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Strategies & Market Trends : Short-termSelling Puts (Covered Calls by another name) -- Ignore unavailable to you. Want to Upgrade?

To: quidditch who wrote (8)	2/4/2006 10:02:03 AM
From: Rocky9	Respond to of 66

"What DEW lines do you guys maintain? (Probably too young to know: "distant early warning"). Is there a subjective or quantitative discipline in place which, if breached, you take your losses and fold?" 1) I'm not too young (unfortunately). 2) I've given this a lot of thought. But I haven't established a quantitative discipline. The one that makes the most sense is have insurance (buying puts far below the sold puts), but I'm not willing yet to pay that price. So, my answer is much more subjective. I try to use companies that I am willing to own, and where I think that I will be able to recover some or all of the loss though call sales in the future. This clearly will not be possible if there is a true market melt-down. But I would be in worse shape if I were long the stocks from the get-go. If we are lucky enough to get a flat/up market for a few months, I'll have enough of the "bank's money" to keep playing for a while. Unfortunately, I do view this (and a lot of investing) as gambling, so the "bank's money" is an good analogy. Of course, given the history of long-term 5-7% increases in the market, investing is probably the only gamble where the odds favor the player and not the bank.

To: quidditch who wrote (8)	2/4/2006 1:50:55 PM
From: tuck	Respond to of 66

I'm not young enough, either. I pretty much agree with what Rocky says about this. One of my weaknesses is knowing when to take a small loss early rather than a bigger loss later. The Bubble Burst almost wiped me out, but it would have been worse without the covered call income. I don't think we're going to see anything of that magnitude any time soon. We three will probably be retired, if not expired, before the next one of those. As such, that risk of an epic melt down does not concern me much. The normal ones that we'll keep getting regularly should be ridable with this strategy. I also like to think I've learned something from that experience. When things look toppy, I tend to take a short position of some kind. Sometimes I lose those trades, but that usually means the rest of the portfolio is doing well enough to outweigh that loss. Shorting would be the closest thing to a DEW line I have. Cheers, Tuck

To: quidditch who wrote (8)	2/4/2006 2:12:57 PM
From: IRWIN JAMES FRANKEL	Respond to of 66

Good questions. High IV and the perception that you can capture big returns drives you to high risk positions. Those are the very stocks that the bottom falls out of as liquidity drys up. They are not the stocks that one can easily hold through a multi-year cycle. At least not in quantity. It seems to me that you always have to make a valuation decision on the stock and the market. It is that decision that determines whether you sell puts or calls. In one multi-year period I determined that the market was over valued. I dumped most of my holdings put the money in T-bills and used the margin to write naked calls. I averaged over 100% annual returns for several years. But then I got uncomfortable with writing calls. It was a good thing. :-) One of the lessons we should have learned from years of biotech investing is that when the Fed drains the liquidity biotech will get killed. It is not the time to be selling puts. ij