NetNews Usenet Archive 1993 #3/NN_1993_3.iso/spool/misc/invest/17013

Text File | 1993-01-25 | 2.1 KB | 46 lines

Newsgroups: misc.invest
Path: sparky!uunet!mailgate.mobil.com!etpeters
From: [e-mail] (E. T. Peterson(Eric))
Subject: Re: Covered Calls:  Less Risk - High Returns.
Message-ID: <[e-mail]>
Sender: [e-mail]
Organization: Mobil Exploration & Producing Technical Center(MEPTEC), Dallas.
References: <[e-mail]> <[e-mail]> <[e-mail]> <[e-mail]>
Distribution: usa
Date: Mon, 25 Jan 1993 14:41:37 GMT
Lines: 33

In article <[e-mail]>, [e-mail] (thomas e mirasol) writes:
|> In article <[e-mail]> [e-mail] (E. T. Peterson(Eric)) writes:
|> >When you sell a stock short, you could also sell a put on that stock.
|> >This is analogous to covered call writing on a long position.
|> >
|> >For example, you short a stock at $40 and sell a 35 put at $2.
|> >
|> >At the expiration date of the put, if the stock is below $35, you will
|> >have to buy it for $35, thus covering your short position.
|> >
|> >If the stock is above $35, the put expires worthless.
|> >
|> >In either case you keep the $2 put premium.
|> >
|> >The drawback is if the stock goes way down, say to $20, you still have to
|> >buy it at $35.
|>
|> Why wait till expiration?  If the stock is on a downward path, why not
|> buy a put earlier to limit your losses?  For example, if the stock price
|> is already at $30 and you feel it is going to drop further, why not buy
|> a $30 put to stop the bleeding.

I think you missed something here.
The above discussion was about SHORTING a stock and SELLING a put.  In this case
you WANT the stock to go down.  No need to "limit your losses" if the stock is
on a "downward path"!

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Eric Peterson                  The sooner you fall behind,
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