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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: Roman S. who wrote (10807)	5/16/1999 8:52:00 AM
From: pride	Read Replies (5) \| Respond to of 14162

to all, i have questions concerning uncovered call writing. what are the risks? say you sell an uncovered call on at&t for jan00-65. if the stock starts to go up and gets near the strike price couldn't you buy the shares then to cover your position? if that's the case i don't see the risk of doing this. i realize that you would have to have the cash on the sidelines to cover you call in the event of the stock price going up but is that it? is there any margin interest charged in doing uncovered calls? please, anyone respond and let me know how this all works concerning uncovered calls. sincerely, pride

To: Roman S. who wrote (10807)	5/16/1999 12:02:00 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 14162

#1 would be true in a cash account, if your broker let you sell naked puts at all. In a margin account, you would need less than 100%. From other posts on this and other options threads, it looks like about 25% might do it. Check with your broker. As for #2 & #3, my first reaction is your strategy does not seem to give you any advantage, at least not in the case of a cash account, and will reduce your return compared to owning the stock. Suppose you do have to obligate 100% of the cost to buy the stock, and you open your position with strike prices at the money. In that case the premium you receive for the put is offset by the premium you pay for the call. For example, assuming premiums at 5% of the strike, your obligated cash would be 95% of the current price of the stock. If things go against you, the stock gets put to you at the strike price, but you have already spent the premium you received from the puts to buy those now worthless calls; the options are a wash, and you effectively pay what it would have cost you to buy the stock outright. You are in the same net position as if you had bought the stock. If things go your way, the calls may appreciate, but not by as much as the underlying stock. By expiration time, if the stock goes up 5% your calls will have just retained their initial value because the 5% premium you paid will have eroded; you will have tied up your money for no gain at all. If the stock goes up 10%, your calls will have gained 5% of the value of the stock on an obligation of 95% of its original value. That's only about half as good as owning the stock. No matter how much higher the stock goes before expiration, your gain will always be trailing the gain in the stock by the erosion in the premium you paid for the call. Of course you can look at other strike prices, but I see no obvious improvement by moving away from at the money. If you set the strike in the money for the puts you gain some protection, but you give up even more gain from the calls if the stock goes up. If you set the strike in the money on the calls, you increase your potential return on the calls, but you received less premium for the puts, so it costs you more to enter the position. This may be a compromise between buying stock outright and just buying calls, but I doubt it is better than buying some stock and some calls. Maybe someone has a spreadsheet that will compare the different scenarios for your stock. If you think the stock is going up, it looks to me like you should just buy the stock, or if you really have great conviction, buy some in the money calls that will track the stock price nearly 1 for 1 to maximize your rate of return while keeping your cash free for other investments. Dan

To: Roman S. who wrote (10807)	5/17/1999 8:31:00 PM
From: Greg Higgins	Read Replies (1) \| Respond to of 14162

Roman S. writes: is it logical to assume the brokerage would require that you have enough cash in your account to cover the purchase of the stock just in case it was 'put' to you? In a cash account, yes. In a margin account, the brokerage margin policy must be followed. Exchange minimum margin is 20% of stock price less the out of the money amount plus the premium. [ I think I said that right.] thinking about writing some naked puts and at the same time buying calls at the same strike price and for the same expiration. This is called synthetic stock. It has the same profit potential as buying the stock at the strike price. If the stock tanks, you're in exactly the same position you would be in if you had bought the stock directly. If it goes up, ditto. Synthetic stock is interesting in that you can probably get into a position for somewhat less than the 50% margin that a stock purchase would take. It can also let you get in over your head. If you're sure the stock's on its way up, ... On the other hand you could also try Systematic Writing Message 3270534

To: Roman S. who wrote (10807)	5/18/1999 5:32:00 PM
From: James Joyce	Read Replies (1) \| Respond to of 14162

each brokerage will have their particular margin requirement for naked put writing. The scenario you portray is generally accurate. If you buy the call and sell the put it means you are bullish on the stock. If the stock runs up you gain the premium on the put which expires worthless plus the gain on the call. The margin money is not sunk money as it sits in your account and generates interest or is covered by other holdings. The negitive scenario is a major drop in the stock where you lose the premium on the call plus lose the increase in the price of the put. Normally you would assume you will not look for the put to be exercised but will close the position before expiry. Just selling the puts works well if you are bullish and are interested in acquiring the stock if it drops. This just lowers your cost but if the stock stays strong you are satisfied with the premium you got on the puts. Remember that put buyers are often buying insurance on their holdings so they gain the security. You should read MacMillan's book for the various scenarios and the follow up planning. I also suggest using some good analysis tools for these situations. good luck James