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To: Wayne Rumball who wrote (51)11/4/2000 7:15:03 PM
From: stu fabian
   of 66
 
Wayne, you didn't miss anything, just the way I posted I guess was a little cryptic. Patrick and I go back a number of years. Don't even remember how it got started but selling me a bridge and providing a couple of his kids to collect tolls was part of it.
As I recall Pat is pretty much an S&P daytrader. He had been trading for quite a few years when I started with SI and he was quite helpful to me in keeping my loses to a minimum.
Nothing derogatory towards you....

Stu

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To: Wayne Rumball who wrote (52)11/5/2000 10:00:38 PM
From: Patrick Slevin
   of 66
 
If you wrote calls and the stock goes up, they are soon so far in the money that there is no premium, and you can buy them back and write higher calls for a more interesting premium.

How exactly did you lose on this?


It was never a loss, just opportunity cost. If the stock went up it usually went parabolic. Chasing the call to cover it would be futile in many cases, I would just allow the stock to be taken away.

For example, let us say that you have a stock and you have written a call against it that is slightly OTM. The stock is volatile, hence the volatility is present in the premium of the option; else you would not be writing it necessarily.

Over a few days the stock has a 37% up move. Say $42 to $58. The volatility remains present to some extent in the option...the play may be to tie up capital at some risk to buy in more stock. Else, risk that the equity halts and the volatility dies off. Either way, there is a $16 opportunity cost minimum. Now, of course, some of that is re-couped through the sale of the call.

However, in a bullish phase, future gains based on further movement in the underlying aren't happening. In essence, then, the practice of buying stock and writing calls against the underlying is a scalp play. It ties up equity for small potential gain with greater downside risk.

I know many who do this, I do not because I determined that for me it appears to be a weak trade from a money management standpoint during a bull phase.

Sideways market yes, trending market no. There are times when it makes sense and times when it may not be.

It is not that there is loss of money. It's a short term trading technique and in my case I decided I was/am a longer term trader in terms of stock equity issues.

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To: Patrick Slevin who wrote (54)11/5/2000 11:10:27 PM
From: Wayne Rumball
   of 66
 
But, is it not a good strategy if you plan to be long a stock for any lenght of time?

If you are long the capital is tied up, if you write the call you have more cash to invest....

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To: Wayne Rumball who wrote (55)11/6/2000 7:40:23 AM
From: Patrick Slevin
   of 66
 
Well, it's not that it is a bad strategy. In a bull phase it comes down to the issue that you have to be willing to lose the stock on a move like that.

< is it not a good strategy if you plan to be long a stock for any lenght of time?>

Because in a situation such as I described for an imaginary issue that has a sharp upward move there is a question whether one should, in effect, "chase it" by covering the call. What was happening to me was that often I was in the "mixed feelings" situation. I was fortunate to buy a stock that had a explosive upside move but unfortunate in the sense that I was not participating in the bulk of the move.

I was gathering dollar bills when I could have been gathering tens and twenties, so to speak. The reason why, I believe, it was not a good money management play for me was because I was not allowing myself the ability to let my profits run.

Here, you are taking what I presume are beaten down issues that may take time to recover so it may be considered a different situation. For me, I was using stocks that had a nice recent move so I was taking them in and selling the volatility. In that phase of the market the issues were (in hindsight) momentum plays so they were taken away. Covering the options usually was not a rational decision.

I was referring to that period of time when I was posting to Stu. I do not recall any stock in particular, but let us say that you purchased RMBS in your IRA early this past February after it moved from the 50s to the 70s. Writing the OTM call you probably would pick up a ton of premium. By March expiration the stock would have been over $450. In effect, the trade would be a very profitable scalp. From a risk/reward point of view, I do not know if it would have been the best play in retrospect.

Looking back on such a period, many stocks with high implied volatility present had momentum-based moves.

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To: Patrick Slevin who wrote (56)11/6/2000 8:20:37 AM
From: Wayne Rumball
   of 66
 
I am new to this. And still need to learn.

From what I've heard if I'm writing March calls today, it is highly unlikely that I would ever be called on the stock until Feb, regardless of what the stock does.

So if the stock does a big run, theoretically, I should be able to buy back my 30% premium calls that are suddenly WAY in the money, for a small premium, and write more near the money calls for another 20-30% premium, assuming I still want to own the stock.

On the flip side, if the stock tanks, my 30% premium is helping me to protect my downside. And if the stock goes down far enough, I can buy my $20 calls back for $1 (having sold for $6), and write $15 calls for $4, further limiting my downside.

The point here is not to try and find a 10 bagger. It is to make low risk plays and maximize returns.

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To: Wayne Rumball who wrote (57)11/6/2000 9:04:58 AM
From: Patrick Slevin
   of 66
 
<point here is not to try and find a 10 bagger. It is to make low risk plays and maximize returns. >

Sure, it's a different style. It's merely not something that I actively do merely because it's been taken away from me often. I do not trade stocks, as you and many others do. So when I find a stock I like I tend to keep it unless it breaks down.

In your case you are trading it, not investing in it. I know several high net worth individuals who do the same thing. The ones I know, however, are mostly amateur traders with lot of time on their hands; they use such activity as a topic to draw on for cocktail chatter so it's a poor example. Yet they have done very well, buying stocks that they do not mind owning because of the fundamental underpinnings of the stock then writing out the calls, often LEAPs. It takes a minor amount of math to determine the "best" strike and month to write, but it isn't rocket science of course.

Serious traders that I know do it very selectively, as I presume you do. Particularly because you are trading a retirement account.

<if the stock does a big run, theoretically, I should be able to buy back my 30% premium calls that are suddenly WAY in the money, for a small premium, and write more near the money calls for another 20-30% premium, assuming I still want to own the stock.>

Yes, true. The only caveat there is the potential for whipsaw. Returning to the RMBS example, after cresting over $450 in a month's time it was down to the 130s one more month after that. It's an extreme example of course, but illustrates the potential pitfall.

<From what I've heard if I'm writing March calls today, it is highly unlikely that I would ever be called on the stock until Feb,>

Odd stuff can and does happen, but it is true that the probability is slight.

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To: Wayne Rumball who started this subject11/15/2000 6:14:09 AM
From: Wayne Rumball
   of 66
 
Bought back my CMOS calls on Monday for 2 n change

Wrote $25's on yesterday's run for 4n change.

Bringing my net cost down around $10 and my selling price up to $29+ should I get called.

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To: Wayne Rumball who wrote (59)11/27/2005 6:55:48 PM
From: Patrick Slevin
   of 66
 
Just checking.

Had this thread marked and wanted to make certain I could let it go.

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To: Patrick Slevin who wrote (60)11/30/2005 3:39:57 AM
From: Wayne Rumball
   of 66
 
while the thread might be dead the idea is still sound

why the hell do I have a CMOS rating at the bottom of the page?

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To: Wayne Rumball who wrote (61)11/30/2005 9:33:50 PM
From: Patrick Slevin
   of 66
 
You are a wonderful man,

Congratulations on your dedication to what you believe is right.

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