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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: LauA who wrote (14208)	3/31/2002 5:34:48 PM
From: Joan Osland Graffius	Read Replies (1) \| Respond to of 78705

LauA, My opinion of writing calls and puts, is you obtain a stream of revenue and if the stock goes against your position you have to be ready for the inevitable. I like to look at the return when I write a call and my current call position in Merck gives me 9% (this does not include the capital sitting in my great money market account <g>) including the dividends which is hard to find anywhere else. IMO, Merck is a quality company selling at a fair price, with management that has a track record – not an over priced Intel or Microsoft. If the stock goes down I will buy back the call at fire sale prices and write another one. If it goes up the risk is it could get called away, but I have the 9% revenue in the bank. This game can be attractive for capital preservation accounts looking for above average income returns. My thoughts are you do not want to play this game with stocks that you have not researched and feel comfortable holding for the longer term. My calculations are simple, just take your costs of owning the stock and selling the call and look at the yield of this capital you receive from the call and dividends from the company. You also can calculate the yield on this capital as it sits in your money market fund which is additive. One can also sell naked covered calls and keep sufficient capital in a money market account to cover the cost of the stock getting called, With Merck right now this is not an attractive alternative since the dividend from Merck is better than your high quality money market rates. We know when wall street gets down on a sector the prices go down and there is generally a quality company or two that become an attractive value. The financials on Merck are not all that bad, but like Buffett points out - it is the management that is important. BTW, my current position in Merck is a first third purchase. My plan is to buy the other 2/3 rds positions at lower prices if the opportunity presents itself. IMO, anyone that does not report option transaction losses/profits on their tax statements are asking for trouble. The transaction data is available to the IRS with a telephone call and IMO not worth the risk. If one writes calls in an IRA the money is gravy. You can not change the bases of the stock that is put to you for IRS reporting, since you must report the put transaction and the stock purchase transaction. Of course the bases of the stock that is put to you is lowered, because you sold the put. Joan