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Subject:  Re: Covered Calls Date:  8/29/2007  5:10 PM
Author:  Rayvt Number:  59012 of 88775

Man, I thought this topic got beat to death 6-7 years ago. Just goes to show that sometimes an idea never dies.

#1) Ok, writing a covered call is *exactly* identical to selling a cash-secured naked put. Exactly. Identical. As in "no difference except in how you think of it". Consult any options book. Except there are more traction fees. So if you really really like doing covered calls, why don't you sell cash-secured naked puts instead?

#2) There was a study done several years ago. I used to have a copy of it until my disk-crive crashed. ;-( The gist of the study was that, overall, writing CCs for income was equivalent to a collecting a dividend. It this is true, then CCs are just an inferior way of collecting dividends.

#3) CC don't really make sense from a risk-reward viewpoint. You cut off all but a little bit of the upside but keep 100% of the downside. They seem to work great for a while, but then a rare occurrance happens and you get your head handed to you. People look at the possible up/down scenarios but somehow never look at the rare occurance where the stock gets hit with a massive loss. Think, for example, of AHM which went from a 10 dollar stock to a 1 dollar stock overnight. And then went to ZERO 2 days later.

All-in-all, IMHO, covered calls give you the illusion of a risk-free return. But they don't. People all the time treat a low probability occurrance as a zero probability occurrance.
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