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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (5805)	1/19/1999 8:00:00 PM
From: jeffbas	Read Replies (1) \| Respond to of 78486

Wayne, I do not like the idea of selling naked calls. You do NOT get the downward movement if the price drops, just the call premium. This is antithetical to the idea that you have picked a virtually worthless stock. Also you may have some not insignificant margin requirements on the position.

To: Freedom Fighter who wrote (5805)	1/19/1999 8:19:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 78486

Mike, Here's a simple example of what I might do. Suppose I wanted to short the S&P500 because I thought it was worth 1000. Instead, I sell strike price 1000 calls going out 3 months and repeat the process every expiration. I might receive an annualized premium of anywhere from 7%-15% (probably closer to the lower) depending on where the S&P trades and what the volatility is. I will also bank the cash and earn interest. If the S&P moves up 7%-8% this year I am still even to slightly ahead for the year and way ahead of a short seller. If the S&P moves up a lot, I am losing but I am better off than the short seller. If the market moves down but remains above 1000 I have made more than the short seller after 3 months (or 6, 9, or 12 months) because of premiums and interest. If if moves close to 1000 at any point I can cash out the same as a short seller but I will have to give up some premium and he will not. Depending on how close to expiration I am and at what level the last option was sold at I may still be slightly better off or even with the short seller depending on how much I have accumulated in prior premiums and interest. It's a close call. Only a crash through 1000 from a high level would leave me worse off. If I felt something like that was more likely for whatever reason, I would reverse course and short instead. I am willing to give up the low probability crash scenario for the other favorable scenarios. Wayne

To: Freedom Fighter who wrote (5805)	1/19/1999 9:07:00 PM
From: Bob Rudd	Read Replies (1) \| Respond to of 78486

Wayne: Highfliers selling calls. The whole point of the operation is to fully participate in the downside collapse of wildly overvalued issue like AMZN. When this will occur or the shape of the downtrend are pretty much unknowable as is the intervening price path. Selling calls exposes you to potential price explosion - AMZN moved about 100 points intraday in 5 sessions, without considering major expansion in risk premium 1 option would have exposed you to $10,000 drawdown, without giving you access to potential price IMPLOSION. It would seem, however, this might be a reasonable strategy for a moderately overvalued issue with moderate fluctuation that lacked catalyst to sink or soar..you would be paid to wait. I wouldn't do it, but it seems reasonable. A variation would be to use call selling to let the market take you out of an issue that you owned yet felt was fully priced..covered call writing.