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

To: alanballow who wrote (4542)	10/30/2006 12:57:55 PM
From: Carl Worth	Respond to of 5205

selling puts equal buying the stock and selling a covered call in each case the upside in terms of realized profit is limited, while the downside is unlimited, in terms of a drop in price of the underlying stock to zero, though obviously stocks seldom actually drop all the way to zero selling a put is preferable to buying the stock and selling a covered call in terms of the capital required to make the trade, though the premium is generally lower with selling the put, as the spreads usually compensate for the cost of capital, based on the prevailing interest rates...as such, you can expect a lower return by about 0.5% a month at the current time, if you are selling puts rather than using covered calls a person selling a put or making a covered call trade is essentially betting on the stock going nowhere or increasing slightly in price...if they thought the stock was going significantly higher, they would want to buy a call, and thereby control shares of the stock on the long side, with limited risk...if they thought the stock was going significantly lower, they would want to buy a put, and thus control shares of the stock on the short side, with limited risk

To: alanballow who wrote (4542)	10/30/2006 12:59:26 PM
From: Bridge Player	Respond to of 5205

<<you may be obliged to buy at the strike price>> Right. <<meaning you anticipate those stocks trading above the strike price and therefore the options not exercised.>> Hopefully. <<< The net effect being you keep the premium.>> Yes, hopefully. << Because of the big difference between call and put premiums, I take it you think the calls are overpriced >> I don't know if they are or not, and really don't care. << , ie the stocks will not rise enough above the strike price to make it worthwhile. << If they do, that's fine with me. Or, they can just sit there. Since both stocks are currently trading above the strike price, and yet down some for the day (which means the put premium is higher than it was Friday), if they just sit there or even go down just a tad in the next 3 weeks, that's fine too. I still collect the premium. Worst case: I have to buy the stock. In both cases I like the stocks and feel they are reasonably priced to maybe undervalued some. So I wouldn't mind buying either, or both. And if assigned would promptly write Dec. same-strike calls against both. Basically, I'm just trying to pick up a little income, and perhaps buy some stock I like below current market. And btw: only one commission to pay if they expire. << Do I have that right?>> Sounds to me like you have it right :))

To: alanballow who wrote (4542)	10/30/2006 2:02:40 PM
From: Uncle Frank	Read Replies (1) \| Respond to of 5205

>> Now slowly, for the dummies on the dummy thread, selling puts = buying calls, except you may be obliged to buy at the strike price... Not at all. Buying calls is a high leverage play... kind of like buying a Keno ticket. You only collect your winnings if the price of the underlying stock rises above the strike price plus the premium you paid to buy the call. You must be extremely bullish on a stock's prospects to be a call buyer. Selling (writing) puts is an unleveraged play. It's like selling Keno tickets, not buying them. If you write an out of the money put and the underlying stock's valuation increases, stays flat, or goes down slightly, you still win (keep the premium). If the stock goes down significantly and you don't buy back the option before expiry, you will be assigned the stock at the strike price. That's why it's best to restrict put writing to stocks that you'd like to own. If the stock does get assigned, your net cost will be the strike price minus the premium you collected for writing the put. I hope I didn't confuse the issue, but I wanted to strongly make the point that selling puts differs dramatically, in terms of expectations and risk profile, from buying calls. duf