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

To: JohnM who wrote (2747)	10/16/2001 11:23:57 AM
From: Dr. Id	Read Replies (1) \| Respond to of 5205

I've done my first round of quite preliminary reading of McMillan on selling puts as a way to get back into Qcom (assuming my 45s are called) and it looks like a strong strategy. The principle risk McMillan sees is having the stock assigned when the share price is actually much lower. But, since, as he notes in his McMillan on Options book, that's the same as being a long term holder of the shares, I don't think I increase my risk. Exactly. I had 1000 shares of SEBL which I planned to long term hold. Earlier in the year, I sold SEBL 35's a few times, and was called away the second time. I wasn't happy about in when SEBL headed to the high forties. When it settled back a bit, I sold SEBL 35 puts for about 3 months in a row. It lowered my cost to around 29. When the stock was put to me, it was at around 20. Now, with great foresight, it would have been better to wait and buy it in the teens. However, if I hadn't sold options on it at all, I'd be in the same boat (without the several thousand in premiums that I collected) as I would have held it all of the way down. I still think it's a good way to enter a position that you want, at a discount from the current price. dDI

To: JohnM who wrote (2747)	10/16/2001 9:41:10 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

John, In fact, I think my risk is different. It's the risk of not acquiring the shares. While I'm new to this, let me recount where I see the risk. If I sell, for instance, Nov puts at 45, when the share price is 50, and the price descends to 46, I will not be able to use the money set aside to buy the 45s to pick up the 46s That is right John. By selling the cash backed put you have tied up $4500 per contract that you cannot use for other purposes. Even if the stock dropped to 40 or 35 you would not be able to buy it unless you used other money, or took the loss to buy back the put. The strike price of $45, less the put premium you received, establishes the cost basis for your shares in the event you have them put to you. In this respect, it is the same as if you bought the shares and sold Nov 45 calls, establishing your net cost of ownership. In either case, if the stock falls below the cost basis you have lost the opportunity to buy at a lower price because you already have your money committed to the position at a predetermined price. About the only advantage to the cash backed short put is that you might avoid the transaction cost of buying (and perhaps later selling) the stock. That can be worthwhile, especially if you are inclined to stop out of the position if it goes against you. It's easier to just buy back the put than to unwind a covered call. It's also easier to monitor the position since all the value is tied up in the one instrument instead of two. Dan