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Technology Stocks : IBM -- Ignore unavailable to you. Want to Upgrade?

To: David who wrote (6951)	11/2/2000 6:58:20 AM
From: Arrow Hd.	Respond to of 8218

David, I think you would sell Calls (writing a Call) if you were expecting a downturn not Puts. Anyway, I buy Puts (not write Puts) to protect a long position when the potential for a bad downturn exists. But I do not do this often and there are far more astute option players who visit this board than me so I would ask that one of them answer in more detail. Thanks in advance.

To: David who wrote (6951)	11/2/2000 1:31:55 PM
From: Jim Koch	Read Replies (1) \| Respond to of 8218

David, options trading can be a good way to hedge. However, having said that, it can be far more risky and is considerably more complex than trading the underlying security. The combination of varying strike prices, expiration dates, hedges, straddles, long or short, covered or naked, etc. can be mind boggling and should only be attempted when you thoroughly understand how options work. Arrow is right. Selling puts is not a hedge. It is a very aggressive tactic used when you are convinced the stock is going higher or you wish to take a position in the underlying stock because you think it is a good value. It obligates you to buy the stock at the strike price of the option. Also, all US stock options and many index options are American-style (as opposed to European-style or capped) which allows the holder (buyer) to exercise their right to put (sell) the underlying security to the writer (seller) at the option's strike price any time before the expiration date. A lot of investors don't realize this and it is not common, but I have had it happen. Trading options can force you to buy or sell the underlying security when you don't want to so there is a risk there also. I like to use out-of-the money calls on stocks that I am long and wish to hold. It is a good way to increase yields in flat or steadily rising stocks. Of course, if the stock rises rapidly like IBM did the first half of 99, you may reduce your gains if the stock rises past your strike price and you sell the stock below market or buy back the calls for a higher price and a resulting loss. But in the long run, it is a tactic that has worked very well for me. I buy puts to hedge a stock I am speculating in, and I think it could move big one way or another but want to protect myself in case it moves sharply lower. For example, I along with others on this board, thought IBM would move up nicely after we announced third qtr. earnings. I added very significantly to my existing long-term holdings as a speculation, not an investment, and bought an equal number of puts in case I was wrong. Boy, was I wrong! Although I lost money, it was not near as much as it would have been if I hadn't bought the puts. It was my "insurance" against a large loss for which I paid a premium, the cost of the puts. Like insurance, the higher and longer the coverage (strike price and expiration date), the higher the premium. If you decide to trade options, I would recommend getting one of the good books out there that describe the process before you start. I am not current on the literature, perhaps someone else could recommend a good text. Anyway, hope this helps. Good luck! Jim Koch