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Beachbumz · 05-22-2005, 06:37 PM

Hi Peter76!
Thanks for the well thought-out response. First of all, I've made hundreds of options trades (probably like you), so I understand the ins and outs (at least enough to be dangerous), but others may not. Secondly, like you, I have made and lost a lot of money writing uncovered puts in the past and I still do that today with my 'play money'. Fortunately, I have made a bit more than I've lost.*

I do like your thought process for picking your trades. I made a lot of money on COF like that, but as you know, you can still get burned; for me it was CECO and IMCL.

This strategy, as you know, is quite a bit more conservative. I'm only talking about solid (relatively) high dividend paying companies with good track records. No GMs or Ford here. One could always get stuck with a MRK situation, but I think that's rare. In any case, the premise is that you WANT to own the stock at the lower price, so you would have bought it at the strike on the way down. You just wouldn't get the premium. Also, in practice, I'm only writing puts a month to 45 days out, so my example of 10% price drop was not fair (just trying to keep it simple). A more realistic example is 5% OOM. We are only talking premiums in the .50 to .80 range, so not going to make you rich. Again, it's just if you WANT to buy the stock, but at a somewhat lower price. I've recently done this on BAC, PGN, DUK, GAS, and ABS.

Your point regarding the funds is well taken. I don't use margin at all, and I don't recommend it. The funds are available to purchase the stock, in fact I WANT to purchase the stocks. My reserve funds for this are held at Interactive Brokers in 3 month bonds that are yielding 7.6% (only available to accredited investors and not insured), so the funds issue is not a problem for me, but it could be for others. BTW, my MM is yielding 2.5%.

The main part of the plan is in owning the stocks, paying an average of 4% and writing covered calls to pick up another 1-3% return. Then, as long as the appreciation or the dividend keeps pace with inflation, you can get the magical 4% withdrawal rate and more. If the stock doesn't keep up with inflation, then the premiums on the covered calls will help out.

There are definately pros and cons to this kind of strategy, but it seems pretty good to me.

Beachbumz* 8)

BTW, I think I'll start another thread re: options writing, since that's a bit OT*

05-22-2005, 06:37 PM	#5
Beachbumz Recycles dryer sheets Join Date: Aug 2004 Posts: 218	Hi Peter76! Thanks for the well thought-out response. First of all, I've made hundreds of options trades (probably like you), so I understand the ins and outs (at least enough to be dangerous), but others may not. Secondly, like you, I have made and lost a lot of money writing uncovered puts in the past and I still do that today with my 'play money'. Fortunately, I have made a bit more than I've lost.* I do like your thought process for picking your trades. I made a lot of money on COF like that, but as you know, you can still get burned; for me it was CECO and IMCL. This strategy, as you know, is quite a bit more conservative. I'm only talking about solid (relatively) high dividend paying companies with good track records. No GMs or Ford here. One could always get stuck with a MRK situation, but I think that's rare. In any case, the premise is that you WANT to own the stock at the lower price, so you would have bought it at the strike on the way down. You just wouldn't get the premium. Also, in practice, I'm only writing puts a month to 45 days out, so my example of 10% price drop was not fair (just trying to keep it simple). A more realistic example is 5% OOM. We are only talking premiums in the .50 to .80 range, so not going to make you rich. Again, it's just if you WANT to buy the stock, but at a somewhat lower price. I've recently done this on BAC, PGN, DUK, GAS, and ABS. Your point regarding the funds is well taken. I don't use margin at all, and I don't recommend it. The funds are available to purchase the stock, in fact I WANT to purchase the stocks. My reserve funds for this are held at Interactive Brokers in 3 month bonds that are yielding 7.6% (only available to accredited investors and not insured), so the funds issue is not a problem for me, but it could be for others. BTW, my MM is yielding 2.5%. The main part of the plan is in owning the stocks, paying an average of 4% and writing covered calls to pick up another 1-3% return. Then, as long as the appreciation or the dividend keeps pace with inflation, you can get the magical 4% withdrawal rate and more. If the stock doesn't keep up with inflation, then the premiums on the covered calls will help out. There are definately pros and cons to this kind of strategy, but it seems pretty good to me. Beachbumz* 8) BTW, I think I'll start another thread re: options writing, since that's a bit OT* __________________ Life is good.