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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: TsioKawe who wrote (282)	4/26/2001 12:37:06 PM
From: Dr. Id	Read Replies (2) \| Respond to of 5205

<<To me, the "worst" possible outcome is when a CC gets called for a huge profit to the buyer. That's a real, permanent loss of capital. >> If you had time could you explain the process of this process?? IE, are you saying if I sell calls in the money, and the buyer exercises his option to purchase my shares at that price, I dont get to keep the money that was given to the account for the writing of the calls....and If the calls go up in price, do I have to dish out any cash to the buyer?? No, he's just talking about the loss of potential gain that's given up when writing a call. You keep the premium plus the sale price of the stock, but if the stock runs way up you've lost the profit that you WOULD have had if you'd never sold the call. That's the major downside of selling covered calls...you cap your profit and may miss a big up move while you're covered. Dr.Id@itshappenedtome.pov

To: TsioKawe who wrote (282)	4/26/2001 2:53:39 PM
From: EnricoPalazzo	Read Replies (2) \| Respond to of 5205

<<To me, the "worst" possible outcome is when a CC gets called for a huge profit to the buyer. That's a real, permanent loss of capital. >> If you had time could you explain the process of this process?? I should state at the outset that I don't believe stock prices are predictable in the short term. Or at least they're not predictable by me, which amounts to the same thing from my perspective. So while some people say they don't mind getting called because the stock price always comes back, I think that's a fairly backwards-looking approach. Of late, that's been true, but who knows what tomorrow will bring? Investors tend to extrapolate the recent past way too far in the future. I should also say that my concern isn't about share price. I buy stocks that I want to hold for the long term, and small price changes matter to me only insofar as they give me bargains. So when some people say you made $5 if your stock went up $5, I don't see that as the case unless you're actually planning to sell at that price. Unless fundamentals have changed (which they rarely do), I don't care about the "market value" of my portfolio as much as the number of shares I own of great companies. I'd much rather have 200 shares of RMBS at $10 than 100 shares of RMBS at $30, even though the latter is supposedly "worth" 50% more. To me, the former is worth twice as much, because I have an arrogant disregard for Mr. Market. So then, what do I mean by a permanent loss of capital? I mean this. Suppose I own 100 shares of RMBS right now, and let's say the stock price is $20 (it isn't exactly). I write a June 30 call for $2, and receive $200 (I'll ignore the interest on that $200). Come expiration date, RMBS is trading at $40, and I'm exercised. I receive $3000, so I now have $3200. Since I don't believe in short-term timing, rather than waiting for the stock to decline (or go up), I just buy. How many shares can I buy? I can buy 80. So I went from owning 100 shares to 80 shares. That's a real, permanenent loss of capital. I lost 20% of my investment, even though its "market value" has increased. Anyway, it's a matter of perspective, and I'm as yet extremely inexperienced in options thinking, and I wouldn't be at all surprised if I'm missing something. It basically comes down to a question of probabilities, and probabilities are typically very hard to wrap your brain around (which is why when you hear about some simple math puzzle that 99% of mathematicians get wrong, it usually pertains to probability). The reason I'm following this thread, FYI, is because I'm trying to understand if there's a system that takes advantage of irrational fluctuations in prices of stocks--i.e. if the use of options can ensure that I buy heavily when prices are low, and sell heavily when they're unusually high (as with dollar-cost-averaging). I'm nowhere near being able to answer that question.