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

To: Uncertain Walker who wrote (3522)	2/24/2000 8:40:00 AM
From: edamo	Read Replies (1) \| Respond to of 8096

brian j "selling puts is like selling insurance"..perhaps selling puts is a much maligned strategy due to lack of understanding of risk. the ability to control risk is gained through discipline and fundamental knowledge of the underlying company and the overall economy. mix in a feel for the psychology of the market and the risk is no greater and actually less then the decision to go long a stock at a point in time. the strategy works in bull and bear markets, and becomes temporarily disjointed in a rapidly falling issue. but unlike call or put buying, repair strategies exist which allow an increase in contract time and an addition of premium to do so. visx, i'm not familiar with, but lu and dell are positions that have been very profitable, more so with the rapid declines which inflated the implied volatility. case in point....2/17/99 dell first downgrade, stock drops presplit to 82.5, the premium on the zdemd (0120) swells to 52, giving at the moment an adjusted cost if assigned of 68. the stock continued over the next few weeks to decline to the 70(35post split) range, yet the premium never went above 52. yesterday the last trade on the post split zdeml(0160)was 21.5 with the common at 41.375......so let's compare the result of the apocalyptic event. (split adjusted) 2/17/99 dell common = 41.25 prem=26 2/23/99 dell common = 41.375 prem=21.5 the above was an example of a higher risk position, as the strike was far above the stock price. positions set with strikes at or below the stock price are very conservative, not just in my mind, but as stated by mcmillan, bittman, roth....and in fact "options" by the educational div of the cboe simply explains (page 102): "the investor who stands ready to purchase the underlying security is not speculating. the investor has the capital necessary to establish a long position in the underlying security. the assignment making him long the stock may not be his goal, but it is not a cataclysm either." consider again your falling knife scenario......this proves how fragile an otm call buying strategy is.... call buying is brilliant in up markets, selling of any contract works in all markets.....believe warren buffett once said (paraphrase) "i'd sell insurance in an accident ward.......if the premium was high enough!!! in summary, risk is what you make it.......knowledge and experience negates speculative risk and establishes calculated risk........a risk that is inherent with any investment. good luck...ed a.

To: Uncertain Walker who wrote (3522)	2/24/2000 8:47:00 AM
From: Jill	Respond to of 8096

I'm sure ed will answer this far better than I, but I just want to note, that when stock tumbles you CAN repair. You buy back your puts for more, but you simultaneously sell puts further out to "refinance." On a sudden drop all puts will have richer premiums. I did this last Sept when QCOM pulled out of a conference and dropped 30 points a few days before options expiry. It was getting very close to the level I'd sold puts, and I was nervous (it recovered the next day actually, but that's another story). So I bought back the puts for more, and sold Jan puts to cover all my costs and come out with a profit. If you're the seller you can reposition. You would only get caught if you'd maxxed out your margin and left no cushion for volatility.

To: Uncertain Walker who wrote (3522)	2/24/2000 2:38:00 PM
From: David Lind	Read Replies (3) \| Respond to of 8096

Brian, concerning the risk of put writing, with the right selection of the underlying and the strike, one can make a very nice income from writing puts that are as much as 25-30% OTM. Yes, they are out there on good stocks. It just takes a little searching. Also, because it is a wasting asset, if the underlying does make a radical move, you can often buy it back at only a small loss and roll it out. Often the new premium, given recent volatility, is even greater than the original write. The only way you can really get hurt is if the stock trashes totally just after the position is opened. But with a little time spent on TA and FA before trading, staying nicely OTM, and remaining diversified in the total account, the risk of a killer event is extremely small. Certainly IMO, much smaller than being long the underlying where you must jump ship or hold 6 months for a recovery. -David

To: Uncertain Walker who wrote (3522)	2/24/2000 10:52:00 PM
From: Uncertain Walker	Read Replies (2) \| Respond to of 8096

ed, Jill, and David, Thanks for explaining your put-writing strategy. It seems some key points for successful put-writing are 1. taking advantage of anomaly in implied volatility. 2. focusing on good companies 3. diversification 4. being intimate with the current perception in the market and in the underlying stock. 5. being ready to repair a failed position, and using time and expanding volatility as your friends. 6. selecting proper strikes for risk tolerance. Am I missing any other points?