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Strategies & Market Trends : Options -- Ignore unavailable to you. Want to Upgrade?

To: edamo who wrote (2417)	2/8/2000 4:40:00 PM
From: PAL	Read Replies (1) \| Respond to of 8096

hi ed ... since you and i are just ignorant posters with gerber foods on our lips, maybe this post from a option pro might help some newbies to understand what selling puts is all about. from option investors: ____________________________________________________________ ********* OPTIONS 101 ********* More on Margin, Putting it All Together Jim Brown's Option 101 of 1/16/00 read as follows: "Minimum Risk, Maximum Reward. By Jim Brown Selling naked puts significantly out of the money offers minimum risk on positions that require very little maintenance. If you can not watch your trades and want a low risk strategy this is it." Never has so much been said with so few words! Minimum Risk and Maximum Reward should top every trader's wish list. Add to it, Magnified Returns through Money Management with low Maintenance and you have a surefire winner! Strategy Dissection: "Selling naked puts" - The writing or selling of uncovered Put options. As the writer or initial seller of an option, control is given up but premium collected. Using margin as collateral, returns are a function of dividing the collected premium by the required security. If this sounds unclear, read my Option 101 columns from the previous month. "significantly out of the money" - Out of the Money refers to options which have no intrinsic value if exercised. Since we would be selling the option and giving up control, we dramatically increase the probability of profit by selling the strike price far away from the stock price. "minimum risk" - This risk can be measured two ways. The first and obvious is the risk of losing money. I'll make a bold statement and say; if you stick with good stocks and truly learn all the nuances of this strategy, you should NEVER lose! To me the second and more common risk is the use of your capital. This strategy can tie up money that can't be used somewhere else. This second risk is the true risk of stock ownership. I feel this strategy can have less risk than straight stock ownership. Funny how many brokerages want you to have extensive experience and large account sizes before letting you sell Naked Puts, but anyone with money can buy stock. "positions" - Positions come in two forms, long and short. When you buy something, you have a long position. When you sell something you didn't previously own, you have a short position. Selling Naked Puts may also be called shorting Puts. "that require very little maintenance" - Think of maintenance like babysitting a position. If you're not on top of the situation, it can run away from you fast. Most every reader has had a position turn from profitable to a loser. Naked Puts can be played two ways; Hold till expiration or traded like buying call options. With Deep Out of the Money (DOTM) Naked Puts, selling them with the hope they'll expire worthless can be "maintained" or protected, with a simple stop loss order. "If you can not watch your trades and want a low risk strategy this is it." - For people with day jobs or those in foreign countries who can't watch the market, this may be the ultimate strategy. You can get great entry points by placing limit orders. If you don't want to hold till expiration, you can also use limit orders to get fabulous exits. First Rule of selling Naked Puts (Do NOT Bend this Rule!): NEVER sell Puts on a company you wouldn't mind owning. Murphy is in charge! If you sell a Naked Put on a company you don't want to own, you'll end up owning it. Think of selling Puts as writing an insurance policy. Insurance companies won't sell life insurance to terminally ill patients. There's too much risk of paying a claim. You don't want to insure terminally ill stocks. Companies like AOL or Lucent may have a bad quarter or two and lose some steam, but they won't lay a rotten egg like Boston Chicken (BOST). Remember IBM, HWP, ORCL and AAPL all had big drops in the recent past, big drops that ended up being great buying opportunities! . . . Playing Naked Puts for maximum profit means only paying one commission. Maybe this is the real reason some brokers aren't as friendly with this strategy. Margin, used effectively, allows smaller accounts to trade like larger ones. Truly good money management, understanding margin requirements is a skill all option traders should master. Next week I'll discuss the windfall profits that you can earn if you get "Put" the stock. Chris Verhaegh chrisv@optioninvestor.com ____________________________________________________________ best regards paul