NetNews Usenet Archive 1993 #3/NN_1993_3.iso/spool/misc/invest/16836

Internet Message Format | 1993-01-22 | 2.9 KB

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From: [e-mail]
Newsgroups: misc.invest
Subject: Re: Covered Calls:  Less Risk - High Returns.
Date: 22 Jan 1993 00:22 PST
Organization: Lawrence Berkeley Laboratory - Berkeley, CA, USA
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[e-mail] (Arthur S. Kamlet) writes...
>
>While you make an argument for this being an analogy, it's also true
>that the risks are quite opposite.  Covered call writing is probably
>the lowest risk of the various combinations we could concoct,
>excepting perhaps  several straddle positions.   However writing
>puts and shorting stock in combination presents about the highest
>of risks.

I disagree.  In fact I would argue that selling short without writing the put
is even riskier.  Just as a covered call is less risky than simply being long
the stock, so a "covering put" is less risky than simply being short the stock.
The premium from the "covering put" gives you a little downside (=upside for the
stock price) protection.

>
>puts are good for folks who think the price won't fall; so is
>shorting the stock itself.  But covered call writing assumes the
>price won't rise, while purchase of the stock to cover the call
>predicts the stock will rise.   Not quite the same.
>
I agree that writing puts is the correct strategy if you are bullish.  But
it is incorrect that selling short is a good strategy if you are bullish.

writing puts, buying calls, buying stock       --> bullish strategies
buying puts, writing calls, shorting stock     --> bearish strategies

>Further, while the stock covers the covered call, the shorted stock
>must be covered by other collateral and also the shorted put must
>be covered by separate collateral.

Here Art is correct to a T.  There is in fact such a thing as a "covered put."
But a short position in the stock cannot cover the put.  A covered put is one
in which:
    1) money is deposited in a bank to pay for the stock and you get a
       receipt from them saying so to send to your broker.
    2) a line of credit representing the strike price is obtained.
    3) a put in the same equity is purchased.

>Art Kamlet  [e-mail]  AT&T Bell Laboratories, Columbus

|=======================================================================|
| Aaron Schindler                                [e-mail]  |
|                                                                       |
| There are two times in a man's life when he should not speculate:     |
| when he can't afford it, and when he can.        --Mark Twain         |
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