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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Sam Citron who wrote (43300)	3/7/2001 3:46:18 PM
From: Ian@SI	Read Replies (1) \| Respond to of 70976

Sam, Re writing PUTs. 1. You seem to have a good grasp on the company risk for which you're providing someone else an insurance policy. Always remember that you're also insuring against Market Risk and any other risk that might impact stock prices. So if the big one dunks California in the Pacific, and insurance companies are forced to liquidate their holdings, that's part of the insurance risk you've provided coverage for. 2. While we were talking about 3 contracts, no big deal. Now that you've mentioned that you have other outstanding contracts, some of which may be in the money, or even deep in the money, you need to have some rules about how much of this "free" money you'll take. E.g. - last March I had more than twice my net worth in short PUTs outstanding. By the third last trading day in May, that had become about 6.5 times my net worth of mostly deep in the money PUTs. I had been out of margin compliance for the last 3 days (worst case was 1/3 or my net worth). For some reason that I still don't understand, my broker never called, nor did the broker take any action without calling. Luckily, one of the stocks for which I'd written an excessive amount of PUTs released some very positive news; and more than 200 contracts expired worthless in June that had been deep in the money. Long story, but I added a new rule. I will never write 1 contract more than I'm willing to have assigned to me the very next day. And the face value of the PUTs written will never exceed 1/2 my net worth. I took what I regard as a very large $ amount of premiums last year; but I came within a whisker of losing everything I had as a result. Only reason that I offer this is to discourage others from venturing into options writing strategies. While appealing, there can be some very severe and unexpected downsides. Regards, Ian.