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.

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

To: Mathemagician who wrote (1024)	6/11/2001 7:02:23 PM
From: FaultLine	Read Replies (3) \| Respond to of 5205

However, I'd like to make an addition: With buy/writes, you buy common now. With short puts, you buy it later and for less. Given the choice, I still don't understand why anyone would buy/write when they can sell a put instead. It is tempting to agree with you but there is (at least) one significant difference, there is no mechanism when selling a put to obtain return from an upswing in the underlying stock to the strike price. The previously OTM contract is now exercised thus yielding the maximum possible return of premium + (strike - basis) - commission. This run-up to the strike, if it occurs, contributes significantly to the total return on the position. -dfl

To: Mathemagician who wrote (1024)	6/11/2001 9:12:37 PM
From: hivemind	Read Replies (2) \| Respond to of 5205

mathmagician wrote: <hivemind> I believe the "superiority" of short puts vs buy-write in comparison is based on the significantly reduced margin and capital requirements for the short puts. This would tend to make the %return numbers seem greater per dollar of capital or margin committed. But although I understand this I don't like the comparison, as it could lead people to short puts beyond their capacity to absorb assignment. If a person is lucky, they can "get away with it", but such an operation is not really worth the risk, in my opinion. </hivemind> The risk you describe is the risk that the investor will use margin irresponsibly and is not a risk inherent in writing naked puts. Regardless, the advantage of puts is not due to reduced margin requirement at all. It is due to the reduced capital requirement, which leads to a more efficient use of your money. That is, all else being equal a larger amount of premium can be collected with greater diversification, given a fixed amount of cash -- even without the use of margin. As usual, margin simply provides leverage, allowing you to play with someone else's money (for a fee). You have interwoven some good concepts here, but I'm not sure I completely agree, or perhaps I don't understand. In reference to using margin irresponsibly and that any strategy can be abused, I disagree. It is a function of the extreme leverage available on short puts due to reduced % margin requirements that presents the danger to the unwary. I can, for arguments sake, sell in aggregate more puts against available margin in my account, leaving me exposed to assignment beyond my buying power. This is not possible with straight buy-write, as the margin requirements of buying the stock will prevent it. These are really leverage differences, and one could argue that if naked put selling margin requirements were raised to be equal to that of the underlying, the issue goes away. <hivemind> As was alluded to by Duf, and rather poorly paraphrased by me, these strategies are more suited to long-term investors than to traders. With buy-writes, you buy common now. With short puts, you buy it later. </hivemind> Agreed. However, I'd like to make an addition: With buy/writes, you buy common now. With short puts, you buy it later and for less. The lower price you get to pay as a result of short put assignment is caused by the premium you receive. This is no different from buy-write, just that the reduced price comes from the short call premium instead of from the short put. Given the choice, I still don't understand why anyone would buy/write when they can sell a put instead. dM I agree. In my own short put program, I am diversifying buy industry and stock, using a fixed aggregate of assignment exposure in total and in individual positions. This is to reduce overall risk and to acquire good stocks at reasonable prices when available, or be paid to "pass em by". To do so with buy-write equivalents would require me to expend greater commission dollars. It may not seem like much, but with at least 5 positions running it makes a difference in performance. Say, this is the CC for Dummies thread right? We got pretty far afield! ;) hm@just-make-us-some-money.com