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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: jebj who wrote (10497)	4/23/1999 2:10:00 AM
From: NateC	Read Replies (1) \| Respond to of 14162

Jebj, you wrote, "Tks, Nate - but why I asked was that brokers will not let most traders sell naked puts. Will most consider the LEAPS as the underlying just as in selling calls? I'm not sure that any broker will do that. First of all....if you're selling puts....there is not underlying stock...like there is with CC's. If you sell a put.....any stock you own long in that particular equity.....is at risk "on its own"....e.g....Let's say you like XYZ at 100...and you buy 100 shares....and then you CC it by selling the next month 110...Fine....if the stock goes to 110...you get called out...make 10%, plus premie...fine. Now...if you ALSO...at the time of buying the stock.....decide you like the stock so much....you want to sell puts ALSO....say the next month out 95 puts....you collect more premium.... but...and it's a big but (nothing intended there, bTW)......your put is at risk...and so is the underlying. What this means is...that if the stock tanks to 80. You just took a 20% hit on the underlying 100 shares that you own.......PLUS.....if you get exercised on your PUTS.....you have to buy 100 more shares of the stock (now at 80) at your put's purchase price of 90....so you lose another 10%. The only way to "cover" a put sale....is to take a short position in the underlying......and I for one....am far to sophisticated, at least yet...to do that. I'd rather sell a naked put. (irrespective of owning the underlying or not).....and just repair it...if the stock tanks.....buying it back....and rolling it down. BTW...if you're long a stock, sell the upstrike CC, and the downstrike put...it's known as a "covered combination".....and it's very nicely covered in the education section at www.cboe.com