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Beachbumz · 05-26-2005, 12:20 PM

Hi Bum!
Wow, 250K that's pretty steep!

I agree that you should never write a put on a stock that you aren't willing to own. This is a mistake that I made back last year, that cost me dearly. Also, if there's bad news out there, like a pending law suit or something, stay away.

You can do this on your own with lower minimums. I do some covered put writing in my IRA with OptionsXpress and have had some success. My preference would be to do a modified version of the covered put writing. I would use Interactive Brokers for this because their commissions are the lowest I've found and the executions are good. You are only required to put up 25% of the stocks current value plus the premium less the amount out of money the strike price is. An example:

BAC at 46.50. 25%=11.63-1.50=10.13+whatever the premium is. The premium is kind of irrelevant since you are paid that up front. Anyway that's about 22% of the strike price.

So, based on this, you can leave maybe 30% of the stocks price in the account (to cover small fluctuations) and keep the remainder in a MMA that pays 3.25%, which is usually better than you will get at the broker. You are still 'covered'. A more aggressive approach would be only to keep a total of 50% available since you can buy the stock with margin. This approach increased the return and the risk, of course.

Another problem to consider is that a stock can drop several points below your strike price and you will not be able to write break-even calls on it. An real life scenario for me is IGT. The stock got put to me at 35. The stock is currently at 28.56. A July 35 call is worthless. This is the major problem I see with completely covered calls. You have to get very close to the strike to make a decent return. If you are willing to take the risk of a little leverage, then you can write a put that is further out of the money and still get a great return. The risk is still there, that you will have to buy it, but it would be at a lower price.

Beachbumz 8)

05-26-2005, 12:20 PM	#14
Beachbumz Recycles dryer sheets Join Date: Aug 2004 Posts: 218	Hi Bum! Wow, 250K that's pretty steep! I agree that you should never write a put on a stock that you aren't willing to own. This is a mistake that I made back last year, that cost me dearly. Also, if there's bad news out there, like a pending law suit or something, stay away. You can do this on your own with lower minimums. I do some covered put writing in my IRA with OptionsXpress and have had some success. My preference would be to do a modified version of the covered put writing. I would use Interactive Brokers for this because their commissions are the lowest I've found and the executions are good. You are only required to put up 25% of the stocks current value plus the premium less the amount out of money the strike price is. An example: BAC at 46.50. 25%=11.63-1.50=10.13+whatever the premium is. The premium is kind of irrelevant since you are paid that up front. Anyway that's about 22% of the strike price. So, based on this, you can leave maybe 30% of the stocks price in the account (to cover small fluctuations) and keep the remainder in a MMA that pays 3.25%, which is usually better than you will get at the broker. You are still 'covered'. A more aggressive approach would be only to keep a total of 50% available since you can buy the stock with margin. This approach increased the return and the risk, of course. Another problem to consider is that a stock can drop several points below your strike price and you will not be able to write break-even calls on it. An real life scenario for me is IGT. The stock got put to me at 35. The stock is currently at 28.56. A July 35 call is worthless. This is the major problem I see with completely covered calls. You have to get very close to the strike to make a decent return. If you are willing to take the risk of a little leverage, then you can write a put that is further out of the money and still get a great return. The risk is still there, that you will have to buy it, but it would be at a lower price. Beachbumz 8) __________________ Life is good.