Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (50954)	4/3/2001 1:55:04 PM
From: Robert T. Quasius	Respond to of 77400

Yes, there is such a think as writing covered puts, but as an investment there is no advantage as with selling covered calls.

To: Gottfried who wrote (50954)	4/3/2001 3:48:07 PM
From: Ira Player	Read Replies (2) \| Respond to of 77400

As you stated, a 'naked call' is easy to understand. A call is sold with no long position in the stock to 'cover' the possible request (demand!) of the stock if the price rises above the strike. A 'naked put' is a put sold without a short position in the stock to 'cover' the demand that you buy the stock if the price is below the strike. It is also considered 'covered' if there is enough cash available to satisfy the put, if exercised. Beware of equivalence. I always amazes me that some people recognize covered call writing as a more conservative investment strategy than outright stock ownership alone, but would never consider selling a "naked' put because it's 'too aggressive'. A 'covered call' combination performs the same as a 'naked put'. The upside in the 'covered call' is the strike price plus the premium received (option exercised) and the downside is the purchase price minus the premium (option expires worthless). The upside on the 'naked put' is the premium received (option expires worthless) and the downside is the stock price minus the premium received (option exercised). Example: Case 1: Buy stock at $40 and sell 40 strike call for $3. Case 2: Sell a 40 strike put for $3. (for example purposes only. The put would actually be cheaper than the call) If the stock moves to $45 at expiration: Case 1: Stock gets called away at the $40 you paid for it and you keep the premium for a gain of $3. Case 2: The option expires worthless and you keep the premium for a gain of $3. If the stock moves to $35 at expiration: Case 1: Option expires worthless and the $3 premium partially offsets the $5 loss in the stock for a loss of $2. Case 2: Stock gets put to you at the $40 strike price and you apply the $3 premium to buy it for net cost of $37, for a net loss of $2. Typical uses If I have the stock for another purpose and do not wish to sell it (maybe tax reasons), I use covered calls when I feel the stock will move sideways or slightly down to provide a hedge. Establishing a stock position specifically to sell the calls seems inefficient to me. Selling 'naked' puts arrives at the same risk profile with less commissions and less collateral (margin) requirements. As long as you do not use the additional leverage available, the results are the same as a covered call, with less commissions and no carrying costs. Ira