Comments on: $$ Buying Stock Too Early: Covered Call Strategy for the Impatient $XLF

By: Phantasmix

Phantasmix — Mon, 28 Jan 2013 20:00:55 +0000

This was a long time ago, but Duc – I was right.

By: Phantasmix

Phantasmix — Sat, 15 Jan 2011 07:04:11 +0000

Ok, you don’t like the strategy and you don’t like the banks 🙂

I’ll cautiously play small to start. “Watch this space”.

2am here, bed time. Have a good weekend.

By: duc

duc — Sat, 15 Jan 2011 06:55:41 +0000

Kat,

As to a sector, anything pretty much will be bullish: Ag, Oil, Equities, you name it, inflation from the Fed drives everyone away from cash.

jog on
duc

By: duc

duc — Sat, 15 Jan 2011 06:53:51 +0000

As I said, a naked Put strategy is [to me] high risk. This strategy is the same.

jog on
duc

By: duc

duc — Sat, 15 Jan 2011 06:52:57 +0000

Kat,

No, I’m indifferent to XLF, it’s the strategy that I don’t care for.

jog on
duc

By: Phantasmix

Phantasmix — Sat, 15 Jan 2011 06:48:38 +0000

Right, I understand the risks.
Sounds like you have a ‘bone to pick’ with XLF specifically, not the strategy itself.

Is there a sector that you like these days? Commodities? Gold?

By: duc

duc — Sat, 15 Jan 2011 06:37:54 +0000

Kat,

Bear Stearns was what, $280 at it’s top, it went to zero. Banks are hideously leveraged, and are always essentially bankrupt. An ETF of banks reduces the risk, but banks…

jog on
duc

By: duc

duc — Sat, 15 Jan 2011 06:35:44 +0000

Kat,

A naked Put is a good way to buy a value stock, Buffett apparently uses this strategy frequently, it reduces your initial cost. But of course you don’t have a naked put, just an equivalent position as far as risk is concerned.

The risk is that the stock goes to $0.00. An ETF is less likely to drop to $0.00, but can still generate a deep drawdown. Assuming you are willing to hold for a long holding period, and the banks recover, then, it should work out on a stock basis.

However, selling ITM, or OTM Options on this stock has a couple of other hidden risks. If the stock drops, then selling OTM options on your stock above purchase price brings in less premium the lower the stock goes.

Selling ATM, if the stock has dropped runs the risk of selling below cost, and locking in a loss. DITM Options have less TV, and thus again, reduce the profitability.

jog on
duc

By: Phantasmix

Phantasmix — Sat, 15 Jan 2011 06:22:49 +0000

Duc,
I don’t think either naked puts or covered calls are Very Risky. Unless you absolutely hate the stock you will be potentially stuck with, it’s not an extreme risk, like let’s say naked calls are. You wouldn’t do it with a penny stock that can go to $0 anyway, so…

In both these cases, the risk is limited to a fixed amount that’s known upfront. To me that’s not very risky 🙂

And aren’t naked puts a good way to accumulate stock for less?

By: duc

duc — Sat, 15 Jan 2011 06:14:27 +0000

Kat,

Selling covered calls, is exactly the same as selling naked Puts. You would agree that selling a naked Put is very risky? If so, then, selling covered calls is highly risky. They are an equivalent position.

jog on
duc