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

To: Thomas Tam who wrote (1420)	7/11/2001 2:34:02 AM
From: Uncle Frank	Respond to of 5205

>> Any other thoughts out there on naked call writing? For thoughts on writing naked calls, I'll defer to one of the masters, Harrison Roth on page 125 of his book, LEAPS. STRATEGY: Writing Uncovered LEAPS Calls OUTLOOK: Extremely bearish ADVANTAGES: Short well above market, money inflow, lower collateral DRAWBACKS: Unlimited risk DEGREE OF RISK: Extremely High The opening advice is short and simple: Don't do it! Why so vehement? Isn't this strategy just the inverse of writing uncovered Puts? Well, maybe it is, but that doesn't really speak to the risk involved. Some people write uncovered equity Puts with the view that they will "get away with it." That is, the stock will not decline below the strike, and they will keep the premium. In that sense, Writing Uncovered Calls, that is writing Calls without the stock to back them up, is the inverse of uncovered Put writing, but that's only half the story. The other half is what happens if the expectation is erroneous. In the first case -- the Put is assigned -- that is, stock must be bought. That is hardly a catastrophe. Buying stock is a familiar and comfortable position to participants in the marketplace. In the second case, however, everything is reversed. Writing uncovered Calls can lead to a disaster. If the stock rises above the strike and the Call is assigned, what results is a very different position: short stock, instead of long stock. And that is neither a familiar nor a comfortable position for most. <snip> SUMMARY: This is not a recommended technique. Even with the improvements offered by LEAPS, its risks are very high compared to potential profit. For those who feel they must do it, we provide guidelines to mitigate the risk. >> I think Frank hates this. Yes, and I believe that puts me in good company <gg>. uf

To: Thomas Tam who wrote (1420)	7/11/2001 11:14:50 AM
From: Dan Duchardt	Respond to of 5205

Thomas, Any other thoughts out there on naked call writing? I think Frank hates this. Looks like you were right about Frank <gg> Roth's warning is well founded, but as it says in the last quoted paragraph from uf's reply Writing uncovered Calls can lead to a disaster. If the stock rises above the strike and the Call is assigned, what results is a very different position: short stock, instead of long stock. And that is neither a familiar nor a comfortable position for most. If you are not comfortable shorting stock, then you should not be selling naked calls. The flip side of that is if you are comfortable shorting stock, selling naked calls instead gives you some protection against loss that you do not get with short stock. Whatever time premium you collect from the short sale offsets some loss if the stock goes up. Of course that protection comes at the expense of limited profit potential; you cannot make more than the premium you collect. An alternative to this strategy is a bear spread with either puts or calls, which further limits the profit potential but gives you a lot more protection. It might be worth looking into that before writing naked calls. Dan