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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Jack of All Trades who wrote (52195)	6/13/2001 4:44:19 PM
From: Gersh Avery	Read Replies (1) \| Respond to of 94695

With naked puts you can figure out an absolute number for cash reserve. ex: I sell a contract with a strike of 20. That means that I might have to buy 100 shares of that stock at $20. $2,000.00 period. It's almost like putting a limit buy order. For naked calls no such number can be put together. BTW .. one trick that I caught my broker trying to pull .. "so you wnat to short a put?" "NO. I WANT TO WRITE A PUT. Why should I pay you interest for something that I back up 100% with cash?" Shorting something requires margin ..

To: Jack of All Trades who wrote (52195)	6/13/2001 8:20:02 PM
From: Joe Waynick	Respond to of 94695

Hi Jack, good question . . . "May I ask why your able to sell naked puts but not calls? both should require margin???" Remember, I said you could sell naked puts so long as you back them up with 100% cash. IOW, you write 10 July $5 put options on IFMX for 50 cents. The next day $500 goes into your account, but you must have $5,000 already there in the event you are assigned. It’s because the BD can assess your total risk you are allowed to do the trade. Now, write 10 July $5 call options on IFMX for 50 cents. The next day $500 goes into your account, and you have the required $5,000 available since the strike is $5.00. Two days later there’s a tender offer to acquire IFMX for $20 per share. Your 50-cent call option is now worth $15 or more, the stock shoots to $19.50, and you have to deliver stock at $5.00 no matter what. That’s known as “unlimited risk,” because the tender could have just as easily had been for $25, $50, or even $100 per share. The little $5,000 cash won’t help you much then. "Selling naked puts in a bear market can be very dangerous..." Selling puts in a bear market is less risky than buying long stock outright in a bear market. If I like a company well enough to buy 1,000 shares at $20, doesn’t it make perfect sense to sell 10 put contracts for $1 to buy that same stock at a $20 strike? If the stock drops to $15 and I’m put at $20, what I’ve done is reduced my risk by the $1,000 option premium. So, instead of being down $5,000 I’m down $4,000. That’s what tweaks me about BD claiming selling naked puts is “risky.” Like anything, they serve a useful purpose if implemented properly. I won’t even go into all the repair strategies one could deploy if the worst case scenario I mentioned above actually developed. Some of which wouldn’t even be available or practical if you had not started with the naked put write. Sorry for the rambling, but I hope this helps. Joe