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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 (1544)	7/22/2001 7:15:26 PM
From: StockHawk	Respond to of 5205

I wish I could say this was a master plan, but I had experimented with VRTS with uncovered calls recently and did reasonably well. And that is often the problem, it's like taking a car trip and not wearing your seat belt. At the end of the tip it's tempting to reason that since nothing bad happened it must be OK not to wear seat belts. Selling naked calls is dangerous. As someone else said SEBL could receive a buy out offer tomorrow. Unlikely, but possible. Or Tom Siebel could start making positive comments and the market could start to climb. I'll tell you a story about Western Union - of course this is just one example, and there could be a million examples with different results - buy anyway, this goes back to the early 1980's. I discovered that a number of stocks selling for about $10 per share had $10 calls one month out for about a buck or $1.25. The idea of making 10% per month seemed too good to pass up and I did it many times with several different stocks. Naturally, some got called and others fell more than a dollar, but there was one, Western Union that was a consistent winner. The stock never went anywhere and the premiums remained high. So I got greedy. Instead of selling 10 calls against my 1000 shares I decided why not sell 20 or 30 and enhance my returns. So I did, and naturally the stock started to move up. $11, $12, $13 in short order I was underwater, the premiums were looking miniscule compared to what it would cost to close them and I was getting more and more worried. $14, $15 dammit. Then one Sunday evening I get in a taxi and the business news is on and they mention that Western Union just settled a union contract and sunny days are ahead. Stupidly, on Monday I buy additional shares to cover myself before it really goes up. You know what happened right? They call it "Sell the news." The stock dropped back and kept dropping. It was a disaster. What did I learn from this? When you're naked/short it is difficult to do the kind of objective thinking that is required and too easy to make mistakes. Will that be true for you? I hope not, but you should consider it. StockHawk