UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next
Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Re: foolish four covered call write Date: 1/3/2000 5:49 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Sure, I've done this for years. The drawback as you know is that you are selling your top. That is, if you sell a call for $500 and your stock goes from 50 to 100 in three months, you feel pretty silly as they take it away on expiration day.
My rule is write calls on stocks I don't mind selling. On my AMCC? No way, because it is flying.
On my CTL? You bet. It is in the doldrums. I don't mind if they take it, but I want a premium before selling. And then there is the CPQ on which I sold a LEAP last year; it will expire worthless and the stock will eventually come back.
Years back, and perhaps you can remember, there were mutual funds with the word "Plus" in the name. They wrote options. In the hands of professionals, it did not work; the "plus" funds underperformed those that just picked stocks.
A buy/write is the most conservative equity position there is. You can make money as you describe. The position is mildly bullish. In a roaring market with tech stocks one can do better by just buying the stock and letting it ride, then sell some shares for income or sell the whole position and buy something else.
Another technique I have found helpful is to buy half the number of shares I would like to own--maybe 200. Then write both puts and calls on the same stock. Let us take XLNX as an example. Buy 200 at 46, sell 2 calls at 50 (or 55) and 2 puts at 45. This approximately doubles the premium and BOTH options will not be exercised. Usually I sell the options about 3 months out. If the stock goes past the call strike, the put will expire worthless and the call will be exercised unless I roll it up and out as you have described. If it drops, the call expires worthless and I will get put to, then owning the full number of shares I intended in the first place. It is also possible that BOTH options expire worthless. I believe this technique is called a strangle. To do this in a retirement account of course you must have the cash in the account to cover the puts.
For the most part, the retail client buys options and the professionals sell them. To make money buying options one must be right both with respect to the stock going up and also the time frame. You can make money selling them if the stock goes up, but not during that time frame, or if goes up just a little. Thus you must only be right on one variable. Thus the odds in options are stacked slightly in favor of the seller. Hope this is helpful. Chris
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (3) | Ignore Thread Prev | Next

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Post of the Day:
TMFDeej's CAPS Blog

Activist Investors Unlocking Value at LSB Industries?
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement