Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Steve 667 who wrote (25896)	5/21/2004 3:24:47 PM
From: Dave	Respond to of 60323

I couldn't have said it better myself. Good job, Steve!

To: Steve 667 who wrote (25896)	5/21/2004 5:54:15 PM
From: Art Bechhoefer	Read Replies (2) \| Respond to of 60323

Steve, >>A strategy which limits your gain, but does not limit your loss does not seem to be either a conservative or prudent strategy.<< If you look at the numbers themselves, you'll see that the strategy of selling covered calls is both conservative and prudent for certain situations. My reference is a book published about ten years ago, entitled "Selling Covered Calls--The Safest Gamein Town" I don't have the name of the author at hand, but I can find it for you if you are interested (a friend borrowed the book and hasn't returned it). Selling covered calls is not a good strategy to use when a stock is well off its recent high. The covered call strategy works best when a stock has a good earnings record, has moved up considerably relative to other stocks in its group or the market in general, and is likely to move higher in the long run. But unforeseen market conditions, such as political events and interest rate changes, could cause the stock to fall in the short run. The sale of covered calls helps compensate for unrealized short term losses in stock value. It assumes that the investor wants to hold the shares for a long term, such as a year or more. It helps guard against loss of value in the whole portfolio during periods of market weakness. This is not the right time to sell covered calls for SNDK. The right time was when the shares were in the 30's. If an investor sells covered calls that expire far enough in advance to warrant a premium, and if the stock at some later time starts moving up, the investor can always buy back the calls and close out the position. As the premium declines, so does the cost of buying back the calls. What does one do when the stock is already down considerably from its recent high? One might simply buy more shares. But if one is interested in options, then there is a choice of in-the-money calls that expire in the current month (to avoid a large premium on the call) or out-of-the-money calls with a longer expiration date (such as LEAPS). A third alternative, which I tend to favor, is the sale of in-the-money puts with an expiration date at least three months ahead. The long term, out-of-the-money call depends on everything going well: The earnings increase substantially. The overall market goes up. Some respected analysts get on the bandwagon and recommend the shares. If all those conditions are present, the investor willing to take the extra risk will probably get a huge profit. Many investors forget the fact that every option is a wasting asset, since it will be worthless after expiration. Since options also gain or lose value at the margin, they require a great deal more day to day or hour to hour monitoring than the stock itself. Those who don't want to be glued to a computer screen day after day should probably leave well enough alone. Art