, I'm interested in discussing the psychology of the trader. Besides the numbers, I think a put buyer is always more likely than a call buyer to exercise early. Granted, there are some call buyer's who will exercise early because they really want a stock (Hi Herm!). But, I think they are a small minority of the call buyer universe, because they know that the call is usually worth more than the stock (i.e., it's better to sell the calls and buy the stock than to exercise). On the other hand, the only way to get full value on a DITM put is to exercise it. Furthermore, I think that one big difference between exercising a call and exercising a put is that if you do it to a call, cash leaves your account; when you exercise a put, cash enters your account. Lastly, the call buyer tends to be hopeful. There is no limit on your return for that call until you exercise it. For a put buyer, however, your maximum gain is set the minute you choose the strike price. If the put is DITM, that means your stock is down, you're protected, but when do you give up and move on to something else? Obviously, if you have the stock and the put, you're not making any money. If you get rid of the stock, however, you'll be almost whole and perhaps you can this time choose something which goes up in value ( like VVUS ).