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Motley Fool Pro / Pro: Catch-Up Trades


Subject:  Re: buy/write to catch up? Date:  1/31/2014  4:23 PM
Author:  FoolishRob99 Number:  559 of 830

Hi Frank,

Another difference is ownership, but that too could be argued based upon valuation. If you're writing covered calls, it could then be considered an income position or sell. If you write an at/near the money option (put or call), and the stock plunges, then is it better to be PUT a falling knife or owning one?

As Lon says, it doesn't matter. More to the point, it won't make a dollar of difference to your account balance. If a covered call position results in you losing $X, then the equivalent written put position will also result in you losing that same $X.

The biggest point of concern with put writing, when compared with covered call writing, is that Pro/MFO steer you towards getting a margin account, but in a margin account you can write puts that expose you to more than 100% of your cash balance. Compounding that problem is the way brokerages report the information to you, which tends to hide your actual exposure.

I have addressed this issue by keeping an ongoing spreadsheet of all my put writes. It allows me to quickly compare my put-writing commitments to my cash balance without the need for mental gymnastics. If I weren't using this spreadsheet crutch, I'd prefer covered calls simply to keep me straight on my commitments. Using a cash account is another easy way to keep yourself from going beyond 100% (assuming that is a goal).

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