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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: BrooksR who wrote (2161)	9/3/2001 8:04:24 PM
From: smchan	Read Replies (1) \| Respond to of 2241

How best for new CC writers to avoid big mistakes? I'll take that question. As a new CC writer, I think the best strategy for avoiding big mistakes is to not take positions. :-) Sam

To: BrooksR who wrote (2161)	9/8/2001 12:09:22 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 2241

Brooks, Sorry for the late reply. I just got back from a week off. As for my CC activity, Sam's reply actually covered it pretty well. Writing CCs is neutral to bullish strategy. If you can count on dives being "minor" then you can work them to your advantage writing and buying back the calls, but when stocks are in a prolonged downtrend it's hard to make any neutral to bullish strategy pay off. Rolling down and out is certainly better than buying and holding stocks, unless the market suddenly finds a bottom and then takes off on you. It's hard to do better with CCs than you can do by simply being in cash until the decline ends. Nobody is completely successful in avoiding mistakes. The danger with CCs is thinking that you are "protecting" yourself and staying in a position that is going bad. The problem with writing options is that the only thing working in your favor is the time erosion of premium, and that is often a minor effect compared to the change in premium due to the price of the underlying. The net rate of change of a CC position as the underlying price changes accelerates as the price moves against you, and decelarates as it moves in your favor. That is exactly the opposite of what you would like it to be. It is the option buyer who has the premium rate of change working favorably, at the expense of the time premium paid. If you are willing to stop out of positions that are going against you, CCs are advantageous over stock ownership. If you write calls that are nearly at the money, the initial rate of loss is only about 1/2 the rate for stock alone. If you use the same stop point you would use for the stock, you can stop out with a smaller loss than you would have with the stock alone. But if you hang on longer thinking the CC is going to take care of you, you can lose more with the CC than with just stock. Dan