To: Gary Kao who wrote (2842 ) 5/15/1999 1:21:00 AM From: michael r potter Respond to
-OT- Gary, Not so much using margin in the traditional sense, but that's splitting hairs. It can only be done in a margin account. Selling puts can be very profitable in a bull market and that is just the market you would be least likely to get killed in. There are two choices. One, be prepared and willing to buy the underlying stock [and have the extra cash to do it] if the position ends up below the strike price. Or two, be extra careful in using a stop loss on the option and absolutely never second guess the stop. All other choices taken invite serious negative consequences. The big problem with writing [selling] calls and puts is that ultimately it violates one of the cardinal rules of investing. That is to let winners run and cut losers. If the stock[s] go down, [eventually some will] and one is exercised, often the stock continues down. If covered calls are written, usually they expire worthless, but when the stock[s] get called away, usually the market has marked it as a winner, and it is no longer owned. Many times they continue to go much higher. Selling options puts the odds in the house [the option writer is the house] favor so most of the time they expire worthless. It is the minority of the time that can create problems out of proportion to the premium received. One of the other problems is the horrendous spreads on options. I wrote the June 135 calls on Tellabs today. They were $2 3/4 bid and $3 1/4 ask. That means that if I changed my mind and covered immediately the spread [loss] is 20% plus commissions. I could have used a $3 limit, and it possibly would have been filled, but that would still be a 10% spread. Occasionally, I will sell puts on a stock I want to own at a really attractive price and if it gets excercised, will buy it, but after doing hundreds of options in the "early days" buying, selling, covered, and uncovered and doing hundreds for clients, I now view all forms of options with skepticism and use both it and margin only sparingly. There are few things as frightening as selling a naked put, having received $400 premium, and having to cover at $8,000 during one inattentive day. I personally knew others who's accounts were completely wiped out in one day. They not only had zero equity but went negative and ended up owing the brokerage thousands of $ [yes it really happened]. I heard a large brokerage firm took a $1M+ loss on a big client who was wiped out and went negative on naked OEX puts during Oct. 19, 1987. For 5 years the strategy had worked like a charm...[selling way out of the money puts] until the bull market ended. Not implying you are taking undue risk, you probably have a well thought out and disciplined strategy, but these are some general thoughts after having done options all ways. Wishing you continued success. Mike
