Comments on: Trade Adjustments Today - AMZN

By: Jozsika

Jozsika — Fri, 04 Jan 2008 18:12:52 +0000

Why do you write covered calls instead of writing naked puts? Esp. if you expect to be called away?

Thanks.

By: John Brasher

John Brasher — Fri, 04 Jan 2008 18:45:53 +0000

We do write naked puts OTM when quite bullish, usually below a strong and trustworthy support level. For this reason, CallWriter offers an extensive suite of Naked Put lists. When we think a fallen stock has bottomed at strong support on big volume, we sometimes write OTM puts.

For most traders, naked puts must be cash-secured, in which case the advantage of writing puts compared to covered calls largely evaporates. Also, it is easier to manage a covered call, since stock does not expire and options can be added or sold in tandem with the stock’s movement as advantage appears. Neither strategy is superior, and both have their advantages and disadvantages.

By: Andrew

Andrew — Fri, 04 Jan 2008 18:55:39 +0000

I have 2000 shares of xlf with a cost basis of $32.02. Any suggestions on how to make money from this situation? New to covered call writing. Need help badly. Thanks.

By: John Brasher

John Brasher — Fri, 04 Jan 2008 19:29:54 +0000

Hi Andrew - we cannot give specific advice about what to do with stocks. The best practice is to first decide your outlook on the underlying - bullish, bearish or neutral, based on the chart and performance of the related index. XLF is a toughie bcause volatility and IV are low, so time value premium stinks.

If bullish, I typically wait for the price to recover (because writing calls below basis results in getting called at a loss or having to buy back the calls to avoid this when the stock rises). I may also do add-on trades, such as write naked calls, buy calls or put on a bullish spread. Writing the June 32C for 0.78 in premium, for example, provides little downside protection and very little return. If bearish, I usually will buy ATM puts a couple of months out and may add a bear call spread.

Whatever you do should be driven by your outlook. You may be wrong, but anything else is a shot in the dark.

By: Jeff

Jeff — Mon, 07 Jan 2008 11:53:54 +0000

Are you primarily a growth investor? From a value perspective, AMZN seems greatly overvalued at 100+ P/E ratio.
From a fellow covered calls investor

By: expert3000

expert3000 — Mon, 07 Jan 2008 14:36:15 +0000

if you were thinking of rolling down . read Larry mcMillan’s book “Options as a Strategic Investment”. In the book, he points out that if you write covered calls and you are afraid that the market will go down or if you worry that your rolldown will be unfavorable, then buy a protective deep out of the money PUT ( “protective PUT”) at the time you write the cover call. it only subtracts a small fraction from what you get from the “call write” and it adds a layer of protection should the stock fall. best wishes

By: John Brasher

John Brasher — Mon, 07 Jan 2008 16:20:27 +0000

Buying puts can work well, if not too overpriced. Sometimes they are breathtakingly expensive, due to high IV. If the level of IV collapses, the put’s value will collapse even with no change in the stock. The dynamics of long puts and rolling short calls are quite different. Repairing a down stock with low volatility and almost no premium is a difficult feat. I agree that rolling down is not the answer, since the purpose of rolling protectively is to lower our cost basis and position the trade to still make money. If it does not accomplish both, it should not be done.

By: John Brasher

John Brasher — Mon, 07 Jan 2008 17:55:30 +0000

Jeff - I am usually a conservative call writer. AMZN has been a good friend over time and is an industry leader. I do risk being caught if etailers take a huge hit, due to high P/E.

By: Jeff

Jeff — Thu, 31 Jan 2008 03:00:16 +0000

John,
If you have an opportunity, please advise if you plan to continue to hold AMZN Feb90 covered calls position until expiration.
Thank you.

By: John Brasher

John Brasher — Thu, 31 Jan 2008 19:14:53 +0000

Hi Jeff, I have made several AMZN modifications since the first post, which I have not had time to update. My basis is now about $82.50, stock 74.87. I am not short any calls and will simply let it recover. I should have done the position as a SuperPut - I could have made about $20 selling the long put today… John