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Technology Stocks : Lucent Technologies (LU) -- Ignore unavailable to you. Want to Upgrade?

To: X Y Zebra who wrote (7844)	5/11/1999 3:46:00 AM
From: blue_lotus	Read Replies (1) \| Respond to of 21876

Hi, >>It is functionally equivilant to selling covered calls. >Indeed, except that in selling naked puts there are less commissions to pay. (that is a positive, for writing the put), but remember, you are liable for dividends, and there is no limit to your possible loss. You are very correct Jaun, writing covered calls are nothing like writing naked puts. The risk and reward analysis is very different. Just a minor correction though: By writing a naked put, one doesn't expose oneself to unlimited risk (like in say writing naked calls). The risk is limited to the strike price - put premium (if the stock goes to Zero), which is usually significant. One way to bring this significant risk down to more manageable levels is to use put spreads. Again, spreads can be very dangerous if not handled in the right way, so I don't recommend it for everyone. But spreads both put spreads and call spreads can allow much better risk management with potentially more rewards, specially when coupled with some T.A. -Raj

To: X Y Zebra who wrote (7844)	5/11/1999 5:31:00 AM
From: E. Davies	Read Replies (1) \| Respond to of 21876

For starters, in writing a naked put, you are now liable for the dividends that the company may pay. Huh? You are liable for dividends only when you are short a stock. Being long options does not make you able to receive dividends and being short options does not make you liable for them either. In reality the dividend is priced into the option itself. the potential in writing a naked put that the loss would be unlimited Not unlimited, just the # of shares* the strike if the stock goes to zero. Again you are thinking about being short the stock, not the option. Guess what? Owning stock has the same risk! The stock might go to zero. LU going to zero? Nah. The fact that in a covered call you are limiting your gain <clip> you can't lose what you did not have to begin with. Covered calls require you own the stock. You can lose money owning a stock, even if you only consider it a paper loss in your head. Ok, I'll skip the rest. Suffice it to say that shorting puts is virtually identical to covered calls except for commission charges, margin requirements, and some tax issues (all of which usually favor naked puts). The one thing you have to do though is be willing to let the put be exercised and buy the stock at the strike (or roll it out to another naked put). This is no different to being willing to hold your stock that you have long even if it drops. You may feel emotionally more connected to the fact that you are losing money when the stock drops and the put value rises, but it is no different than when you own the stock and it falls. Ok. I'll give a simple example. Say LU is at 60. You can sell the calls for $2 or sell the puts for $2. Potential gain in either case: $2. Loss in either case if stock drops: $60-current price-$2. Thats it. Obviously volatility and the amount of time left before expiration will affect the degree of risk in the naked puts... but still they are open to a greater loss than a covered call. I hope you have seen that this is not true. Naked puts are just as risky as covered calls and owning the underlying stock. No more, no less. Eric