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 : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Amy J who wrote (137527)	6/18/2001 11:31:37 AM
From: tcmay	Read Replies (2) \| Respond to of 186894

Gambler's Ruin, Martingales, and Futures Amy wrote: "Regarding "fallacy of thinking filters can make money." Here's a basic way to do it, regardless of the direction of the market: "- establish a strike price that's out of the money around 10 to 15%. If the stock shoots up (worse case when writing cov calls), the gain is 10 to 15% if a person doesn't roll it over. How is that gain a fallacy? " Like any form of "collar," in this case an upside collar, you are locking-in a maximum upside of 10-15%. Should the stock go up more than this, you don't get the full gain. And if your call is a covered one, as I think we are mostly talking about in this particular thread, moves downward are obvious losses. (The seller of a CC is not free to dispose of his stock, as he needs the underlying shares to cover the call. There are ways to buy and sell other puts and calls, of course, but we're just looking at the one position at a time, i.e., your example here.) The "fallacy of the filter" is best understood by looking at a series of applications of the filter. Not much use to say "I sold CCs at a strike price of $30 and made an easy 10% profit and I still have my stock." There's a closely-related domain: gambling. Consider this "filter strategy for gambling:: -- go to Las Vegas with a specific amount of money, e.g., $1000. -- bet it on a roulette wheel, e.g., "black." -- if you win, continue bettting -- if you lose, stop and go home (Variant 1: Take 50% of all winnings and set them aside in a place that cannot be touched, that cannot be used. This ensures that if you start to win, you have some winnings no matter how much is later lost.) This "strategy" is a filter strategy. It allows runs of winnings and limits losses. Think about this. I'll comment on it in a few hours or a day or so. "Admittedly, cov calls don't address the issue of the underlying stock, and there is a huge opp cost should the stock rise way higher than the strike, which is why I prefer to do this on no more than a third of the portfolio. A third can move the portfolio in a flat/down market, yet a third won't hurt the gain too much if the stock shoots up since these can be rolled over." I didn't say writing options is not a useful investment approach: I said it's not a surefire winning strategy. It's a way to modulate the risk-reward equation. At one extreme (e.g., buying naked puts) it heightens risk for a potentially high gain. At the other extrmee (e.g., selling covered calls) it lessens risk but also forecloses certain gains. Whether this is done on 1% or 30% or 100% of a portfolio is just another part of the risk equation. I don't write covered calls on any part of my holdings I'm not prepared to see taken away from me--and have me pay taxes on. "Just a thought...I find it easier to read a post that has RE:. Sometimes I don't see the quotes. " Understood. But I believe comments here in this forum are for anyone to respond to, not just a series of personal exchanges. So I favor making the subject line as descriptive or interesting as possible (sometimes I slip up and just hit the "Submit" button and SI takes the first N characters as the subject line, of course). --Tim May

To: Amy J who wrote (137527)	6/18/2001 11:55:09 AM
From: GVTucker	Read Replies (1) \| Respond to of 186894

In the end, this is the way I look at covered calls and equity investing. You invest in a stock and take a certain risk. You take that risk because you think there is a possibility of getting a decent reward. By writing a covered call, you haven't really changed your risk at all. The downside of the stock is still pretty much the same less the price of the call, which is most probably small compared with the price of the stock. You have, however, completely eliminated the potential reward, outside whatever amount of money the strike price is. For a stock like Intel, that amount is probably much smaller than the potential upside if things work well. In the end, if you have too much risk in a stock, in the long run you're better off selling some of the stock until the risk is manageable. All of the added strategies, like rolling at a certain price or covering at a certain price, are just options trading strategies, not risk minimizing strategies on a common stock. IMO, the only winners in the long run in covered call strategies are the brokerage houses getting the extra commissions.