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Non-Tech : The Critical Investing Workshop -- Ignore unavailable to you. Want to Upgrade?

To: Brian K Crawford who wrote (8937)	3/23/2000 7:52:00 PM
From: Voltaire	Read Replies (2) \| Respond to of 35685

Hey gang, MARGIN: From the PM's I am receiving about Call Writing and the mistakes made by those posting me, by far the most serious error is the use or MISUSE of margin. First of all, from a stress reduction and quality of life standpoint, margin should never be used to ENTER the market. If one is hell bent on using it, then by all means use it in ABEYANCE. In other words, have it in reserve to pick up stocks or write calls when we have manipulated selloffs in stocks that you love. I did this with ELON the other day when it was down 21 points. To my mind there is Margin and then there is Quality of Life Margin. I am stunned by the number of people that are on 50% MAINTENANCE MARGIN in stocks like ELON and RNWK. There is absolutely nothing of good quality coming out of 50% maintenance margin. A margin requirement of 50% means an investor goes on margin with let's say $100,000. That means what? They can purchase $200,000 in stock, but what happens if the stock comes down another $50 or less. That's right! MARGIN CALL. Normally the Houses require 50% margin to get in and then allows your equity to sink as low as 30% before invoking a margin call. Obviously you can see where 50% maintenance margin is a royal pain in the ass, not to mention the pocket book. What has one done when they go on 50% maintenance and then write calls on the purchased stock? They have severely restricted their position to demand or maneuver. The Good Bad and the Ugly of margin: The Bad Ex. Investor buys 1,000 shares of RNWK at $70 and writes April 70's for $8 on 50% maintenance margin. a. stock goes down to $62. That is not too bad because of his $8 premium. But now what happens if the stock goes down another « point? Right, margin call and not only that but every time it dips under that, even if $20 there will be a margin call. Now the broker can be on your ass all month long and you can't even enjoy the good life with your premiums because you may need them. That is no way to live. b. There is another side to this besides the pain in the butt. It has removed the investor's position to demand. The investor now is forced to do what? Send more money, transfer more money or worst of all switch his position on his call in order to create more cash. Why is this so bad? BECAUSE IT WILL HAVE TO BE DONE AT MARKET BECAUSE TIME IS YOUR ENEMY. As most of you have seen that have written calls, the spread between the bid and the ask can be as high as two points or more and guess what, the investor will in all probability have to pay the ask not only on your Buy To Close but also on your sell to open. That alone can be four grand. ONE HALF OF YOUR ORIGINAL PREMIUM! Now let's look at the good life: The Good side of margin: The quality of life writer has a margin account but does not use it to ENTER nor to write the calls. Purchases 500 shares of RNWK at $70 with no margin. Writes the same call and receives the $8 per or $4,000. Why is this so much better. a. The investor has $4,000 to spend and spend it at will and can spend every damn cent without what? Worry of a margin call. There are only two things that can forcibly happen, the stock can stay under the strike and he keeps his premium and writes another next month or the price of the stock is higher than the strike at expiration and it is called out BUT, nobody can come and demand part or all of the premium back. b. Margin is held in abeyance. This is smart margin and when the market takes those manipulated dips, the investor can go in and pick up those wonderful shares when they are down $10 or so. c. Margin is also available for any other need that might arise. I love margin but only in the right situation. If you are going to use margin to write calls, I suggest about 20%. V