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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: ref who wrote (9801)	6/9/1998 9:40:00 PM
From: Investor-ex!	Read Replies (1) \| Respond to of 18691

ref, Just suggesting it may be a bit safer to write naked calls against an index, rather than individual issues, if you can swing the margin requirement. A stock can trade all over the place and without warning. A buyout announcement can double a stock just like that. A stellar earnings report can result in a quick 25% rise on some issues. On the downside, if the company gets caught cooking the books or the officers are arrested for something, the stock can get cut in half or more overnight. Bad earnings can clip the share price 30-40%. An index like the OEX or SPX doesn't have these problems and there are usually enough strikes in the series that hedging for total catastrophe in advance is possible. However, the margin requirement for naked options against the major indexes is rather hefty, so writing against an index proxy would place the risk factor somewhere between an index and just any old stock. An index proxy would be a hugely capitalized, somewhat diversified, relatively slow-moving, non-techish stock like GE, MO, etc. McNabb Brothers is (are?) right, though. If you are willing to short a stock, selling calls against it is roughly the same risk on the upside, as long as one doesn't succumb to the temptation of over-committing by writing calls against more shares than one would normally sell short. The upside risk is about the same as short. If the stock stays flat, you come out ahead selling calls. However, if the stock tanks, you get to keep the call premium only, and miss out on most of the downside gains that one who is short would enjoy. So, as far as being appropriate or superior, call-writing really comes down to your outlook on the candidate stock. Good trading,