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To: AreWeThereYet who wrote (727)	1/24/1998 5:18:00 PM
From: Sword	Read Replies (2) \| Respond to of 886

A naked put contract is written by an investor who does not have the underlying short position. A naked call contract is written by an investor who does not own the underlying stock. There are three basic objectives to options trading: 1. Income 2. Hedging 3. Speculation You should decide which of the three you are interested in because the type of options that you will write, buy or sell differ significantly depending on your decision. INCOME: For income, one writes out-of-the-money calls on one's stock position. For example, I sold 5 Feb 22 1/2 contracts to cover 500 shares when the stock was selling for about 22. I received $828 for these. Two days later I bought them back, thereby negating or cancelling the contracts, for $575. The stock was at $21 at the time. The options MM was happy because he had hedged the 5 contracts by selling short. The stock declined more than the options lost in value. When he bought them back (and I know he never sold them to anyone else), he lost some on the contracts but made twice as much by closing out his short position. He's happy. I'm happy too, because I have no intention in speculating by buying and selling my SMTC stock based on short term fluctuations. But I was able to make some extra cash by giving up my opportunity to realize any appreciation above about $24 ($22 1/2 plus the 1 11/16 premium) on that stock for about 3 weeks. As it turned out the stock price declined enough for me to cancel the contracts in two days. I had met my profit objective (the mountain bike). HEDGING: If you are long in the stock and are concerned that some significant decline may be coming but don't want to sell the stock, you can buy a put option. This protects your investment from declines below the put strike price. When Todd expressed worry back in October about the price action of SMTC stock, he might have been able to prevent losing a lot of value by buying a (split adjusted) $30 put option for each 100 shares he owned (if they had existed at the time). Recently, he suggested that this is something he might do in the future now that options are available. The only disadvantage of this is that if the stock doesn't decline, one loses the premium (the short who wrote the contract gets it). SPECULATION: This is where I finally get to answer your questions. Naked puts and calls come into existence when someone writes them and doesn't have the underlying short position or stock respectively. THIS IS VERY DANGEROUS. The SEC has rules that mandate equity of at least 50% of the underlying security for naked calls or puts. But I think this isn't good enough. If the stock moves up or down significantly while you are short a naked put or call and you only have 50% equity, you will get totally wiped out. If they are covered, then no problem. If the stock of SMTC tanked to $10 for some reason, and I had written a put against an existing short position in my portfolio, I would still wind up with more money in my account than I had started with. But I don't short stocks so I never write any covered puts. Is it ever safe to write a naked put? Especially on a quailty stock like SMTC? It's certainly better than writing one on an overvalued stock like MSFT! But I don't think I would do it unless I was comfortable with losing the equivalent of 65% of the underlying security position and this would not result in any margin calls. The last type of speculation is buying and selling long on short range expiration options in order to make money. The premium decay is terrible in most cases and you pay for this. Better to write the option than to be the one buying it. Hope this helps. Sorry for the long winded answer. Regards, Jerry