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Strategies & Market Trends : Are you considering quitting your dayjob to daytrade?! -- Ignore unavailable to you. Want to Upgrade?

To: john o who wrote (320)	1/20/1999 9:28:00 PM
From: jebj	Read Replies (1) \| Respond to of 611

>If the price starts moving down, couldn't you just sell short to protect yourself against the losses until the option expires? There would be some margin cost but it would probably be cheaper. If the price moves to the strike price, why not just immediately repurchase the stock? - John John, the object of trading options is not to own the stock - the options are traded just as the stock is. There is no reason to purchase either the stock or a short as you stated above. When you initially go into a position - wheather a buy or sell of either a put or call - you are "opening" a position. If the stock starts to go against your position, ie, you start to lose moeny, you just "close" the position by taking the opposite action as when you "opened". Example - you buy a call, expecting the stock to go up but it goes down instead. You then sell a call to close the position at a small loss - usually far less that if you owned the stock itself - to "close". But if one wants to own the stock, one can do so at a much less risky positon by using options. As an example, one buys a call and sells a put, same strike price, one is now in exactly the same position as owning the stock* - but at a fraction of the cost to do so. Since someone gives you money on the put you sold and you give someone else money on the call you bought, it is very close to a wash in many cases - can even be a net plus in some cases. Now, it the stock goes up, you make money, if it goes down you lose money. You have almost no money out of pocket and must maintain only a 20% equity in your account on the sold put side only. * Note that the one advantage to owning the stock is that you get any dividends that are paid - an options holder does not do so. An option holder does, however, particapate in all splits. One can also "insure" ones profits in a stock just as one would buy insurance on his home, life or vehicle. There are several good books on options - McMillan is considered "the man" - and please don't start trading options until MUCH study has been done. Although they are very powerful investment and trading tools, they are not simple and not something to go into with little knowledge. And PLEASE, if you read Wade Cooks book on covered call writing, take it with a very small grain of sand - and follow up with more study. jb

To: john o who wrote (320)	1/21/1999 10:52:00 AM
From: Kevin McKenzie	Respond to of 611

Regarding Covered Calls Disclaimer: This is all based on only my experience, and other, more successful day traders might have a great deal more to say on the subject. Also, I'm using boldface to highlight points, not because I'm "shouting" into virtual space. First the short answer to your question: If your intention is to daytrade for a living, you cannot afford to lock up huge chunks of buying power for positions that take a month (or more) to free up. Covered calls lock up your capital for too long to be useful as a daytrading mechanism. Now the longer answer to your specific question You asked: If the price starts moving down, couldn't you just sell short to protect yourself against the losses until the option expires? There would be some margin cost but it would probably be cheaper. My original point was that it is very frustrating to buy a stock, sell a call against it, then watch the stock "take off". I'm sure there are many techniques you could use to hedge your losses and even squeeze more gains out of the covered position. But all of these techniques have two problems (that I can see) (1) They tie up valuable buying power (2) They complicate the trade, which makes it much more difficult for you, the trader, to determine a good exit point. It also complicates and lengthens the time it takes you to exit a position. The position you described involved a stock, a covered call against the stock and a short of the stock against the box. So to go flat that position, you would have to buy back the call, sell the stock and cover the short. You would have to determine the best order in which to do this. My mind isn't that fast. I've had much better results just buying and selling equities (and occassionally options, when a clear trend develops).