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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club -- Ignore unavailable to you. Want to Upgrade?

To: MrGreenJeans who wrote (1857)	10/27/1998 5:12:00 PM
From: Trebor	Read Replies (2) \| Respond to of 15132

>When they happen people lose their homes, lose their children's education funds and lose their retirement accounts. Some go bankrupt. Some are out of business permanently. All because they think the move will never happen to them. People who hedge against these moves are wise people indeed! It is the rare move that you must hedge against to avert financial ruin.< I don't know if we are arguing or agreeing here. Surely you are not saying that a person can lose their homes, retirement accounts, etc. from covered calls? From naked calls yes, from selling short yes, from running up your margin account yes, but not covered calls, which I view as a hedging device such as you seem to advocate. Yes, a covered call may limit your upside potential but it can also buffer against the downside potential. It's a matter of saying, okay, I really don't know what a particular stock is going to do but I would be perfectly happy with a 10% gain between now and January. Therefore I'll sell Jan. calls at a strike price that will give me that 10% gain if exercised, and I'll take in some cash for doing so, lowering my cost basis in the process. If the stock goes up 20% clearly I left some money on the table but I still made my 10%. But if it goes down 20%, I'm better off than if I'd done nothing. Now how am I going to lose my home on a deal like that?

To: MrGreenJeans who wrote (1857)	10/28/1998 12:17:00 AM
From: Lars	Respond to of 15132

MrGreenJeans, >>> That is exactly my point. One must be fully prepared for the 3 standard deviation move. The move that has a zero chance of happening according to the probability tables; the move that will not happen in your lifetime. Well guess what...these moves happen more often than the probability table suggests. When they happen people lose their homes, lose their children's education funds and lose their retirement accounts. Some go bankrupt. Some are out of business permanently. All because they think the move will never happen to them. People who hedge against these moves are wise people indeed! It is the rare move that you must hedge against to avert financial ruin. >>> Excellent point. I know of a story where a person wrote naked calls way out of the money. This was back in the late 80s. The person did this strategy over and over. It was like printing money. They were writing tons of these naked calls. One time the price moved violently to the upside and cost the person close to a half million. OUCH!