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Technology Stocks : Oracle Corporation (ORCL) -- Ignore unavailable to you. Want to Upgrade?

To: AnnieK who wrote (6579)	3/26/1998 6:21:00 PM
From: WBendus	Read Replies (2) \| Respond to of 19080

Anniek, There are some crucial consideration which I do not think that you have made in evaluating a covered call strategy for yourself. Selling covered calls is a taxable event, that is you must report it as income on your taxes. Furthermore, in the event that your calls get exercised, there will likely be a very substantial tax burden placed on the longterm capital gains. The longer that you have owned the stock and the larger that your unrealized capital gains are, the less appealing covered call strategies should seem. Net that $10,000 of taxes and then further consider the capital gains tax that you would face on the shares if you were called. Beyond that, you must also realize that after you have been called of 10,000 shares at $35, you now have $350,000, less taxes, that you will probably want to reinvest and may have to pay substantially higher prices to do. My advice, if you are looking to generate some additional income in your investment account, is to consider opening up a margin account and purchasing shares which are specifically intended for covered call writing. This will protect your long term capital gains from being taxed and can generate some additional returns. But remember, these additional returns from margined stock also increases risk. Best of luck, Wayde.

To: AnnieK who wrote (6579)	3/26/1998 7:21:00 PM
From: DanZ	Read Replies (1) \| Respond to of 19080

Off topic discussion on naked puts Annie, Many complex option strategies exist but there are two primary reasons why one might want to sell naked puts. First, it is a good way to lower the cost basis on a stock that you want to buy anyway, and second, you can profit from the premium if the stock goes up or doesn't move much. This is best demonstrated with an example. The Oracle April 30 put closed at a bid of 9/16 so let's assume that you sold 10 contacts at that price. If Oracle closes below 30 on April 17 it is likely that the holder of the options would exercise them and you would be forced to buy 1000 shares of ORCL at 30. This would give you a cost basis of 29 7/16 (30 less the 9/16 premium you took in). If Oracle closes above 30 on April 30, you wouldn't have to do anything and could keep the premium that you took in. All you are really doing is guaranteeing that you can buy the stock at a price of 29 7/16 if the put holder exercises them. The downside is that your broker will require you to deposit funds in a margin account to cover the cost of the stock in case the options are exercised. The formula that Ameritrade uses (and I assume it's the same at all brokers), is shown below. 30% of the current stock price * number of shares - amount out of money (if any) - premium received Using the ORCL April 30 put and the closing price today of 31 1/2, your initial margin requirement would be: (.30 * 31.5 * 1000)- (1.5 * 1000) - (.5625 * 1000) = $7,387.50 You would also be subject to a maintenance requirement after the initial short sale which is calculated using the following formula: 10% of the current stock price * number of shares - out of money amount (if any) - premium received While the options are held: For Naked calls: ú As the stock price increases, the maintenance requirement increases. ú As the stock price decreases, the maintenance requirement decreases. For Naked puts: ú As the stock price increases, the maintenance requirement decreases. ú As the stock price decreases, the maintenance requirement increases. The upside to selling naked puts is that you can lower your cost basis from the current market price if you want to buy the stock anyway. The downside is that you will tie up funds in exchange for what might be a small amount of premium. In the example above, you would have to deposit $7,387.50 in exchange for $562.50 in premium. Still, that's 7.6% return on capital for the next three weeks which isn't too shabby. I don't think that selling naked puts is all that risky as long as you are planning to buy the stock anyway. In other words, if you bought the stock at 31 1/2 instead of selling naked puts, you would still be at risk if the stock went down. The main drawback to selling naked puts over buying the stock is that your profit is limited to the amount of premium that you receive. Concerning your last question about selling puts in the money or out of the money, this really has to do with your objective. If you think the stock will go up and you want to capture more premium, then you would sell in the money puts. But keep in mind that the deeper an option is in the money, the less time value it will have. One of the major benefits of shorting options is to capture the time value and you wouldn't have that with an option that is deep in the money. Also remember that if you sell an in the money option and the stock goes down, you will be forced to buy the stock at what could be a much higher price. There really isn't any difference between this and buying the stock so I don't see too much benefit in selling a naked put that is deep in the money. What you need to look at is how much time value you will capture because the intrinsic value of the option isn't really what you are after. This is my opinion only and somebody else might have a different perspective on it. I sincerely hope that this information is useful to you. Best of luck with ORCL and your other investments. Dan