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Strategies & Market Trends : Rande Is . . . HOME -- Ignore unavailable to you. Want to Upgrade?

To: Kanetsu who wrote (49345)	3/19/2001 8:36:23 PM
From: rocklobster	Read Replies (1) \| Respond to of 57584

I disagree with your assessment of covered calls. I believe it is a fact that the majority(over50%) of options expire worthless. therefore the people selling these options get to keep the premiums the majority of the time. Now if the option seller is sophisticated and is selling options at a strike price above his basis, than even if the option is exercised, the option seller still keeps the premium, and often makes a profit on the underlying position. With that said, I will concede that selling covered calls in a declining stock isn't too brilliant. May as well just liquidate the stock and avoid further losses. However, I know some people that make very significant money selling options. covered puts can be nice too in a decling market. (selling puts against your short position). Obviously selling covered options requires you to have an underlying position in the stock, and therefore, to assume the risk of that underlying position. However, If you are a buy and hold investor, and don't plan on selling your stock anyway, and the stock is in a downtrend, than selling covered calls is a great way to reduce your basis. Especially considering the volatility and rich premiums that options have these days. It's not hard at all to collect 10% premiums on your underlying positions per month selling options. of course brokers make a commission, but what's new. Every financial instrument out there is basically a way of seperating you from some of your money. The question is, what is your return on that investment. considering a historic return of 10% in stocks being the baseline, one month of option premiums could return a person the equivalent of one average year of returns on their portfolio. Of course, the stock could get called away, and you would have to give the stock up. But in this scenario, assuming you bought IBM at 100 sold the next month out strike at 110 for $10.if you got called out, you have a one month return of 20%. There's always something else you can sink your money into, so I wouldnt be too worried about missing out on the upside. just some thoughts. rok