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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Slava Chechik who wrote (7643)	6/14/1998 8:11:00 PM
From: Herm	Read Replies (2) \| Respond to of 14162

Hummm? Options are instruments (when utilized properly) that do exactly what they were designed for such things as protecting the downside risk (PUTs, Bear spreads, or CCs), enhancing your upside profit (CALLs, Bull spreads), or anything in between (strangles,etc.) Most investors guess wrong when it comes to options. Hence, a fairly high no $ payouts. Supply and demand are indeed at work when it comes to options. Excessive returns may not apply since the premiums are based on three factors. 1. Intrinsic value. 2. time value. 3. volatility. I would venture to say that the more buyers (and profits) the more volatility in the stock option as the MMs start jerking the price around to move towards a certain parity each month. Because options are profitable more and more investors are trying their luck. In fact, this past year was the largest transactions recorded in options trading. It is going all the time. CBOE travels around the country offering free workshops. Now, somebody must be paying right? Yeap, the dude that buys my CCs and pays a fee to the exchange. Pennies that amount to hundreds of million of dollars each year.

To: Slava Chechik who wrote (7643)	6/14/1998 9:15:00 PM
From: Tom K.	Respond to of 14162

Slava, another way to look at an options contract is like an insurance policy. The buyer pays a premium for some protection. The seller offers to meet a condition for a period of time for the premium. The deal is market priced so that both sides feel comfortable. Sort of like fire insurance on my house.... I pay a premium but hope I don't have to collect and the insurer hopes they don't have to pay.... but they keep the premium.... and there's not a great rush to get into that business even though it can be profitable for the premium collector. When you sell an option and collect a premium, you are the insurer and are getting paid for taking a risk and the buyer is feeling protected because she bought protection for a period of time. That's a fair transaction. You are correct that the pricing could get out of line, however the natural market forces (and MM's) quickly bring it back to norm. Hope that this view of the business is helpful. Tom