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

To: StockHawk who wrote (2283)	8/29/2001 5:29:16 PM
From: Mathemagician	Respond to of 5205

Today I was reviewing this one, which looked pretty good at the time. Of course, a lot can happen between now and Jan. but right now the drop in SEBL would have completely wiped out the premium, and paying $30 for a $22 stock would hurt. Plus SEBL could keep falling. Agreed. In hindsight, it doesn't look so good. Of course, a buy/write would be facing the same situation and would be contemplating repair strategies. The bottom line is that the underlying issue dropped substantially in price. That is never good in a neutral/bullish position. (To be clear, though, you are really only paying $25.8 for a $22 stock.) Still, reviewing the assumptions underlying that position we should be satisfied. Recall that the assumption is that we had used some valuation technique to come up with a fair buy price, then implemented the purchase using puts rather than limit orders. Viewed in that light, we are still ahead of the buyer whose limit order was executed at 30 and held. I don't think we've ever discussed this explicitly and in condensed form, but it is often useful to think of option writing as a replacement for limit orders. In a nutshell, 1. Use your preferred valuation criteria (you do have valuation criteria, right?) to pick an entry and exit point. 2. Sell a put whose strike is your entry point, thereby lowering your cost basis by M premiums (1 premium each round until assigned). 3. Sell a call whose strike is your exit point, thereby increasing your profit by N premium (1 premium each round until assigned). The result: You are ahead some number of premiums (M+N) of where you would be had you simply bought at your entry and held until your exit. Moreover, each trade was less risky because you don't need to be as accurate with your valuation to be successful. Also, the accumulated premium provides some downside cushion. This is a variation on the Money Generator and ONLY works if you are neutral/bullish. It might be interesting to follow this play with the strategy you outlined in post 1881, the "Money Generator." That strategy begins by selling a naked put, as was suggested with SEBL. If the stock is put to you, the next step is then to sell a straddle/combination. Have you been watching any of the plans you have outlined, and if so, how are they playing out? I have not been watching any of the positions I have posted. Despite that, I can still tell you that none has been very successful. How can I say that, you ask? Well, the market has been generally down and every position I've posted here has been bullish/neutral, so I can safely wager that these positions would have been losing money. The bottom line is this: If you think things are going to go down for a while, close your bullish positions and go short or buy puts. (Unless that would have unfavorable tax implications, of course.) That's why I've been cash and short the QQQ for a little while now. dM