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Strategies & Market Trends : Trading For A Living -- Ignore unavailable to you. Want to Upgrade?

To: R Stevens who wrote (292)	5/27/1998 9:10:00 PM
From: Eric P	Read Replies (3) \| Respond to of 1729

RS: <<Did the second paragraph on your comment come out as you intended because I lost you at that point.>> The 2nd paragraph was: "Unless you already own the stock that you are going to short a covered call, then it would be worthwhile considering a short put instead of a covered call... " Let me start with a few definitions: Covered call: A combined position consisting of being long the actual stock, while being short an equal number of shares in call options. ==> I.e. You sell someone else the call option get paid the premium to accept the risk. Short put: You sell someone else a put option and get paid a premium to accept the risk. If you think it through, a short put will have the exact profit/loss value at expiration as a covered call at the same strike price. <<Also, which chapter in M. Wizards if you remember...>> Found it!!! And... I lied. ==> It was actually in "The New Market Wizards" on page 384 in the interview with Blair Hull. The actual quote is: Jack Schwager: "Covered calls [buying a stock and selling a call against it] are frequently promoted as trading strategies. As we both know, doing a covered call is identical to selling a put. Is there ever any strategic rationale for implementing a covered call instead of a short put, or is the former promoted because it involves a double commission, or perhaps for semantic reasons --- that is, even though the two trades are identical, the covered call sounds like a less risky proposition that a short put position?" Blair Hull: "I don't know how to articulate the fraud that is sometimes perpetrated on the public. A lot of strategies promoted by brokers do not serve the interest of their clients at all. I almost feel guilty when taking the other side of a covered call position, because it's obvious that the customer is operating under a misconception." Jack Schwager: "Then you agree that anyone who wants to do a covered call would be better off simply selling a put, assuming that he plans to initiate and liquidate the stock and call positions simultaneously?" Blair Hull: "Right. If you want to guarantee an inferior strategy, do covered calls." For what it's worth, Blair Hull is an options trader and his "starting stake of $1 million in 1985 grew to $90 million by mid-1991, after expenses." ==> Not bad.