Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Robert Graham who wrote (14578)	8/13/1998 6:53:00 PM
From: Marq Spencer	Read Replies (2) \| Respond to of 42787

>IMO selling naked CALLs is risky and is an approach that needs to be monitored closely. I think the trader would need to be very familliar with the underlying stock in order to attempt this strategy. There is the risk of a sudden move up by the stock that can place the person in a losing position that is theoretically unlimited compared to what you made on writing those CALLs. Considering there are other ways to make money that are less risky, I look at this approach as needless risk. Since I have never attempted this before, perhaps a person who is experienced and has a successful track record at writing naked CALLs will comment here.< Bob, I done this twice (makes me an expert :-). Naked call writing is definitely risky, but there are times when the risk is manageable. In those cases, I would not categorize it as "needless risk". Let me give you an example. On monday, July 20th, Dell was trading around 114. Aug 120 calls had a premium of almost $8 !!! Dell had pulled back from its high, and I felt that 128 was not imminent. I wrote naked calls on DELL (Aug 120s) for just under $8. I also placed a stop order to buy DELL if Dell went over $119. My reasoning was that if Dell made a new high (went above 119, while the previous high was at 118), it's uptrend would be intact and it could very well move above 120. So I wanted to limit my risk. Also, it would have to gap up from 119 to 128 before my stop order was filled to cause me a loss - very unlikely. As it turned out, Dell never made a new high, and I closed my position last week (made over 6 points per call) and cancelled my stop order. So, the conditions when one can write a naked call with limited risk are: * There is a huge premium for a near term call (note $8 premium on a call that was out-of the money by $6 and only 1 month out) * The stock has backed off a resistance (note that Dell was below its all-time high, and that is always a strong resistance) A corollary of this rule is to never write naked calls on a stock that is making new highs - wait until it backs off. * No scheduled event before you intend to close your position (note that the earnings announcement is next week, before the expiration - therefore I decided to not be greedy and take my $6+ profit :) * A stop can be set up that will limit your loss in the case that the stock does take-off (I set this up well above the resistance point). What do you think? - Brian.